United States: Renouncing US Citizenship Or Giving Up A Green Card: Why And How To Consider It

Israel and the United States share a strong bond, and U.S. citizenship or permanent resident status allows access to the largest economy in the world. Why would a dual Israeli-U.S. citizen, or an Israeli who has been granted a U.S. "green card," ever consider giving that up? Increasingly, the answer is one word: tax.

Unique among global powers, the United States taxes the worldwide income of its citizens and permanent resident status holders no matter where they live. Additionally, the requirement that an Israeli-U.S. citizen or green card holder file an annual U.S. income tax return is not waived by the fact that the United States grants a credit for taxes paid to Israel. In fact, many U.S. citizens living abroad do not actually owe U.S. tax, but they can face very stiff monetary penalties for failing to file required disclosures about non-U.S. assets in a timely manner.

U.S. citizens who do not call America home also face the specter of estate and gift taxes following them outside U.S. borders. Indeed, it is possible for a person who has never been to the United States to be subject to annual U.S. income tax obligations, gift taxes on large gifts made during life, and estate tax upon death. For example, many children born abroad to U.S. parents are automatically U.S. citizens and are therefore subject to U.S. federal tax law. Individuals born in the United States are also U.S. citizens subject to U.S. tax, even if they left as infants and have never returned. Israelis who have held U.S. green cards are subject to U.S. income tax and reporting obligations unless they properly terminated their status and filed final U.S. tax returns.

None of this is new, but what is novel is increased and more sophisticated enforcement. The U.S. Foreign Account Tax Compliance Act (FATCA) went into full effect on July 1, 2014, mandating international information-sharing on U.S. individuals with non-U.S. bank accounts. Israel's Supreme Court rejected a challenge to FATCA implementation in September 2016, so Israeli banks now must automatically disclose U.S. account holders to the Ministry of Finance, which exchanges data with the U.S. Internal Revenue Service (IRS). U.S. individuals in Israel—estimated by some to comprise as much as five percent of the population—may be facing sleepless nights in anticipation of a notice from the IRS asking why they have not filed.

The solution to this predicament often comes in the form of renouncing U.S. citizenship or turning in one's green card. As U.S. lawyers who have helped many individuals give up U.S. citizenship or green card status, we find that clients are often emotionally and financially drained by the process of becoming U.S. tax-compliant, staying compliant, and continually planning for cross-border tax issues. While the IRS currently offers amnesty programs to help reduce penalties for taxpayers who come forward before being contacted, getting compliant is not easy. Many U.S. individuals who might not otherwise consider renouncing eventually find that the benefits of keeping U.S. citizenship do not outweigh the headaches.

Renunciation carries serious consequences, including tax and immigration traps; any Israeli considering it must decide if it is the right choice and then get competent advice before going through the process. Renouncing U.S. citizenship is permanent: once the U.S. Department of State issues a Certificate of Loss of Nationality (COLN), the only way to regain U.S. status is through the long and difficult process of naturalization. Further, patriotism aside, U.S. citizenship does provide certain benefits that can prove very valuable depending on an individual's circumstances: protection and consular services abroad, the right to vote in U.S. elections, access to the U.S. job market, and an unquestionable right to travel to the United States at any time. Renouncing provides relief from the U.S. tax regime, but it is not for everyone.

If an Israeli decides to renounce, he or she must take precautions to avoid the imposition of the U.S. exit tax. Under the law in effect since 2008, a renouncer can become a "covered expatriate" by failing one of three key tests. If a renouncer is deemed a covered expatriate, he or she is treated as having sold all property for "fair market value" the day before renunciation and is taxed on the imputed gain in those assets (less a credit of $699,000). Gifts that the covered expatriate later makes to U.S. citizens or residents during life or after death also become taxable in the hands of the recipient at a rate of about 40%. A renouncer becomes a covered expatriate when he or she has a net worth of $2 million or more at the time of renunciation; has an average annual U.S. net income tax liability of more than $162,000 in the five years ending before the date of expatriation; or fails to timely certify to the IRS that he or she complied with all U.S. federal tax obligations for the five years preceding the date of expatriation.

There are limited exceptions to the U.S. exit tax. The most important is that a renouncing Israeli who was born a dual citizen and who still lives in Israel is not subject to the net worth or tax liability tests. Individuals who have just turned 18 also enjoy some special exemptions as it is generally difficult to renounce as a minor and a parent or guardian cannot renounce on a child's behalf. Every renouncer will always be subject to the compliance test. Thus, avoiding the exit tax requires that a renouncing individual is U.S. tax-compliant in all circumstances.

Assuming a renouncer takes the tax compliance steps need to avoid imposition of the exit tax, the actual process of renouncing one's U.S. citizenship also has immigration issues of which to be wary. The U.S. Immigration and Nationality Act includes a provision (known as the "Reed Amendment") that denies a former citizen reentry to the United States if the U.S. Attorney General determines that the individual renounced for the purpose of avoiding U.S. tax. This is an example of why potential renouncers need qualified advisors: what a renouncer says during his or her exit interview at a U.S. embassy or consulate is critical.

Many individuals pursuing renunciation request that a U.S.-trained and licensed attorney accompany them to the interview. This is possible at the discretion of the individual embassy or consulates. At minimum, consulting with U.S. counsel before an exit interview will help avoid legal traps and make what can be an intense, emotional event less so.

In the end, renouncing U.S. citizenship requires careful consideration. U.S. immigration and tax pitfalls are scattered throughout the process, so both understanding the repercussions of renouncing and proceeding carefully are imperative to a smooth departure from the U.S. club and its membership fees.

***

Moodys Gartner will be hosting a free webinar on March 30 for those who would like to find out more about the pros and cons of renouncing, and whether or not it may be the right decision for them. If you would like to attend, we'd be happy to answer your questions, but would ask that you please register in advance.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estate planning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
18 Oct 2017, Webinar, Calgary, Canada

The “consultation period” for the July 18, 2017 Canadian private corporation tax proposals ended on October 2, 2017. Where do practitioners and their clients go from here?

19 Oct 2017, Seminar, Ottawa, Canada

On Thursday, October 19, 2017, Moodys Gartner Tax Law will present a complimentary seminar on the main topics of interest in consideration of renouncing your US citizenship.

20 Oct 2017, Seminar, Hamilton, Canada

On July 1, 2014, the US’s Foreign Account Tax Compliance Act (FATCA) went into effect, and as a result, it will become increasingly difficult to renounce your US citizenship for the “right reasons” and avoid any negative consequences.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.