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October 7, 2011 - Phil Hodgen

Accidental American and the exit tax

A question from a reader (edited to obscure personal details):

I am an accidental U.S. citizen, having been born in the United States while my mom was visiting there.  Never lived or worked in US.  Now I am doing voluntary disclosure. Never knew about filing. Close to retirement.  Is there an exit tax to Canadians born abroad? There was some comment about having to be registered in Canada therefore not considered dual. Canada passed a retroactive law 2 years ago saying that all such babies were in fact considered Canadian at birth. Do you know?

My answer:

From the U.S. side, there is nothing that I know about which gives you an easy “out” from the U.S. tax system.  You have some paperwork ahead of you, I’m afraid.

Assuming you want to cancel your U.S. citizenship in 2011, here is what you need to do:

  1. Make sure 2006 – 2010 U.S. Federal income tax returns are on file and up to date and accurate.  (You have to have a 5 year history of tax returns on file).
  2. Go to the Embassy or a Consulate before year-end and give up your citizenship in a small bureaucratic ritual.
  3. For 2011, file your final U.S. income tax returns along with Form 8854.  Your final tax returns for 2011 will be Form 1040 (the U.S. resident tax return) for the time until you cancelled your U.S. citizenship, and Form 1040-NR for the remainder of the calendar year.  And did I say Form 8854?  Don’t forget Form 8854.  😉

You might have to pay the United States an exit tax for the privilege of cancelling your U.S. citizenship.  Or you might not.  This is something I can tell you after we talk and I get specific details about you and your situation.

The “all such babies born abroad are considered Canadian at birth” idea you’re talking about probably was a (sane) Canadian legislative reaction to the (koo-koo) U.S. exit tax law.

For someone who is a U.S. citizen AND was also a citizen of another country at birth, there is a way to give up U.S. citizenship without paying any U.S. exit tax.  You still have to do all the paperwork described above, thought.

The Canadian Parliament was probably hard-wiring the “You’re a Canadian at birth” idea into the Canadian legal system so there would not be any ambiguity for purposes of the U.S. exit tax.  If your Canadian politicians were thinking that way, they get bonus points for foresight.

Bad position to be in.  Good question though.  It’s worth a blog post.  🙂

Keep in touch.  If I can help you, please let me know.

Thanks for the question!

(Insert routine lawyer disclaimer/pre-emptive strike/waiver/advance repudiation here — I’m not your lawyer, you’d be a damn fool to believe everything you read on the interwebs, go get some smart professional to advise you, etc. etc.) 🙂

 

 

 

Expatriation