The United States is one of only two tax jurisdictions that tax individuals based on citizenship or residency (the other is Eritrea). The definition of “citizen” for U.S. tax purposes is fairly expansive, and it’s possible to owe U.S. tax even if you have never lived in this country. Meet the “accidental American.”
Former British Prime Minister Boris Johnson came down with a case of accidental Americanness — he was born in Manhattan and was thus a U.S. citizen even though he left America when he was age 5. Upon the 2014 sale of his London home, which did not generate tax in the UK, due to his American citizenship he owed around $165,000 to the IRS.1 He initially stated he would not pay the bill because it was “absolutely outrageous.” It is assumed that he eventually paid the tax because he renounced his U.S. citizenship in 2016.
Time to jump ’ship
Lest you think it’s easy to undo this mess, that citizen-ship has sailed. To exit the U.S. tax system, you will need to prove five years of tax compliance and you may have to pay an exit tax (aka expatriation tax) if you meet certain income and net worth requirements.
The exit tax, if it applies, is calculated as follows: All property of a covered expatriate is treated as being sold on the day before their expatriation date for its fair market value.2 The exit tax is an income tax on the total of any unrealized gain from that deemed sale plus the deemed distribution of IRAs, §529 plans, and health savings accounts (taxed at ordinary rates). However, the exit tax applies to this amount only to the extent it exceeds an inflation-adjusted exclusion amount ($767,000 for 2022).3
The cherry on top of this fruited plain is that once you make it through the exit tax gauntlet, you also end up in the government’s slam book: Every quarter, the U.S. Treasury Department publishes a list of the names of people who renounced their U.S. citizenship: www.federalregister.gov/quarterly-publication-of-individuals-who-have-chosen-to-expatriate