Becoming a US Citizen: Is a US Passport Worth Additional Taxes

Becoming a US Citizen: Is a US Passport Worth the Additional Taxes

Becoming a US Citizen

For many U.S. taxpayers who are either residents or permanent residents of the United States, at some point in time, they will have to determine whether or not they want to become U.S. Citizens or not. Becoming a US citizen is a big deal, because it involves both immigration and taxation implications. Most notably, once a person becomes a US citizen, they may lose the opportunity to apply for certain treaty elections and at a future date may become subject to the exit tax. For some taxpayers, becoming a US citizen is worth it because they obtain a United States passport which is considered relatively strong in the passport marketplace. But, before becoming a US citizen, taxpayers should be aware of certain tax implications that accompany the U.S. citizenship status. Let’s take a look at a few important issues to consider when becoming a U.S. Citizen.

Worldwide Income

One of the most important aspects of being a U.S. citizen is that the taxpayer is subject to US tax on their worldwide income. While this is also true for taxpayers who are considered permanent residents and even those who meet the substantial presence test, Taxpayers who are permanent residents may qualify for certain treaty elections to be treated as foreign persons for tax purposes. Likewise, taxpayers who meet this substantial presence test can apply for the closer connection exception or various other exceptions that may apply so that they are not subject to US tax on their worldwide income. Once a person is a U.S. citizen, they generally do not qualify for these two mechanisms to try to reduce or eliminate U.S. tax on worldwide income

Limited Treaty Elections

Some taxpayers who are permanent residents decide that they want to become U.S. citizens because if they try to give up their green card, they will be considered a long-term lawful permanent resident and potentially subject to the exit tax. Taxpayers who want to become U.S. citizens but are green card holders and may have been making treaty elections in prior years must know they will not qualify for a treaty election to be treated as foreign persons for tax purposes once they are U.S. citizens.

May Be Forced to Give Up Other Citizenship

Many countries do not allow taxpayers to be dual citizens. For example, in Singapore, taxpayers cannot have dual citizenship. As a result, once taxpayers reach a certain age if they are both Singaporean citizens and U.S. Citizens then they would be forced to give up their Singaporean citizenship. This can lead to unwanted or unintended tax implications that the taxpayer should be aware of.

Exit Taxes

When a person is a U.S. citizen, and they decide at some point that they want to renounce their U.S. citizenship, they have to complete Form 8854. Depending on what their net worth is and how much income they earn in a year — and if they have been tax compliant for the past five years — they may be considered a covered expatriate, which may lead to them being taxed as a covered expatriate. This is especially important for taxpayers who may have wealthy family members overseas and those family members intend on leaving the now US Citizen with substantial foreign assets or income streams. Even if estate taxes are paid overseas, that does not negate the potential exit tax implications for taxpayers who become US citizens.

U.S. Person vs U.S. Citizen and Late Filing

Oftentimes, there is a catalyst event in a person’s life that may lead them to learn that they have been out of compliance in prior years for not reporting foreign income, accounts, assets, or other investments. It is not uncommon for a taxpayer who may be on a green card or visa to begin researching becoming a U.S. citizen only to learn that the worldwide income tax rules apply to more than just U.S. citizens and that they are out of compliance for prior years. Even if this is the case, it is important to note that the IRS has developed various amnesty programs to assist taxpayers with safely getting into compliance even if they’ve been out of compliance for prior years and even if they are not U.S. citizens.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.