U.S. Expat Tax Rules: Why Giving Up Citizenship Often Costs More

Americans who move abroad still must file with the IRS, sometimes on top of taxes already paid in their country of residence. Experts advise against giving up U.S. citizenship, saying it usually is not worth it.

“It’s usually not worth it for a number of reasons,” said Alex Ingrim, financial adviser at Chase Buchanan Wealth Management.

Double taxation is uncommon, but filing costs can be high

Ingrim said Americans are “very rarely double taxed,” even though the so-called “American pain” can arise in some cases.

However, giving up citizenship is not easy, and it is hard to reverse once you change your mind.

Taxpayers planning to move abroad should also plan ahead and understand what their tax residency status will look like. Boudreaux said the outcome depends on treaties and agreements between the U.S. and the country of residence, including income tax treaties, estate tax treaties, and agreements that standardize retirement income rules.

Ingrim explained that some European countries, such as Portugal, may tax retirement income at the source, so under double-taxation treaties an expat’s tax responsibility mainly applies in the country of residence rather than the U.S.

Under those treaties, a person filing in the U.S. can offset U.S. tax liability with credits for taxes already paid abroad. If Portugal’s rate is higher, it would offset the U.S. tax bill; paying Portuguese income tax can create a credit on the U.S. return.

Boudreaux said the “American pain” often shows up at tax time because filing in two different countries can be more expensive.

Investment goals and low-tax motives do not eliminate IRS obligations

Ingrim said some people consider giving up citizenship to explore investment options or to seek ultra-low-tax jurisdictions such as Monaco or Dubai. Even there, U.S. tax obligations may still remain.

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

The IRS treats certain products as passive foreign investment companies (PFICs), and it has rules governing the types of structures U.S. taxpayers can invest in. Ingrim said PFIC filing is “extremely burdensome” and expensive.

That is especially frustrating for people who earn income in euros and do not want to send money back to the U.S. and invest in dollars; it is also true for those who hope to receive tax advantages in some jurisdictions from certain European mutual funds.

The U.S. financial system remains a major advantage

Ingrim said the U.S. financial system “is a huge advantage,” allowing Americans to invest, trade, and hold money at relatively low cost.

He added that many European banks usually charge more for similar services and often push new products, while the U.S. system is more mature.

Giving up citizenship has bigger consequences, is hard to undo, and may trigger exit tax

Boudreaux said giving up U.S. citizenship is a much bigger process than many people expect, and once done, it is both costly and hard to reverse.

He also noted that, under the HEART Act of 2008, expatriates may owe an exit tax. Boudreaux said you cannot simply renounce citizenship and avoid U.S. tax on assets you owned in the U.S. and then moved abroad; he added that there is basically no way to escape U.S. tax in that form.