According to Nerdwallet, there are about 6 million Americans who live abroad and have, thus far, kept their U.S. citizenship. Others have renounced their citizenship, often due to tax considerations. Others have renounced their citizenship due to disagreements with what the U.S. government has become on the world stage or due to reduced civil liberties at home. Investopedia reports that 5,411 Americans chose to renounce their U.S. citizenship in 2016.
At Punch Associates, a firm that has solutions for people in debt, we field questions from people who are wondering if they can avoid their debt problem by moving overseas and renouncing their U.S. citizenship. The quick answer is that they cannot escape their debt incurred in the U.S., and there are quite a few important financial factors involved for people who choose to live overseas.
Past Tax Debt
The Nomad Capitalist advises that your past tax debt to the U.S. government does not go away when you renounce citizenship. In fact, as a part of the renunciation process, you will have to settle up any past tax debt.
What high-income expatriates often do not tend to understand is that they owe taxes to the U.S. government even when they are not living in the U.S., until such time as they renounce their citizenship, for any year in which they made over $97,000 overseas. The reason for this is that U.S. taxes are based upon citizenship, not upon residency.
Some U.S. citizens who have lived abroad for years do not understand this and owe quite a bit in back taxes. They often don’t find this out until they decide to renounce their citizenship and then are hit with a huge tax bill.
Student Loans
If you owe the U.S. government student loans, these loans do not go away. You will always owe them until they are paid, or until you have made some arrangement with the federal government to either repay them at a lower rate or be forgiven the debt.
Since there are more options provided by the federal government for those who have student loan debt today than there were in the past, it is not a good idea to flee the country if you get your first student loan bill and are frightened. Options exist for deferment or forbearance if you have had a job loss or if you never were able to secure employment after school. Also, there are income-driven repayment options available.
Child Support Payments
According to the Nomad Capitalist, even child support payments in the U.S. are still due and owing if you renounce your U.S. citizenship. You could get extradited and called before a U.S. judge for failing to provide support.
Other Types of Debts
Although the creditors may not try to follow you to get you to pay other types of debts you owe in the U.S., there are a few potential problems:
- Your credit score will still take a ding. This could harm you if you return to the U.S.
- If you are sued and return to the U.S., you still owe the debt.
- If you owe the government, such as in taxes or student loans, or you are sued for private debt in absentia, and you return to the U.S, you could be hit with garnishment of your wages or tax penalties.
If You Have Not Left the Country Yet
According to Forbes, a new law allows the State Department to revoke or deny passports to any U.S. citizen who owes over $50,000 in delinquent taxes.
One Additional Issue
CNBC reported that due to the complexities of taxes and other issues, including new requirements that force foreign banks to report on the assets of American citizens to the U.S. government, U.S. expatriates today are finding it tougher to get foreign banks to work with them and their assets.
Debts don’t go away if you move abroad. At Punch Associates, we have solutions for people in debt. Contact us for help