The No. 1 Reason Americans Renounce Their Citizenship

Recently I’ve noticed an uptick in online chatter about “expatriation”—the legal process of renouncing one’s United States citizenship.

Voluntary expatriation has increased dramatically over the last decade. In 2006, about 400 Americans gave up their citizenship. Last year the figure was 3,260.

Two things suggest an even bigger spike in expatriations.

The first is the state of the country. Many Americans are looking for a second home abroad out of concern for the stability of the political system and social fabric. This usually involves getting a long-term residence visa somewhere.

increasingly, however, Americans are considering the more radical step of renouncing their US citizenship after adopting another one. That’s because of US “exceptionalism” about income tax.

The US is the only developed country that taxes its citizens on their global income regardless of where it’s earned or where the taxpayer lives. There are loopholes, including the Foreign Earned Income Exclusion (FEIE). But even if you don’t owe tax, you must still follow onerous and complex reporting requirements.

Those reporting requirements are a hassle for foreign banks, so many of them don’t want to do business with Americans—even if they have lived in a country for decades.

Even worse, people who acquired US citizenship by birth but never lived here face capital gains taxes when they sell a foreign home—even if they’ve never set foot in the US since infancy.

When an American expatriates, however, they cease to have any obligations to the IRS other than taxes on pensions and Social Security. As word of the possibility of expatriation has spread, more expats are choosing to go this route.

Tax is also behind the second reason for the expected surge in expatriation.

Under current rules, the IRS levies an “exit tax” on a percentage of an individual’s net worth at the time of expatriation. Because net worth is based on assets and liabilities, not income, it’s a form of taxation of unrealized capital gains—something that doesn’t apply to US taxpayers at home.

But Moore v. United States, a case currently before the Supreme Court, could change that. The case involves a couple that invested in an Indian nonprofit company years ago. They have never taken any income from it, treating it as an act of charity. But the IRS wants to tax them on the undistributed profits the company has made over the years. That’s because under the 2017 tax “reforms,” unrealized corporate income held abroad is considered personal income for US taxpayers.

Moore argues that the neither the Constitution nor the US tax code authorize taxation of wealth such as unrealized capital gains and retained corporate income. If the court finds in favor of the plaintiffs, the IRS could no longer levy an exit tax on expatriates.

The threat of the exit tax has made high net worth individuals reluctant to expatriate. If the Supreme Court rules in favor of Moore, they wouldn't have that concern anymore—opening the floodgates to expatriation.

But even if the Supremes rule against Moore, we could still see a surge in expatriation. If the court finds that taxation of unrealized capital gains is constitutional, wealth taxes inside the US itself would be legal. That would also impel many high-net-worth individuals to expatriate.

So, if expatriation has been on your mind, keep a close eye on the Supreme Court docket this summer!