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The Accidental American and the Taxman

Obtaining Citizenship at Birth

The Fourteenth Amendment to the US Constitution was adopted on July 9, 1868.  Section 1, Clause 1 of the Fourteenth Amendment states that all persons born in the United States are US citizens. This Clause overruled the landmark 1857 United States Supreme Court case of Dred Scott v. Sandford.  The Dred Scott case held that black persons could not be citizens of the United States.

Citizenship due to an individual’s birth in the US results regardless of the tax or immigration status of the individual’s parents.  Thus, every individual born within the United States is automatically a US citizen regardless of whether his or her parents were there for a day, a month, as students, on a visit or as illegal immigrants.  (There is an exception for children born to foreign diplomats officially serving in the US).

 It is also often the case that a person born outside the United States becomes a US citizen at birth.  Generally, this happens if at least one parent is a US citizen and has lived in the United States for a certain period of time.

For example, under US Immigration laws, an individual is considered to have acquired US citizenship at birth even if the individual was born overseas and born out of wedlock after December 23, 1952 and his / her mother was a US citizen who was physically present in the United States or its outlying possessions for at least one year of continuous presence prior to the individual’s birth.  As another example, an individual born abroad is considered to have acquired US citizenship at birth if one parent is a US citizen at the time of birth, the birth date is on or after November 14, 1986, the parents were married at the time of birth and the US-citizen parent had been physically present in the US or its territories for at least five years prior to the birth, and at least two of those years were after the citizen parent’s 14th birthday.

US Income Tax and Estate Tax – Worldwide Basis for US Citizens

Obtaining US citizenship at birth and the US tax rules imposing worldwide income tax on US citizens can create very unwelcome surprises for the so-called “Accidental American”. In addition, to income tax consequences, the estate of a deceased US citizen must pay US estate tax based on the value of the worldwide assets of the decedent.

Combining these rules with the fact that a US citizen cannot ‘lose’ his citizenship by accident or inadvertence means that unless the individual actively determines to get rid of US citizenship, the individual is subject to US income tax on his worldwide income, and US estate tax on worldwide assets owned at death. These rules apply regardless of where the US citizen lives.

Expatriation – US Tax Issues

Giving up US citizenship entails certain US tax issues that must be considered beforehand.  More information can be found at my blog posting .

Under certain so-called “expatriation” tax rules, harsh tax consequences will result if any of the following apply:

  • Certain dollar thresholds are exceeded (net worth of US$2 million or a certain average income tax liability over the past 5 years) or,
  • The person fails to notify the IRS that he has expatriated and satisfied all of his tax liabilities for the past five years even if he did not meet the dollar thresholds.

In these cases, imposition of an “Exit Tax” (among other harsh tax results) will occur when one gives up his US citizenship.

A limited exception will apply if an individual became at birth a US citizen and a citizen of another country and continues to be a citizen of, and is taxed as a resident of, that other country.  In order for this exception to apply, the individual must not have been a resident of the US for more than 10 years during the 15-year period ending with the year of expatriation.   A similar exception applies for certain minors who expatriate before reaching the age of 18½ if they have not been a resident of the US for more than 10 years before expatriation. Even if either exception applies, the individual must still meet the tax compliance certification requirement.  

The  tax compliance certification requirement acts as an effective bar to expatriation for those who have not filed tax returns and met all of their US tax liabilities for the five year period prior to expatriation. When a US citizen expatriates, the individual must submit a very detailed form to the IRS along with the final tax return. Part of this form requires the individual to certify under penalties of perjury whether he has complied with all of his tax obligations for the past 5 years including but not limited to income tax, employment tax, gift tax, filing of information returns as well as having met all obligations to pay tax, interest and penalties. If the person has not complied with these tax obligations, it means the Exit Tax and other consequences will be imposed even if the individual did not meet the dollar thresholds for net worth or average annual income tax liability.

Getting Rid of US Citizenship: “Renunciation” versus “Relinquishment”

US citizens who wish to set aside their US citizenship may pursue one of two options: “renunciation” of the US citizenship or, in certain cases, its “relinquishment”.

Renunciation of US Citizenship

“Renunciation” of one’s citizenship is done by making a formal sworn declaration before a US Consular Officer renouncing one’s US citizenship. The procedures for renunciation are rather straightforward and fully outlined in the Department of State’s Foreign Affairs Manual Chapter 7 Section 1260 et seq

Relinquishment of US Citizenship

 “Relinquishment” of one’s US citizenship is more complicated and not very well understood.  It is not clearly addressed in the Foreign Affairs Manual.  Essentially, relinquishment involves a formal confirmation after a person has turned 18 years old that the individual committed a prior “expatriating act” with the voluntary intent to give up the rights and privileges of US citizenship.

Section 349 of the Immigration and Nationality Act of 1952 (8 USC 1481) contains a list of acts that are considered expatriating – including, for example, taking on the citizenship of a foreign country, serving in the armed forces of a foreign country, or taking an oath of allegiance to a foreign country.  The US Supreme Court has ruled, however, that commission of the act alone is insufficient.  An individual’s committing of a statutory act of expatriation will result in relinquishment of US citizenship only if the act is performed (1) voluntarily and (2) with the intention of relinquishing US citizenship.

Individuals must hold current US citizenship in order to be able to renounce it.  Many individuals married and took on the citizenship of their non-US spouses. Many no longer considered themselves to be US citizens at the time of taking on their new citizenship. As such, for many years these individuals stopped filing US tax returns, stopped voting in US elections and ceased renewing US passports.  Such persons can certainly renounce US citizenship as there is nothing in the law preventing one’s asserting US citizenship strictly for the purpose of renouncing it.  In this case, the individual must certify under penalties of perjury that he has complied with all of his US tax obligations for the past 5 years. This is often a difficult conundrum since the majority has not been US tax compliant.

If you are an “Accidental American” who has not considered yourself an American for some time because, for example, you took on the nationality of another country (and you have not taken other contradictory actions — e.g., you have not renewed your US passport, voted in US elections, filed or paid US taxes and the like), you may have to take action to ensure that your status as a former American is formally recognized and officially documented. The Department of State has generally adopted the administrative presumption that a US citizen / noncitizen national intends to retain US nationality when he or she commits certain expatriating acts. Depending on the date you undertook the expatriating act, the US tax law may continue to to treat you as a US taxpayer. This area of law is highly complex and both the IRS and tax practitioners are uncertain of its parameters. 

 

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