A First-Hand Expatriation Guide
for Americans (III) – Major Misconceptions

Because reliable advice about renunciation is difficult to find, it’s easy for inaccurate, misleading information to spread. Here are five major misconceptions some people have about expatriation:

1.) “Even if I expatriate I’ll still have to file U.S. tax returns for the next ten years.”

Believe it or not, this USED to be true. However, the law changed years ago and no longer applies. Now all you do is file a final return for the part of the year when you were still a citizen. That final return also includes Form 8854, which lists what, if any, exit tax is due.

2.) “If I expatriate, the IRS will take half my money.”

Not true. Taking half your money is what the IRS does if you die as a wealthy U.S. citizen. Here’s the reality. If you have a net worth less than $2 million and don’t meet their income test, you automatically owe no exit tax. If your net worth is over $2 million, you are what the IRS calls a “covered expatriate,” meaning you MIGHT have to pay exit tax. But you also might not, even if your net worth is $200 million or $2 billion.

So how can you tell what you would owe, if anything? It’s pretty straightforward: You pay exit tax on unrealized gains as of the day before you expatriate. In other words, it’s as if you sold all your assets the day before you expatriated and paid whatever applicable tax would have been owed (long-term capital gains, ordinary income, etc.). If you own illiquid assets when you expatriate such as private companies or real estate, you’ll need to get a fair market valuation done to determine what, if any, gains you would have had IF they had been sold.

Here’s a critical caveat in the calculation: You get a free pass, called the “exclusion amount,” on the first $626,000 in gains. If you’re married and your spouse expatriates with you, the exclusion amount doubles to $1.252 million. For example, you and your spouse could expatriate with a stock portfolio showing $1.2 million in gains and not owe exit tax on it. Even if the portfolio tripled in value shortly after expatriating, you could sell it any time and owe no taxes.

To recap, if upon renunciation you own assets with unrealized gains of less than $626,000, you will not owe exit tax, no matter how wealthy you are. If you do end up owing exit tax, look at it this way: Because of the exclusion amount, it’s less tax than you would have paid if you’d stayed in the U.S. and sold the assets. Plus, if any asset you pay exit tax on continues to rise in value post-expatriation, all those additional gains are yours, free and clear.

3.) “Expatriation means I’ll be barred from ever visiting the U.S.”

Nope. While renouncing citizenship means that you forgo the right to enter the country, in reality it’s a straightforward process to visit the U.S. after you expatriate. If you already have a passport that gives you visa-free entry to the U.S., then you just go and visit like anybody else. If you have a passport that doesn’t give you visa-free entry, you simply apply for a tourist or business visa at a U.S. embassy or consulate. It’s called a B1/B2 visa, and it typically lasts for ten years.

4.) “But if I expatriate, I’ll sacrifice my pension, Social Security and Medicare.”

All untrue. You’re still entitled to these after you expatriate. With Medicare you obviously have to be in the U.S., so your Medicare use would be limited to visits there.

5.) “If I expatriate, I’ll get grilled by government authorities about why I’m doing it.”

Not the case. Ask an expat-savvy attorney what to expect, and he’ll likely describe an experience similar to my own. I went to my expatriation appointment, filled out the forms, signed the “oath of renunciation,” and handed the official my U.S. passport. That was it. No heat about why I was doing it, my finances, taxes or any other grief. The officials who process renunciations are low-level bureaucrats just doing their job. If you show up with the right documents in hand, fill out the forms correctly, and behave courteously, it’s an easy and mechanical process.