Renouncing US Citizenship...what are the tax implications?

[oomotep]

I've done a tiny bit of research on this topic, but haven't found a clear answer, so I thought I'd post it here. It's a bit complicated of a question, but I think it's super interesting to work on an answer.


Let's say you're a U.S. Citizen who retires at 35 or 40 with a $2 million dollar portfolio. For this example, half the money is in taxable accounts, half is in non-taxable.

You decide that you no longer need to live in the U.S., and you want to spend become a citizen of a more favorable tax treatment nation like Belize, Cayman Islands, Etc...

You renounce your U.S. citizenship.

What kind of tax would you owe? I've read a little bit of the IRS publication here: https://www.irs.gov/individuals/international-taxpayers/expatriation-tax


Also,
If you knew in advance at the start of your career in the US that you would eventually renounce your US citizenship, would you put more money in taxable accounts vs. IRA's or 401K's?


Obviously you would forfeit your SS checks in the future, but for early retirees that wouldn't be too big of an issue.

[gocurrycracker]

This is something I've not really explored deeply.

You don't need to be a citizen to receive SS benefits that you have qualified for, but there are some rules specific to Non-resident Aliens (NRAs.)

You'll need to have another citizenship first. You can't be a citizen of nowhere.

There is a potential exit tax. All assets are assessed at current market value, and you pay a tax on the value over $2 million. You will also be taxed if you made more than ~$150k each of the last 5 years.

After becoming an NRA, 401k/IRA withdrawals are still taxed as normal.

If you keep funds in the US, then there are special tax rules for NRAs. 30% withholding on dividends, etc..

You can Google NRA taxes to explore deeper

[oomotep]

This is something I've not really explored deeply.

You don't need to be a citizen to receive SS benefits that you have qualified for, but there are some rules specific to Non-resident Aliens (NRAs.)

You'll need to have another citizenship first. You can't be a citizen of nowhere.

There is a potential exit tax. All assets are assessed at current market value, and you pay a tax on the value over $2 million. You will also be taxed if you made more than ~$150k each of the last 5 years.

After becoming an NRA, 401k/IRA withdrawals are still taxed as normal.

If you keep funds in the US, then there are special tax rules for NRAs. 30% withholding on dividends, etc..

You can Google NRA taxes to explore deeper

Thanks for the reply.

I'm aware of the exit tax, just unaware of what the rate is. Also, if you do Capital Gains Harvesting you can potentially get your basis up high enough to avoid a lot of the tax I would assume.

The IRS form I've looked at don't get into the specifics of what the rate is on the exit tax.

The question really only becomes important for those that think the US might turn into a Venezuela (not something I'm predicting by any means)

How do you make sure you get off the boat before it sinks? And what's the cost to get off?


I see a lot of wealthy Chinese people taking their money out of China and into real estate into places like Vancouver, Canada, Los Angeles, etc...


That's why I'm trying to figure out the answer to this. I don't think it will every happen in the US where people will want to take their money away, but just trying to figure out if it's a viable option.

[gocurrycracker]

It's a capital gain tax, up to 23.8%

Go through Form 8854 and instructions. Roughly first $700k per person is excluded.

Increasing basis in the years before will help if you have more than $700k gains and can do it at a lower rate.

[oomotep]

That's a lot of gains tax free for renouncing.

<edited>

[prognastat]

At the same time I feel reducing your options by renouncing your citizenship has a large hard to quantify cost. It might never be a problem, but if SHTF wherever you are staying the option to easily return to the US could be invaluable.

Now if you are going to be staying somewhere safer/more stable than the US this might not be much of a concern, but I would suspect most places with a more advantageous tax policy than the US probably aren't as safe/stable as the US. Meaning it would be nice to have a safe backup option in the event that things go south. Question is how much is this backup option worth.

[oomotep]

It might never be a problem, but if SHTF wherever you are staying the option to easily return to the US could be invaluable.

Looks like my previous post got edited by the moderator so you missed some of my points about the ease of retuning to the US as an undocumented immigrant, but returning to the states after renouncing citizenship is not that hard.

You just have to do it through the southern border. Thousands of people do it every day, millions more each year.

I know it's a highly charged political topic to bring up immigrating illegally back into the US, but currently it's not that big of a deal, and likely won't be for the foreseeable future.