Renouncing Your U.S. Citizenship? – Count ALL Your Assets

November 19 2019

Renouncing U.S. citizenship raises the issue of whether U.S. exit tax applies and what that calculation includes.

Canadians with U.S. citizenship continue to review its benefits and costs. Its benefits include unlimited access to work and travel to the U.S. while its costs include the application of complex U.S. tax laws and requirement to file annual U.S. federal income tax returns to report worldwide income and activity.  More people are seeing the costs of U.S. citizenship outweigh the benefits. From 2015 to 2018 more than 15,000 people renounced their U.S. citizenship which is more than double the amount of people for the 15 years prior to this period.

U.S. Exit Tax

Individuals who renounce their U.S. citizenship are subject to an exit tax where they meet certain criteria.  This would include individuals: (1) who are not currently compliant with their U.S. tax returns, (2) with  a high average U.S. federal income tax liability over the last five years, or, (3) who have a total net worth exceeding U.S.$2 million. If any of the preceding three criteria are met, individuals are subject to U.S. federal income tax on certain unrealized gains and deferred income plans. Exemptions and deferrals exist in some situations. However, individuals that don’t meet any of the above three criteria can avoid the U.S. exit tax completely.

More information on the U.S. exit tax can be found here:  https://andersen.com/newsletter/2011/december/exit.php

Total Asset Test Includes All Assets

To determine whether an individual is subject to U.S. exit tax when renouncing their U.S. citizenship, they need to calculation the fair market value of their net worldwide assets, not just U.S. based assets. This calculation includes the assets one can see now such as their home and investment assets but also includes assets to come in the future. Many individuals have pension plans either through their employer or through U.S. Social Security or Canada Pension Plan that will produce an income stream at a future time. This income stream is considered an asset when determining an individual’s net worth for U.S. Exit Tax purposes. Calculating the current value of a future income stream requires a complex calculation using the individuals age, projected future contributions and the estimated expected payout. The Internal Revenue Service requires taxpayers to use their actuarial tables to calculate this value.

Seek Assistance to Calculate or Reduce U.S. Exit Tax

We work with individuals who want to renounce their U.S. citizenship to perform such calculations, to review strategies to reduce or eliminate U.S. Exit Tax and to meet their final U.S. tax obligations. Contact us if you want to discuss your situation further.