cross posted from Quora
If I have an American citizenship, am I stuck paying taxes to them for life unless I get rid of the citizenship? How do you get rid of the citizenship?
U.S. Citizens are subject to extreme regulation wherever they live in the world…
— John Richardson – Citizenship Lawyer (@ExpatriationLaw) January 3, 2018
U.S. AKA American citizenship is very different from all other citizenships in the world. It is a difficult citizenship to maintain if you do NOT actually live in the United States. The reason is that the United States is the only (I am not counting Eritrea) country that requires ALL if its citizens to abide by the rules in the Internal Revenue Code, regardless of where they live in the world. I note that some of the answers to this question confirm that U.S. citizens are subject to U.S. taxation whether they live in the United States or not. Although U.S. citizens are subject to U.S. taxation regardless of where they live in the world, the requirements in the Internal Revenue Code are about much more than taxation. Here are some ways that the Internal Revenue Code imposes requirements that are not specifically about taxation:
- The requirements of the Internal Revenue Code also include a very large number of “penalty laden” reporting requirements. (A U.S. citizen resident in Canada was recently fined $120,000 by the IRS for failing to disclose that he was running a small consulting business through a Canadian corporation.) Furthermore, although this requirement is found in the Bank Secrecy Act and not the Internal Revenue Code, U.S. citizens living outside the United States are required to report their “local” bank accounts (including those shared by a non-U.S. spouse) to the Financial Crimes Division of U.S. Treasury (FinCEN).
- The rules of the a “foreign” mutual fund and subject to punitive (in some cases the gains could be taxed at rates approaching 100% of the gains).
- The rules of the Internal Revenue Code treat “non-U.S. citizen” spouses differently from U.S. citizen spouses. Although not specifically stated the effects of this differential treatment appears to assume that a spouse who is NOT a U.S. citizen exists only at best as an opportunity for money to leave the U.S. financial system and at worst a form of tax evasion.
I could go on, but you get the point. The Internal Revenue is NOT only about taxation. It is about enforcing life and investment choices (and ultimately U.S. cultural values) that do NOT recognize that U.S. citizens living in other countries also have tax obligations to those other countries. The effect of (1) being subject to the restrictions imposed by the Internal Revenue Code and (2) being subject to taxation in their country of residence.
How is U.S. citizenship obtained …
One can become a U.S. citizen by either “birth” (either born in the USA or in certain cases born to a U.S. citizen outside the United States) or by “naturalization” (a choice made after birth). Most countries do NOT confer citizenship simply by virtue of birth in the country.
Interestingly, the United States is the ONLY country that both:
Imposes citizenship because one was born in the United States; and
Imposes a comprehensive tax code based on citizenship.
Therefore, those born in the United States are required to obey ALL the rules of the Internal Revenue Code (whether based directly on taxation or reporting …) for life.
In a Global World, there are many U.S. citizens who are citizen/residents of other countries …
The big problem is that under the guise of “citizenship-based taxation” the United States is imposing full taxation (and the requirements of the Internal Revenue Code) on people who are citizens and tax paying residents of other countries. Think of it! For more discussion of this issues see:
Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?
But, there are actually two kinds of U.S. citizenship and ALL U.S. citizens are “dual citizens” …
The first kind of U.S. citizenship is citizenship for the purposes of nationality. This is the what most people understand citizenship to be. This is what is meant when one enters a country with a passport. U.S. citizenship for nationality purposes gives one the right to “enter the United States”, to live in the United States, to vote in the United States, etc.
The second type of U.S. citizenship (first created in 2004) is citizenship for the purposes of the Internal Revenue Code. Let’s call this “tax citizenship” which means that you are considered to be subject to regulation and taxation by the Internal Revenue Code. Significantly one can cease to be a U.S. citizen for the purposes of “nationality” (no right to live and work in the United States), but still be a U.S. citizen “tax citizen” meaning that you are still subject to the requirements of the Internal Revenue Code. (This is a very difficult situation to be in. Incidentally Green Card holders have exactly the same kind of problem. They can lose their right to live in the USA but still be subject to the rules in the Internal Revenue Code.)
Relinquishing both kinds of U.S. citizenship – breaking the bonds of nationality and the requirements of the Internal Revenue Code …
Since June 16, 2008 (there was a different set of rules prior to that date) a “Certificate of Loss of Nationality” (“CLN”) is required to cease to be both a U.S. citizen for the purposes of “nationality” and for the purposes of “taxation”. A CLN is acquired by either formally renouncing U.S. citizenship or by applying to the State Department for a (“CLN”) based on another kind of relinquishing act. Here is a blog post that I wrote about that describes the issue in a general way:
Renunciation is one form of relinquishment – It’s not the form of relinquishment, but the time of relinquishment
Are U.S. citizens renouncing U.S. citizenship to avoid the payment of U.S. taxes?
Few people renounce U.S. citizenship because of taxes. Most people who renounce are residents of other countries and subject to the tax systems of those countries. They renounce bc the Internal Revenue Code prohibits them from financial planning in their country of residence.
— John Richardson – Citizenship Lawyer (@ExpatriationLaw) January 8, 2018
In my experience no. Because of various tax mitigation rules (foreign tax credits and foreign earned income exclusion) many U.S. citizens abroad do NOT owe U.S. taxes. In fact very few of the people who I assist with renunciation owe U.S. taxes. Therefore, the notion that people renounce U.S. citizenship to avoid U.S. taxes is a a myth. As Ted Sorenson wrote for President Kennedy:
“For the great enemy of truth is very often not the lie–deliberate, contrived and dishonest–but the myth–persistent, persuasive, and unrealistic.”
People do renounce U.S. citizenship to escape the regulatory aspects of the Internal Revenue Code that make it very difficult to live productive lives outside the United States
Caution!!! Caution!! – Since June 16, 2008 relinquishing U.S. citizenship may subject you to the draconian Exit Tax rules found in S. 877A of the Internal Revenue Code!!!
Anybody contemplating relinquishing U.S. citizenship needs to be cautious. You need to understand what the possible U.S tax implications of renlinquishing/renouncing U.S. citizenship would be FOR YOU with YOUR SPECIFIC tax and FINANCIAL PROFILE. This is NOT a “one size fits all” kind of exercise. To learn how the S. 877A Exit Tax rules work see:
Renouncing US citizenship? How the S. 877A “Exit Tax” may apply to your Canadian assets – 25 Parts
Do you have to be compliant with the requirements of the Internal Revenue Code to relinquish/renounce U.S. citizenship?
The answer is NO YOU DO NOT! But, a failure to be compliant with the rules in the Internal Revenue Code for each of the five years prior to renouncing/relinquishing would make you subject to the S. 877A Exit Tax rules.
In closing …
As you might have guessed, I spend a significant part of my professional life helping people terminate their relationship to the United States (both citizens and Green Card holders). I have written this detailed answer to correct a lot of the incorrect information found in various sources. That said:
Under NO circumstances should this answer construed to be legal advice or any other kind of advice. Furthermore, laws are subject to change and you should NOT assume that the information I have given is even correct. You should NOT relay on this answer and absolutely should seek a competent advisor who will help you understand your situation and come to an appropriate decision for you.
Citizenship Counselling For U.S. Citizens in Canada and Abroad
About the Author John Richardson
Toronto citizenship lawyer: FATCA U.S. tax + renunciation of citizenship
B.A., LL.B., J.D. (Of the bars of Ontario, New York and Massachusetts)
Co-chair of the Alliance for the Defence of Canadian Sovereignty and the