Our Expat's Manual was last updated on Tuesday 4th June 2013.
There are a number of myths that are in circulation regarding giving up US citizenship and there appears to be a large amount of confusion related to what individuals can, and cannot, do after relinquishing their US passport. This section of our manual takes a look at some of the common misconceptions and provides the real facts about the consequences of giving up US citizenship.
Although this used to be true it is no longer the case. Now all you do is file a final return for the part of the year when you were still a citizen. That final return also includes Form 8854, which lists what, if any, exit tax is due.
If you have a net worth less than $2 million and don’t meet the IRS income test after giving up US citizenship, you automatically owe no exit tax. If your net worth is over $2 million, you are what the IRS calls a “covered expatriate,” meaning you MAY have to pay exit tax. But you also may not, even if your net worth is $200 million or $2 billion.
So how can you tell what you would owe, if anything? You pay exit tax on unrealized gains as of the day before you give up your passport. In other words, it's as if you sold all your assets the day before you expatriated and paid whatever applicable tax would have been owed (long-term capital gains, ordinary income, etc.). If you own illiquid assets when you expatriate such as private companies or real estate, you'll need to get a fair market valuation done to determine what, if any, gains you would have had IF they had been sold. Here's a critical caveat in the calculation: You get a free pass, called the “exclusion amount,” on the first $626,000 in gains. If you're married and your spouse expatriates with you, the exclusion amount doubles to $1.252 million. For example, you and your spouse could expatriate with a stock portfolio showing $1.2 million in gains and not owe exit tax on it. Even if the portfolio tripled in value shortly after expatriating, you could sell it any time and owe no taxes.
To recap, if upon giving up US citizenship you own assets with unrealized gains of less than $626,000, you will not owe exit tax, no matter how wealthy you are. If you are required to pay tax it's less tax than you would have paid if you'd stayed in the U.S. and sold the assets. Plus, if any asset you pay exit tax on continues to rise in value post-renunication, all those additional gains are yours.
When you give up US citizenship you do forego the right to enter the country. However, providing you have a passport from a country that allows you visa-free entry to the U.S., then you can enter the country just like any other visitor; you simply apply for a tourist or business visa at a U.S. embassy or consulate. It's called a B1/B2 visa, and it typically lasts for ten years.
This is not true. You’re still entitled to these after you expatriate. With Medicare you obviously have to be in the U.S., so this would be limited to visits there.
You will be required to make an expatriation appointment, fill out forms, sign the “oath of renunciation,” and hand the official your U.S. passport. Providing you attend the meeting with the appropriate documentation and behave courteously, it’s an easy and mechanical process. For full details concerning the process for giving up US citizenship please see our guide to renouncing us citizenship.
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