I’ve asked this before, a long time ago but am unable to find the thread. We have not lived in the US for 6 years. Our daughter, 18, will go to uni either in the UK or Australia. She and dad are dual citizens USA/Aussie. I am American. She has no plans to study in or return to the US. We are considering she relinquish, if that’s the correct word, her US citizenship because she will likely never live there and does not wish to pay taxes, for life, to a country in which she will not live. She might wish to visit the states sporadically but would travel on her Aussie passport. Just living abroad these past years, we feel that US citizenship is not as important as it once was, in terms of access and travelling. Also, we already pay US taxes for life and don’t see how that makes sense for her to have that burden. Has anyone done this? Pros and Cons?
I don’t know, I find it confusing. Just a couple questions. What gets taxed by the US, your Australian income? And/ or any assets in the US? what do you receive in exchange for paying US taxes for life? The ability to vote? Any benefits like social security?
If she lets her passport expire she cannot travel to US is she then still on the hook?
My sister moved to Canada became a citizen yet retained her pp, but pays no taxes. She doesn’t vote in US either. ( thank og for that).
And some folks have multiple passports, do they owe taxes to all the countries?
When I was offered a job in Canada and would have eventually obtained dual citizenship out of the idea, I was appalled by the idea that I’d owe taxes to a country I lived in zero days out of the year.
For individuals who are dual citizens of the U.S. and another country, the U.S. imposes taxes on its citizens for income earned anywhere in the world . If you are living in your country of dual residence that is not the U.S., you may owe taxes both to the U.S. government and to the country where the income was earned.
[Moderating]
Requests for personal experiences are a better fit for the IMHO category. Moving from FQ to IMHO.
Yes. The US is one of the only countries in the world that requires its expats to pay taxes on their foreign income. My wife and I left the US several years ago and own no assets and make no income stateside, but we still file an annual return. And when our US-born kids turn 18, Uncle Sam will expect the same of them. When we tell our European neighbors about this, they are invariably astonished and offended.
We are on a path to acquire citizenship in our adopted country and are likely to renounce our American citizenship shortly thereafter. There are downsides (the US makes this a very painful process) but we consider it a net positive.
If I were going to renounce my citizenship so I didn’t have to pay taxes in the US, but still wanted to visit the US from time to time, I might get advice from an immigration attorney to help me understand this:
Specifically:
Former U.S. citizens would be required to obtain a visa to travel to the United States or show that they are eligible for admission pursuant to the terms of the Visa Waiver Program. If unable to qualify for a visa, the person could be permanently barred from entering the United States. If the Department of Homeland Security determines that the renunciation is motivated by tax avoidance purposes, the individual will be found inadmissible to the United States under Section 212(a)(10)(E) of the Immigration and Nationality Act (8 U.S.C. 1182(a)(10)(E)), as amended.
Perhaps “tax avoidance” in this context has a very narrow definition that doesn’t apply to a good faith desire to live abroad with taxes being incidental to that, but, again, I’d want to talk with an attorney who specializes in such things just to be safe and avoid complications if possible.
The U.S. certainly makes things awkward for anyone they suspect may be renouncing principally to avoid paying taxes. This means
(a) I would strongly endorse @ASL_v2.0 's recommendation to take professional advice from an immigration attorney, even if it costs a significant amount. This is potentially a life changing decision for your daughter.
(b) You are wise to be making this decision now, before she reaches a point in her life where she has a long history of filing U.S. returns and paying any significant amount of tax to the U.S. (or indeed living in the U.S. in the past). I would suspect that the U.S. authorities might be less likely to view renouncement with skepticism or suspicion under her circumstances.
The U.S. taxes the entire worldwide income of its citizens, regardless of where they reside. This does not mean that you are taxed twice on the same income - there are tax treaties with every major country, so you get relief from double taxation. However, it means an immense amount of paperwork filing two returns every year, exacerbated by the fact that in some countries the tax year does not start on Jan 1st. And although you are not taxed twice, you usually end up paying the worse of local or U.S. tax rates, and only getting any special tax breaks if they are recognized in both local and U.S. jurisdictions, which is rarely the case. Pensions are a total nightmare.
Partial. While the majority of our US income tax is forgiven because we primarily pay our taxes in our country of residence, we are not paying zero.
But this is not usually double taxation. As I noted, you are in total paying the worse of local and U.S. tax rates. So whenever the U.S. tax would be slightly higher than local rates (or if some local tax break is not recognized in the U.S. tax system), the relief you get on your U.S. return for the local tax you have paid does not reduce your U.S. tax bill to zero.
There can be situations where you need to be very careful - for example, I believe that you get U.S. tax relief for local taxation on a “when paid” basis, so it is essential that you pay all your local tax within the relevant U.S. tax year in order to get relief on that same year’s U.S. return.
I can confirm this is not fun. I sometimes wonder if I lived in a country that higher tax rates, and had national healthcare, how much lower my U.S. taxes would be.
It’s much easier to renounce at 18 - I belive there’s a one-time chance that is much easier for the person giving up their citizenship.
There is also the cost (whether time or money) of doing two income tax returns. The U.S. system is convoluted for residents. Even more so for non-residents.
As we will most likely return to the U.S. after retirement (we do not have children), we plan to keep our U.S. citizenship, even though it is very costly to do so.
Of course. Believe me, my wife and I are intimately familiar with the expat tax burden. I just wanted to clarify for the benefit of any casual readers following along that the US tax forgiveness scheme is limited in scope, and that in many cases you’re sending a check back home (for no justifiable reason you can fathom).
Yes. The broad intent of the system is that you only pay additional tax to the U.S. to “top up” your total tax bill if it would have been higher if you had been living in the U.S.
In practice, the system is horrendously complicated with endless pitfalls. It’s not just the income tax rates, what tends to screw you is that you will only benefit from any special tax break if it is recognized in both jurisdictions, and they rarely are. For example, in the U.K. the entire capital gain on your primary residence is tax free. But the U.S. does not recognize that tax break. If you sell your home in the U.K. for a substantial gain, your U.S. tax liability follows U.S. rules.
Another absolute nightmare is that for your local tax return everything must be reported in local currency values, whereas for your U.S. return everything must be translated to $ using the prevailing forex rate at the date the income was received or the transaction took place. For the exact same transaction, you may have a capital loss on your local return and a capital gain on your U.S. return!
This is a widely held belief, but do you have any evidence of it?
I obtained Canadian citizenship in my 20s because as a child, I had been told over and over that I’d have to choose one citizenship at age 18 and (presumably) renounce the other, but I woke up one day and went, “wait a minute—why didn’t I get that choice?” It turned out that dual citizenship works because neither country much cares what the other country does about its citizens, but they have strong opinions about their own.
I have not had to pay US taxes since moving to Canada, but I have to file every year, which is a right royal pain.
I have contemplated giving up citizenship. Not for tax reasons, but just because I can’t see coming back as I age and might need healthcare. But since I will forever have a US birthplace in my passport, I worry that renouncing could make it difficult to enter the US for vacations, conferences, and other visits.
On balance, the costs of renouncing citizenship so far outweigh the roughly $1000 / year cost of filing US taxes. Ease of entry at the border and ability to vote are the only benefits I’m seeing at the moment.
Don/t be so casual about this…I doubt if she would just be able to travel on her Aussie passport, like a typical Australian tourist.
Renouncing citizenship is VERY very serious, and the US Embassy does not like people who do it. It marks you as a suspicious person. So if she wants to travel the the US, she will probably be required to go to the US Embassy 6 months in advance , and ask for a visa granting her permission to enter the US. This is the standard procedure for tourists from every country in the world, except for the 40 countries which are given special status known as
the visa waiver program, and allowed to enter to the US without a visa.
She might well be prevented from ever entering the US.–see ASL’s link in post 5. And be aware that visas to enter the US are granted–or NOT granted–at the sole whim of the employee in the US Embassy who happens to check your application. If you are refused permission, no reason is stated, and there is NO recourse and no way to appeal the decision.
Officially, this is explained as “protecting the right to privacy” of the applicant- (for example, suppose you have a criminal record which bars you from getting a visa, the US Embassy does not want to invade your privacy by revealing your criminal record to the public.)
But that’s just a fig leaf…The real reason is that they have the power , and you don’t. So they tell you to just shut up, get the hell out of our embassy, and don’t come back.
It seems plausible that the U.S. authorities (who I think have considerable discretion) would be less likely to give you problems in the future if you decide early in life, and not when you clearly have a history of paying a significant amount of U.S. tax., and a transparent primary financial motive.
But I would still absolutely take professional advice from an experienced U.S. immigration attorney both on the technical details of the law, and equally importantly on their experience of how policy is implemented.
However
here you vastly underestimate both the potential direct financial cost and the huge inconvenience involved in filing U.S. tax returns for the rest of your life.
This is also one of those areas of the law that hasn’t been updated that much. There was an option to exclude the first $20,000 in gross income entirely in 1964, which that equates to $181,000 in modern terms–very few people would be earning money at that level, abroad or domestically, in 1964.
In 1982 it was changed to $80,000 which equates to $232,000 in current day money, and was then allowed to be gradually “cost of living” adjusted up–it’s up to like $108k now–so inflation adjusted it’s significantly reduced from how much could be excluded, and the number of people likely to be above the threshold is a lot higher now.
Paperwork wise it has always been a nightmare, although the law did create carveouts for military personnel and charitable organization employees to avoid a lot o fthat.
I have a coworker who renounced a few years ago and he also investigated what his son would need to do to give up U.S. citizenship. Switzerland doesn’t care if someone has dual citizenship, so there is no obligation from the Swiss government to give up the U.S. citizenship. The U.S. also doesn’t require reunciation, becaus the U.S. government doesn’t concern itself with other citizenships.
One of the major challenges with renouncing U.S. citizenship is the tax issues. TOne of the exceptions is for the following:
Certain minors. You can qualify for the exception described above if you
meet both of the following requirements.
• You expatriated before you were 18 ½.
• You were a resident of the United States for not more than 10 tax years before you expatriated. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.
It’s worth mentioning that Canada has the same tax-free rule as the UK on capital gains from a primary residence, which is especially relevant because there are a lot of dual US-Canadian citizens, and many of them live and own a primary residence in Canada. The US tax implications could be horrendous. The article below cites a perfectly plausible example in which the dual citizen selling a home would owe nothing in Canadian taxes but $178,500 in US taxes. The example assumes a married couple owning the property jointly, where only one partner has US citizenship. If a dual citizen was the sole owner, in this example the tax liability would be twice that amount – a staggering $357,000.
The capital gains numbers in the example may seem outlandish but in many areas, especially Vancouver and Toronto, house prices really have appreciated astronomically in recent decades. It’s been a significant part of my financial equation that would have been hugely decimated if I had US tax liabilities.
Like @Dr.Drake I file both US and Canadian tax returns every year, but pay no US taxes because Canadian taxes are higher. But I do my own returns so the only cost is postage. It is a nuisance, but the bigger nuisance is the FBAR return on foreign bank accounts. In fact, I am taking time from filling out the 1116 form (credit for foreign taxes) to write this. There is an automatic two month filing extension for non-residents so I have until June 15.
I have thought of renouncing, but the possibility (even remote) that we might want to move back deters me. But if Quebec sinks any further into fascism… A proposed law provides that if some random person accuses you of speaking English when you are not entitled to, the police can come to your house without a warrant and seize your phone and your computer.