Citizenship and Taxes


Although all of us focus on helping people to obtain U.S. citizenship, there is an interesting trend happening in the opposite direction, the reasons behind which we should be aware as they could have implications for our work.

In 2014, the number of individuals who renounced U.S. citizenship or gave up LPR status increased dramatically: 3,415, up from 2,999 in 2013, a change of 14% according to a recent Department of Treasury report. The report does distinguish between citizens and LPRs, and it does not indicate the nationality of each person.

There has been a rise over the past decade of people handing over their U.S. passports or green cards in favor of another country. Although each individual person is not asked why he/she made the decision, experts opine that the main reason lies in one thing: taxes.

U.S. citizens and permanent residents are subject to taxes on income received worldwide. People may end up paying taxes in two countries even though they are living in working in one. Children of American citizens born abroad may also be subject to U.S. taxes.

  • 31% of recently surveyed U.S. citizens living abroad considered renouncing U.S. citizenship.
  • 3% of those surveyed were in the process of renunciation.

The costs of renunciation is high. The process costs $2,350 as of September 2014, an increase of almost 5 times the previous cost. On top of this processing fee, some U.S. citizens are also required to pay an exit tax, which can run into the thousands or millions of dollars.

  • People with more than $2 million in global earnings must pay a tax on the current value of their total assets.
    • This includes salaries, stocks, property, savings accounts, art, jewelry, etc.
  • Pension and retirement funds can also be taxed in full.

There is a monetary cost to renunciation, but there is also the underlying loss of status as a U.S. citizen or resident. An attorney at a large firm notes, “This is what really boggles everybody — you’re going to go into the U.S. embassy, you’re going to swear an oath of renunciation, you’re going to hand over your passport, and yet in some cases, you’ll never be free from a tax perspective. At the same time, you’ve given up all your legal rights as a citizen.”

You may be wondering what all of this has to do with the work we do in helping people to naturalize. It seems like it would be a deterrent for many people, if they have income or assets anywhere else in the world. However, the thing that people are giving up is more valuable to many of our clients than the money they may potentially pay in taxes: the rights and privileges that come with U.S. citizenship. The ability to travel freely, bring family to the U.S., and participate in democracy are worth so much more.

In keeping with the theme of taxes, and to shed positive light on naturalization, there are major tax benefits for an LPR to naturalize. The two major incentives are the estate tax and the gift tax.

  • Estate Tax
    • When a person dies, property that they leave to another person may be subject to an estate tax.
      • If assets and gifts are worth more than $5,430,000, the property will be subject to an estate tax.
    • If a person leaves property to his/her spouse and the spouse is a U.S. citizen, the property is NOT subject to the estate tax, no matter how much it is worth. There is no limit to the value of the property.
    • If the person’s spouse is not a U.S. citizen, including an LPR, the total amount must be less than $5.43 million.
      • This is a lot of money. Most likely, this is not going to be an issue for all but a tiny portion of clients, if any at all.
  • Gift Tax
    • Whereas the estate tax threshold is quite high, the gift tax threshold is within reach of more people.
    • A gift tax is applied when one person transfers property to another person and receives nothing, or something less, in return.
      • Like the name indicates, someone is giving someone else a gift.
    • If a person transfers property to his/her spouse, who is a U.S. citizen, there is no federal gift tax.
    • If a person transfers property to his/her spouse, who is not a U.S. citizen, there is no gift tax on property worth up to $147,000.

Practice Tip: If any clients have questions regarding tax benefits or burdens, I strongly encourage you to send them to a seasoned tax attorney. The rules are complicated and as you all know, taxes are something that the U.S. government takes very seriously.

  • We had provided a contact for a pro bono tax attorney back in September, but I wanted to remind everyone of this service in case you have clients with tax questions. Dale Kensinger is a pro bono attorney who is starting a tax clinic at the WilmerHale Legal Services Center in Jamaica Plain. The tax clinic can assist persons living up to 250% of the poverty guidelines.

Whether a person is obtaining permanent residency or U.S. citizenship, or in the process of renouncing, Benjamin Franklin was right when he noted, “…nothing can be said to be certain, except death and taxes.”

Sources: Wall Street Journal (wsj.com/articles/record-number-gave-up-u-s-citizenship-or-long-term-residency-1423582726), CNN Money (money.cnn.com/2014/12/10/pf/taxes/expat-passport-citizenship-renounce/)