Mythbusters - Renouncing US Citizenship

Every few months, we tend to receive a flurry of enquiries from clients regarding renunciation of US citizenship, usually after seeing online information which poses the worst case scenario as ordinary.

Amongst a wide range of articles and webinars regarding renouncing US citizenship, there’s usually a common theme, that US citizens overseas must renounce their citizenship before it's "too late".

The presentation usually focuses on worst-case scenarios, horror stories, and tax traps, leaving attendees convinced that renunciation is a must and that it financially catastrophic to stay a US citizen.

The reality is considerably more complicated, and there is much to consider.

For some people, renouncing US citizenship is absolutely the right decision. For others, it would be a mistake. Tax is only just one part of the decision to be made.

Like most areas of US tax, the answer depends entirely on your individual circumstances.

Here are some of the most common myths we hear.

Q - Should I file US tax returns before I renounce?

A – In most cases yes, but not all

This can usually be one of the more confusing points of renouncing, and US citizenship.

Many people believe they cannot renounce until they have filed every US tax return they have ever missed. That's simply not true.

Depending on your specific circumstances, there may be a variety of amnesty programs available to you.

For some, this requires missed tax returns for recent years to be submitted before renouncing citizenship, and others allow filing to occur after renunciation has taken place.

A good US tax advisor can help steer you down the most efficient route here.

Any US citizen renouncing US citizenship, needs to certify on Form 8854 that they’ve complied with their US tax obligations for the previous five years. Failing to do so can result in them becoming a covered expatriate, even if their wealth is nowhere near the exit tax thresholds (discussed later).

This is why getting advice before taking any action is so important. There are a number of eligibility conditions placed on the IRS amnesty programs, and ensuring that you qualify before renouncing is crucially important.

Q – Will I need to pay an Exit Tax?

A – Only a covered expatriate is subject to the exit tax

The Exit Tax receives an enormous amount of attention, much of which can be posed in dramatic terms, and targeted towards individuals whom are unlikely to face paying it.

The reality?

Most people who renounce US citizenship will never pay it.

The Exit Tax applies only to individuals whom are considered to be a “covered expatriate”.

Specifically, for 2025, a covered expatriate is:

-       An individual with a net worth of $2,000,000 USD or greater

-       An individual with an average tax liability of $206,000USD or greater over the 5 year period prior to renouncing US citizenship

-       An individual who renounces and fails to declare on Form 8854 that their US tax obligations have been met for the prior 5 years

For the average American living in New Zealand, the Exit Tax is often something which is unlikely to affect them, when obtaining good US tax advice as part of the process.

Q – Will US citizenship mean I pay less tax?

A – Usually yes, but in some cases it can mean you pay more tax

Some online US citizenship renunciation webinars attempt to encourage people to renounce citizenship, and give the impression that once they renounced, every US tax issue disappears forever and that they’ll pay less tax.

In many cases that's of course correct, but not in all cases.

There are situations where giving up citizenship can actually result in a worse tax outcome.

One commonly overlooked example involves certain types of US-source income (such as 401Ks or IRAs).

As is well discussed on our website, New Zealand has a Double Tax Agreement (the tax treaty) with the USA, which contains provisions to prevent double taxation of individuals with both US and NZ tax obligations.

However, in some cases, these benefits are no longer available for those who’ve renounced and still have any US based assets and can cause double taxation.

The result can be additional tax that may not have arisen had the person remained a US citizen.

In addition, for a covered expatriate, there can be hefty gift taxes imposed on gifts made.

This doesn’t necessarily mean that an individual intent on renouncing shouldn’t, but it does highlight that the process shouldn’t be rushed into.

Q – Renouncing US citizenship is my only option?

A – With the right tax advice, the tax burden of maintaining US citizenship can be managed

Over the last decade of US tax consulting, I’ve spoken with clients from all sides of the spectrum with regards to renunciation.

In some cases, I’ve chatted with clients who simply couldn't wait to renounce, and felt no emotional connection to the US. In addition, I frequently chat with clients who find it incredibly difficult to consider renunciation.

Indeed, as a migrant myself, I appreciate how for many, that citizenship can be a tie back to home. For some, US citizenship can represent family history, identity, or a connection with where they grew up. For others, it's simply an administrative status that burdens them with tax compliance fees every year.

Of course, renunciation is highly personal and each person has their own thought process on whether it is right for them.

Renouncing US citizenship isn't like closing a bank account. It's a permanent decision that deserves careful consideration beyond the tax consequences alone.

With regards to maintaining US citizenship, indeed with the right planning, the tax implications can be manageable. Indeed, more US citizens living overseas choose to continue retaining their citizenship as opposed to renouncing.

We do offer expert US tax advice to help keep both the tax implications of US citizenship, and the accountancy burden to a minimum.

Q – Will I keep my Social Security after renouncing US citizenship?

A – If you hold only New Zealand citizenship, likely no

This is one area where the answer depends heavily on where you live after renouncing, and frequently, many find out only after they’ve renounced US citizenship.

For New Zealand residents, there is no Totalisation Agreement between New Zealand and the United States.

As a result, renouncing US citizenship can mean that unless certain conditions are met, many do lose access to their US Social Security benefits while living in New Zealand.

These rules are based upon citizenship, and for those who hold other citizenship (ie UK, Australia etc.) there can be different outcomes with regards to social security.

For many New Zealand residents, however, this is one of the most significant non-tax consequences of renouncing US citizenship, and one that is often overlooked in discussions focused purely on tax.

Q – Will I need to continue filing US tax returns for 10 years after renouncing?

A – For the vast majority of people, no. This is generally only a requirement of covered expatriates

It is true that for covered expatriates, there can be an ongoing filing requirement as part of the rules around Section 877 of the tax code and the exit tax.

However for most people, the biggest benefit of renouncing US citizenship is singular, no more annual US tax returns. No more FBARs. No more Forms 8938, 3520, 5471, 8621, or other US filing requirements.

Indeed the saving of these compliance costs are the biggest consideration for many of the clients we advise through the renunciation process.

Its true that, by living in New Zealand and also holding US citizenship, you’ll likely be tax resident of two countries. This means being subject to two sets of competing tax rules.

When it comes to investing, this can mean being subject to FIF tax in New Zealand, or being subject to PFIC taxation in the US.

It shouldn’t be understated that it can make it more difficult to “get ahead” in the Kiwi sense. However, as mentioned above, for those who aren’t certain that renunciation is right for them, it is worth chatting with your US tax advisor to see what efficiencies can be made and whether the dual tax residency is more manageable.

Q – Do I need to work with an expensive overseas business to renounce US citizenship?

A – Absolutely not, there are qualified professionals able to assist in NZ, usually at a lower cost

Many clients do reach out to us after reading information online or attending webinars, which many do describe as terrifying, and usually are left with the understanding that they have no choice but to work with an expensive overseas US tax firm to help with their renunciation process.

This couldn’t be further from the truth. New Zealand has a robust US tax practice field, with multiple operators, almost all qualified to practice before the IRS and with years of experience with renunciation.

Indeed, for me personally, the first client I assisted through this process was more than 12 years ago, albeit my involvement in the process has changed significantly since then.

In addition, we have excellent US immigration attorneys based in New Zealand to help guide you through the legal ramifications of renunciation, and to prepare you for that day in the Auckland US consulate.

For the following two questions, we were delighted to speak with Amanda Sadlier of Optimum Law, who offered this helpful contribution

Q - What's the difference between online advice and having someone local to NZ help me? 

A – Citizenship, residence and taxation are highly intertwined. Being able to speak to someone who specialises in this process and its interaction with New Zealand specifically, is important.

While there are some pieces of renunciation and US tax filing that are universal, there are uniquely New Zealand aspects of the process including US-NZ tax agreements, US-NZ visa agreements, and the execution of the process itself. We can assist you in determining the tax-related pros and cons of US citizenship renunciation as they apply to you and your unique circumstances.

Meanwhile, our Auckland-based colleague, Amanda Sadlier, at Optimum Law offers a range of personalised legal advice and representation for US citizens considering and choosing to renounce their US citizenship in New Zealand. 

Q - When is the best time to renounce my US citizenship? 

A - Renouncing US citizenship is a permanent decision with consequences across the person's life.

In addition to taxes, someone should also fully understand how it impacts their future US travel/work/study options, citizenship of future children, feelings of identity, and more. We recommend getting sound tax and legal advice before making the final decision. The best time to renounce US citizenship is when you have consulted professionals, are fully educated around the consequences, and are firmly ready to take the step.

Summary

Renouncing US citizenship isn't something that should be rushed into because of a frightening webinar or an alarming headline.

Equally, it shouldn't be dismissed simply because someone tells you "it's not worth it".

As you can see above, blanket statements like “there are tax savings’ or “now or never” are certainly dramatized, and its not quite as clear cut.

The important thing is understanding your position, rather than someone else's worst-case scenario.

If you're considering renouncing your US citizenship, take the time to understand the implications first. The process is permanent, and the best decision is an informed one.

At The US Tax Team New Zealand, we offer expert US tax consulting in preparation for renunciation, or to explore the possible implications. In addition, our friends at Optimum Law specialise in the often misunderstood legal implications of renunciation, and help clients understand the future ramifications of the process.

If you’d like to discuss any of the issues above, reach out to us today for US tax advice – info@usatax.nz