Greenback Expat Tax Services, which helps Americans abroad file their taxes, recently conducted a survey on 3200 expats living in 121 countries. A quarter said that they plan on renouncing their US citizenship (6%) or are seriously considering it (20%). The leading reason is the tax burden they feel, followed by concern about their home country's political climate. Many feel that having to pay US taxes while not living in the country is unfair.
US expats file taxes in two countries
There are an estimated 9 million Americans living abroad, according to the US State Department. These American citizens are subject to two tax returns: that of their country of expatriation and that of the Internal Revenue Service (IRS), the federal US government body responsible for collecting taxes. They need to report all sources of revenue, whether it is a salary, investment income, business profits or rent from their properties.
According to Bright!Tax, another US expat tax service, any adult US citizen abroad who earns at least 12,550 USD a year must file the IRS Form 1040 every year. They also need to report any overseas asset worth over 200,000 USD that is not their primary residence. As for their savings in foreign banks, if it amounts to at least 10,000 USD, they need to report it through a Foreign Bank Account Report (FBAR). Failure to file all of these forms (willful non-compliance) will make the expat liable for heavy penalties from the IRS.
This situation is an anomaly on the global scene, for only a minority of countries require their non-resident citizens abroad to pay taxes. Most countries have a residence-based taxation system, not a citizenship-based one. The United Kingdom, for example, does not tax citizens whose ‘domicile' (permanent address) is abroad, irrelevant of how high their foreign earnings are.
Foreign Earned Income Exclusion and Tax Credit
The IRS does have certain measures to avoid over-taxing US expats when they need to file two tax returns in two different countries. The Foreign Earned Income Exclusion allows expats to exclude part of their foreign earnings from US taxes. The amount excluded is about 108,700 USD and depends on the expat's income, how much they spent on housing and yearly inflation. Expats can also claim US Foreign Tax Credit from the IRS for taxes they've already paid in their country of expatriation. This means that if a US expat already paid 10,000 euros of taxes in France, they can claim a deduction of the equivalent amount in dollars (at the moment, around 10,000 USD itself) when filing their IRS return.
The United States has tax treaties with around 70 countries, according to Bright!Tax. These treaties make it easier to file for Foreign Tax Credit through IRS Form 116. American digital nomads, who move from country to country on tourist visas and are not subject to foreign taxes, evidently don't qualify for US Foreign Tax Credit. Furthermore, the Foreign Tax Credit won't eradicate the full US tax liability of an expat who lives in a country where tax rates are lower than in the US. In that case, the expat will only get a partial deduction equal to the difference between the taxes they owe to the IRS and the lower amount they already paid abroad.
US expats feel frustrated by IRS rules
Despite the aforementioned measures, many American expats still feel frustrated by the time and expense required to file two tax returns every year. They usually face more paperwork from the IRS than American citizens domiciled in the US, which often makes them need to pay a tax service company to help them file it. A minority (8%) has even faced problems in getting their foreign banks to collaborate with the IRS, and these banks charge high fees to disclose their information to the US government.
77% of respondents to Greenback Expat Tax Services' survey report that they don't think expats should have to pay US taxes, and 57% would like to see citizenship-based taxation repealed. In comparison, in Greenback's 2021 survey, 47% (10% less) had desired that. Another 19% of respondents would like tax-filing procedures to be simplified. One suggestion is to merge the Foreign Account Tax Compliance Act (FACTA) and Foreign Bank Account Report (FBAR), so that expats only need to fill out one form for both their income and assets.
In addition, nearly half of the expats surveyed (49%) don't plan on returning to the US permanently. 12% are married to foreign citizens, which gives them a greater sense of security in their country of expatriation, and 46% disapprove of the way Washington handled the pandemic, which has lessened their trust in the country's politics. Indeed, political dissatisfaction ranks as the second reason in this survey on why US expats want to renounce their citizenship. 86% feel that Washington doesn't listen to their concerns, which is why some have opted to renounce their citizenship. After multiple years in a foreign country, it makes more sense to become its citizen and file only its taxes.
It should be no surprise that US citizenship renunciations are on the rise. According to a Forbes article by Kathleen Peddicord, between 2005 and 2009, less than 2,500 Americans renounced their citizenship. In the decade from 2010 to 2020, this number skyrocketed to 36,840. In only 2021, 2,426 Americans renounced their citizenship, according to the data of Greenback Expat Tax Services.
Disclaimer: Renouncing US citizenship is no easy task
The American expats looking to renounce their citizenship should prepare themselves for a long and costly process. The CEO of another expat tax services company, Nathalie Goldstein of MyExpatTaxes, wrote in Forbes about the things an expat should be aware of before renouncing their citizenship.
Firstly, renunciation of citizenship costs an unwaivable and non-refundable fee of 2,350 USD. Secondly, renunciation is irreversible for adults and will make expats lose their US passports. They will need a visa to enter the United States, and they will be rendered stateless if they haven't acquired dual nationality before the renunciation. They will also be ineligible for any stimulus checks from the US government during times of crisis.
Last but not least, US expats need to catch up on all their taxes before their renunciation process can be started. This means that renunciation is not a loophole for committing tax evasion. Renouncing your citizenship has no effect on student loans or child support payments that you owe. Goldstein recommends US expats to first consider getting help to become tax compliant before deciding whether renunciation of citizenship is the right move.
