A Proposed Senate Bill Would Force Expats To Renounce US Citizenship. Here's What You Need To Know.

A new bill introduced by Senator Bernie Moreno (R-OH) has sparked debate and concern across the global US expat community. His proposal? Eliminate the legal recognition of dual citizenship in the United States. Under the proposed legislation, anyone holding US citizenship and another nationality would have just one year to choose: forfeit their foreign nationality or be stripped of US citizenship permanently!

According to the bill's text, all US citizens with another nationality would be required to declare their allegiance exclusively to the United States. If they choose to retain their foreign citizenship, they must:

• Renounce US citizenship in accordance with federal law, and
• Do so within one year of the law going into effect.

There's no nuance, no consideration of family ties, tax residence, or global mobility. The language is sweeping: "The United States shall not recognize any form of dual citizenship."

Senator Moreno frames this proposal as a matter of loyalty, arguing that "citizenship is a privilege, not an accident of birth" (which flies in the face of the whole "Accidental American" dilemma). He also points to national security concerns, particularly for government employees or military service members with divided national allegiances.

Why Should US Expats Support a Government They No Longer Live Under or Agree With?

This bill also raises a deeper question: Why should Americans abroad continue to maintain ties to a government that often doesn't represent them or their lives anymore?

Many dual citizens:

• Haven't lived in the US for decades;
• Are raising families, building businesses, and paying taxes abroad;
• Have little or no political voice in US policymaking, and are
• Impacted by US financial reporting and tax rules that conflict with their local obligations.

Despite lacking substantial ties to the US, these expats remain subject to global US tax enforcement, the Foreign Account Tax Compliance Act (FATCA), and now (potentially) laws like Moreno's that question their loyalty altogether.

This Time It's a Bill. Next Time, It Could Be Law.

Currently, the proposed bill is just that, a proposal. However, even if the bill never sees the light of day in Congress, it sends a message: US citizenship policy can change FAST. For many renouncers, proper tax planning takes time. A tax-optimal exit takes months of planning. A bill that places a short time limit on renunciations—like the one currently proposed—could make such tax planning a challenging rush.

The consequences of a poorly planned—or unplanned—renunciation can be drastic. Under the current rules, any individual who becomes a so-called "covered expatriate" upon renouncing is subject to an exit tax. This tax is effectuated through a "deemed sale" of their worldwide assets, taxing all unrealized gains on every single asset they own. Even for individuals who do not have a high net worth, the resulting tax liability can be hundreds of thousands of dollars. And the cherry on top? This tax can't be offset by foreign tax credits in any country, meaning it is a double tax that can potentially wipe out decades of savings, investments, and capital gains.

Despite the potentially massive tax burden of a poorly planned renunciation, the current rules are the best in history for avoiding the exit tax. The rules in place now are so good that more US expats are renouncing than ever before—and most are able to completely avoid the exit tax with proper planning. This golden age of renunciation won't last forever. This proposed bill is proof of that very fact. Expats who have been on the fence about renouncing may want to act now, before deadlines and outside pressures start closing in. It is much better to carefully plan on your terms to renounce the right way, rather than being forced to renounce in a rush, where mistakes can be made!

Besides Avoiding the Exit Tax, What Reason is There to Renounce?

While it's true that the rules are the best ever for avoiding the exit tax, that alone isn't the reason renunciation is at its peak. US expats consistently get the proverbial short end of the stick when it comes to US taxation. Despite many expats having no connection to—and deriving no benefit from—the US other than their US citizenship, all are subject to US taxation. Most US expats can swallow this pill, but the significantly more painful reality is that compliance with US international tax obligations comes at a great personal cost of expensive international returns and dozens of wasted hours each year—even when no US tax is actually owed.

This isn't to say that the international US tax burden doesn't matter. US expats are subject to tax on many transactions that are not taxed in their home country, such as the sale of their primary residence, leading to US tax that may not be eligible to be offset by foreign tax credits. They face difficulties investing in and working for foreign corporations that would be subject to daunting US reporting requirements by involving themselves with US citizens, despite no other connection to the US. If these burdens weren't enough, the US adds insult to injury by also imposing a 40% death tax on every expat. With the mountain of downsides to retaining US citizenship, the real question becomes, "Why shouldn't I renounce"? It is an economic no-brainer for most US citizens living abroad. Being taxed by one country is always better than being taxed by two!

Look to Start the Process Now

Renouncing your US citizenship the right way can eliminate your US tax burden while still allowing you to travel to the United States without harassment at the border. You can also retain your hard-earned Social Security benefits and invest in US assets. With proper planning, it is also almost always possible to renounce without any adverse US tax consequences. The current rules are the best in history for renouncing and avoiding the US exit tax altogether. Take advantage before they change!

Renunciation can be a complex and intimidating process, but the vast majority of potential negative consequences, including difficulties in travelling to the United States, can be avoided if it is done the right way.

Our team of experienced US tax attorneys and accountants helps between 900 and 1,200 people terminate their US status correctly every year across six continents. This is hundreds more than any other firm in the world.

Moodys Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.