US Expat Tax Rules: Why Renunciation Often Costs More

Americans who move abroad still have a responsibility to file their taxes with the IRS, sometimes in addition to taxes paid in their place of residence. Experts advise against renouncing U.S. citizenship, saying it typically doesn’t make financial sense.

“It typically doesn’t make financial sense, and there’s a few reasons why,” said Alex Ingrim, a financial advisor at Chase Buchanan Wealth Management.

Double-taxing is uncommon, but filing costs can hurt

Ingrim said Americans are “very rarely double-taxed,” even if “the pain of being American” can arise in tax liability in some situations.

However, citizenship renunciation is not an easy process and can be difficult to backtrack on if you change your mind.

Taxpayers looking to move abroad should also plan ahead to understand what their tax residency will look like. Boudreaux noted that tax outcomes depend on treaties and agreements between the U.S. and the country of residence, including income tax treaties, estate tax treaties, and retirement-income normalization agreements.

Ingrim explained that some European countries, such as Portugal, may tax streams of retirement income so that expats’ tax liability under a double-taxation agreement applies primarily in the country where they reside rather than the U.S.

Under such an agreement, those filing U.S. tax returns can use credits from what was paid in the other country to extinguish their U.S. liability. If Portugal has higher tax rates, it expunges U.S. liability, while paying Portuguese income taxes can generate credits on U.S. filings.

Boudreaux said the “pain of being American” often happens when filing, because it can cost more money to file in two different countries.

Investment goals and low-tax motives don’t remove IRS burdens

Ingrim said some people consider renunciation to explore investment options or pursue very low tax jurisdictions, such as Monaco or Dubai. Even there, the U.S. tax liability can remain.

Others may want to invest in tools such as European mutual funds, exchange-traded funds, savings products, or wealth-structuring solutions. But Boudreaux warned that some investments can fall under “negative” tax rule sets.

The IRS treats certain products as passive foreign investment corporations (PFIC), and the agency has rules around the types of structures American taxpayers can invest in. Ingrim said PFIC reporting can be “extremely onerous” and costly.

This can be especially frustrating for Americans earning in euros who do not want to send money back to the U.S. and invest in dollars, or for those seeking tax benefits from certain European mutual funds in certain jurisdictions.

The U.S. financial system is still a major benefit

Ingrim said the U.S. financial system is “a huge benefit to have,” where Americans can invest, trade, and hold money for relatively low cost.

He added that many European banks typically charge higher fees for similar services and often try to sell new products, and that the U.S. system is more evolved.

Renunciation is bigger, harder to undo, and may trigger exit taxes

Boudreaux said renouncing U.S. citizenship is a much bigger process than many expect, and it can be expensive and hard to undo once completed.

He also noted that an exit tax may be owed as an expatriate under the HEART Act of 2008. Boudreaux said you can’t simply expatriate and avoid U.S. taxes on assets you owned in the U.S. and then moved overseas, adding that there is basically no way to avoid U.S. taxes in that form.