Expatriation Tax in the U.S.

For many, holding U.S. citizenship is highly valuable, as it represents the world's strongest nation. Consequently, numerous Chinese individuals go to great lengths, even traveling to the U.S. to give birth, just to secure American citizenship. However, according to official statistics from the U.S. Treasury (see attached image), thousands of individuals actually renounce their American citizenship each year. In 2023, the number of Americans giving up their citizenship reached 3,260. The U.S. recognizes dual citizenship, so relocating overseas does not affect the legality of holding U.S. citizenship. Given that maintaining U.S. citizenship is legal, why would anyone choose to renounce it?

Reasons for Renouncing U.S. Citizenship

1. Tax Considerations

One of the primary reasons is tax implications. The U.S. is one of the few countries in the world that taxes its citizens and permanent residents on their global income, regardless of their residency status. In other words, even if an American citizen has never set foot in the U.S. since birth, they are still liable for U.S. taxes on their worldwide income. In contrast, most countries' tax laws (including China) stipulate that only the global income of tax residents is taxed. This means that as long as citizens and permanent residents of these countries do not qualify as tax residents, they are only taxed on income sourced from those countries. Therefore, if American citizens or permanent residents do not intend to settle in the U.S., renouncing their citizenship can lead to immediate savings on U.S. taxes, eliminating at least the annual obligation to file U.S. tax returns.

2. Financial Considerations

The U.S. global taxation policy is underpinned by a dollar-based global financial system. Some other countries may wish to tax their non-resident citizens globally but lack the capacity to enforce such rules on a global scale like the U.S. However, U.S. hegemony has led many financial institutions to be reluctant to serve American clients, as this allows them to avoid stringent compliance requirements (such as FATCA and FBAR). As the saying goes: "If you can't fight them, avoid them."

U.S. Measures Against Renunciation

The U.S. does not simply stand by while its citizens or permanent residents renounce their citizenship. One measure in place is the Expatriation Tax. This tax is relatively unfamiliar to Chinese citizens, as China does not impose such a tax. When Chinese individuals renounce their citizenship and immigrate abroad, they generally only need to consider the tax implications of their destination country, without worrying about Chinese tax consequences. Currently, China only requires individuals renouncing their citizenship to complete tax clearance (i.e., pay all due taxes). However, if one is renouncing U.S. citizenship or permanent residency, they must consider the U.S. tax implications.

In this article, we will discuss the specifics of the Expatriation Tax, including the types of U.S. identities affected, the actions that trigger this tax, the taxpayers facing the Expatriation Tax, the taxation rules, and the filing requirements for Expatriation Tax. Furthermore, with China tightening its grip on taxing global income, it is possible that they may adopt a similar Expatriation Tax in the future to combat tax avoidance through immigration. Therefore, it is essential for readers who do not hold U.S. citizenship but plan to immigrate in the future to understand this issue.

Important Note

Please note that U.S. tax law treats the tax implications of renouncing citizenship differently based on whether the renunciation occurred before or after June 17, 2008. Unless specifically noted, the rules discussed in this article apply only to those who renounced their U.S. citizenship after June 17, 2008.