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So You Don't Want to Be a U.S. Citizen?

Statistics tell us that the number of U.S. citizens who expatriated from, or renounced, their U.S. citizenship has risen dramatically in the past few years. A big part of this rise has to do with increasingly onerous U.S. income tax filing and reporting obligations, combined with scrutiny of foreign accounts under the U.S. Foreign Account Tax Compliance Act (FATCA) reporting requirements. Matters are not expected to get better any time soon. Personal circumstances and attitudes will play the deciding role in choosing to expatriate--not everyone who lives abroad and finds U.S. tax reporting onerous and expensive will want to do so.

Ten years ago or so, each year only a few hundred U.S. citizens sought to expatriate. The process was more onerous including multiple visits to a U.S. consulate and bringing two independent witnesses to swear that one was not being coerced to expatriate, but the tax consequences were almost non-existent. The current process has become much more streamlined and the tax consequences can be quite daunting, but in 2013 approximately 3000 U.S. citizens expatriated. For an overview of the process involved in expatriation and the tax consequences of expatriation, please see our August 22, 2013 blog post on this topic.

When it comes to making the decision to expatriate, aside from making sure your U.S. income tax filings are up-to-date and in order, which is a necessary prerequisite, there are several matters you will also need to consider.

U.S. citizenship confers benefits on those who hold it, so you should think about whether you wish to keep such benefits. Other than protection abroad and consular services (not a big incentive for most), travel to the U.S. is an automatic right for a U.S. citizen, in addition to the rights to work in the U.S. and the right to vote in U.S. elections. If you plan to work or live in the U.S. in the future, you may want to hold on to your U.S. citizenship. On the other hand, many of those living in Canada or elsewhere have lived outside the U.S. for many years, have no personal connection to the U.S., and may feel that U.S. citizenship confers no advantages on them.

A possible advantage to expatriation is ceasing to be subject to U.S. tax reporting, filing and payment requirements, including U.S. gift and estate tax. However, in certain circumstances the estate of an expatriated individual or a trust settled by an expatriated individual may create unexpected tax burdens for U.S. citizens or the expatriate's tax-resident beneficiaries. In addition, expatriots may also be subject to expatriation tax. This is an important reason why professional tax advice is crucial before expatriation.

Expatriation may result in restricted travel options. If you would be otherwise ineligible for travel to the U.S., for example, due to a communicable disease or criminal record, expatriation may render you ineligible to enter the U.S. or subject you to tedious and invasive scrutiny on each trip once you are no longer a U.S. citizen. One should also be mindful of a 1996 amendment to U.S. immigration laws (the so-called Reed amendment), which appears to be seldomly used successfully, but allows the U.S. to bar someone who renounces his or her U.S. citizenship from re-entering the country if the government determines that citizenship was given up for U.S. tax avoidance purposes. In future, the U.S. may choose to more vigorously enforce this law, or pass newer and tougher legislation restricting the re-entry of expatriates, as was attempted in 2013.

The names of expatriated individuals are also published each year in the U.S. Federal Registrar, which may not be ideal for those seeking privacy for their personal affairs.

Ultimately, the choice to expatriate is very individual, and will require professional advice. There are advantages and disadvantages regarding whether to expatriate or keep one's U.S. citizenship, and they should all be carefully weighed and considered before you make this decision.

- Susannah B. Roth

Don't miss our next blog post on assisted dying and the recent Supreme Court of Canada decision in Carter v. Canada (Attorney General).

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.

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