According to the state department, an estimated 9 million citizens currently live overseas. These 9 million Americans include aid workers, students, families working abroad, freelancers, military staff, and accidental Americans who are born in the US but leave shortly after.
Most Americans who choose to live and work abroad may never visit or live in the US for the rest of their lives, but they’re still tied to the US tax system and must file a return every year.
The American Tax System
The US tax system is one of two countries left in the world with a citizen-based tax system. Regardless of what country they live in, Americans must file a US tax return. This law often leads to double or even triple taxation if you’re paying double for goods and filing twice.
Even if you’re only receiving income in your country of residence, you may have to pay income tax twice. Americans filing abroad can claim tax credits and exemptions to eliminate their tax bill. But, at the very least, Americans must pay to file a return and for international postage.
Renouncing your American citizenship is a big step. Once you renounce, you can no longer work or travel freely across the US, and you relinquish your voting and protection rights. However, as a tax avoidance strategy, renouncing your citizenship can make a lot of sense if:
1. You’re a Freelancer Who Pays Self-Employment Tax
Self-employment tax in the United States is 15.3%, twice what you’d pay as a regular employee. If you have clients in the United States, it’s almost guaranteed that you have to pay US taxes on top of your current country's self-employment tax. You could lose 30% of your income this way.
2. You Never Plan to Work Full-Time in America Again
While it’s possible to work in America after renouncing your citizenship, you have to apply for a visa or work permit to do so. If you want to have full rights as an American worker, you’ll have to wait at least 7-11 years before you can reapply for citizenship. The waitlist is notoriously long.
However, if you’re situated in your new country and don’t plan to work in the United States ever again, you should renounce your citizenship immediately to avoid an extra tax burden. For this reason, accidental Americans should also renounce if they’ve never lived in the US.
3. You Can’t Afford to be Taxed Twice or Thrice
Renouncing your citizenship can be expensive. The cost alone is over $2,000 USD, and you may have to travel to the United States more than once to renounce. Still, it beats being charged twice or thrice every single year. Sometimes it’s cheaper to take the $2k hit right now.
4. You’re Wealthy and Can Afford the Exit Tax/Gift Tax
Wealthy Americans are considered “Covered Expats” if they have a net worth that exceeds $2 million, and/or an average net income of over $160,000, and/or haven’t been tax compliant for five years. Qualifying for one of the above metrics requires you to pay a hefty exit tax.
A wealthy American could likely avoid paying the exit tax if they max out their Gift Tax exemption or sell some of their assets, but if that isn’t possible, it’s still worth it for them to pay the exit tax. Wealthy Americans immediately save money after removing their US tax burden.