The Pros and Cons of Being an American Citizen Abroad: Why Expats are Giving Up Their Citizenship

Living and working abroad can be an enriching and life-changing experience, but for Americans living in Europe, it can also present unique challenges. In recent years, an increasing number of American expats have been relinquishing their U.S. citizenship, with 2020 seeing a record high of over 6,700 people renouncing their citizenship, a 237% increase from 2019. This trend has raised questions about the pros and cons of being an American citizen when living abroad in Europe, and what factors are contributing to this shift in citizenship.

In this article, we will explore why expats are relinquishing American citizenship and the pros and cons of being an American citizen when living abroad in Europe. We will first discuss the reasons behind the increasing number of citizenship renunciations, including taxation, citizenship-based taxation, and the Foreign Account Tax Compliance Act (FATCA). We will then examine the advantages and disadvantages of maintaining U.S. citizenship while living in Europe, such as access to government support and benefits, the burden of complying with U.S. tax laws, and the impact of FATCA.

By understanding the complexities of being an American citizen abroad, we can gain insight into the changing landscape of personal finance in a globalized world and the implications of expats relinquishing their citizenship.

Challenges with American Citizenship

Living abroad as an American citizen can present a unique set of challenges, particularly when it comes to taxes and financial regulations. One of the primary reasons for the increasing number of expats relinquishing their U.S. citizenship is taxation. Unlike most countries, the U.S. taxes its citizens on their worldwide income, regardless of where they live. This means that American expats are subject to both U.S. and local taxes, leading to potential double taxation and additional financial burdens.

Another reason for citizenship renunciations is citizenship-based taxation, which requires Americans living abroad to file taxes and report foreign financial assets to the IRS, regardless of whether they owe any taxes. This can be a time-consuming and complicated process, with many Americans incurring significant fees for professional tax preparation.

While there are certainly challenges to being an American citizen abroad, there are also advantages. American citizens living in Europe can access government support and services, such as consular assistance and protection, voting rights in U.S. elections, and certain social security benefits. Additionally, being an American citizen can provide a sense of connection to the United States and the ability to maintain ties to family and friends back home.

However, there are also disadvantages to being an American citizen abroad. In addition to the tax burden, maintaining U.S. citizenship can also be a barrier to accessing certain financial products and services, as well as to employment opportunities in certain fields. The increasing complexity of U.S. tax laws and regulations can also create significant stress and financial burden for expats, potentially outweighing the benefits of maintaining U.S. citizenship.

Why expats are relinquishing American citizenship

One of the primary reasons for citizenship renunciations is the burden of taxation. As mentioned earlier, the U.S. taxes its citizens on their worldwide income, regardless of where they live. This can result in double taxation and significant financial burdens for American expats, particularly those living in high-tax countries such as many European nations. In addition, the process of filing U.S. taxes from abroad can be complex and time-consuming, leading many expats to hire professional tax preparers and incur significant fees.

Another reason for citizenship relinquishment is citizenship-based taxation. This requires Americans living abroad to file taxes and report foreign financial assets to the IRS, regardless of whether they owe any taxes. This can be a significant burden for expats, particularly those who may have limited financial resources or who are not familiar with U.S. tax laws.

FATCA has also been a significant factor in the increasing number of expats giving up their U.S. citizenship. This legislation requires foreign financial institutions to report the account information of U.S. citizens to the IRS, which can make it difficult for American expats to access financial products and services. Some foreign banks and financial institutions have even refused to work with American clients, further complicating the financial lives of expats.

The process of relinquishing U.S. citizenship involves filing Form DS-4079, paying a $2,350 fee, and attending an in-person appointment at a U.S. embassy or consulate. It can take several months for the process to be completed, and there may be additional tax implications for expats who renounce their citizenship. For example, there is an exit tax that may apply to individuals who have a net worth of over $2 million or an average annual income tax liability of $171,000 for the five years prior to expatriation.

While being an American citizen abroad can offer many benefits, the burden of taxation, citizenship-based taxation, and FATCA has led to an increasing number of expats relinquishing their U.S. citizenship. The process of relinquishment can be complex and time-consuming, and there may be financial implications for individuals who choose to renounce their citizenship.

Pros of being an American citizen when living abroad in Europe

While there are several reasons why expats are giving up their U.S. citizenship, there are also advantages to being an American citizen when living abroad in Europe. One of the primary benefits is the protection and support provided by the U.S. government. American citizens can receive assistance from U.S. embassies and consulates in case of emergencies, such as natural disasters or political unrest. Additionally, U.S. citizens can benefit from access to certain services and programs, such as social security benefits and federal student loans.

Another advantage of being an American citizen in Europe is the ability to vote in U.S. elections. American expats can still vote in federal elections, regardless of where they live, by submitting an absentee ballot. This allows them to have a say in the political decisions that affect their homeland.

In addition to these general benefits, being an American citizen can also be advantageous in specific European countries. For example, in Italy, American citizens can apply for dual citizenship if they can prove that they have Italian ancestors. This can provide additional benefits, such as access to healthcare and education programs.

Similarly, in Spain, American citizens can apply for a non-lucrative visa, which allows them to live in the country for up to one year without the need for a work permit. This visa is available to those who can demonstrate that they have sufficient funds to support themselves and their dependents while living in Spain.

In Germany, American citizens can benefit from the country's social welfare system, including access to healthcare and unemployment benefits. Additionally, American expats can apply for a permanent residence permit after living in Germany for five years, which can provide them with more security and stability.

Cons of being an American citizen when living abroad in Europe

While there are certainly advantages to being an American citizen abroad, there are also several disadvantages that must be considered. One of the most significant challenges is the issue of taxation and double taxation. The U.S. is one of the only countries in the world that practices citizenship-based taxation, which means that American citizens are required to pay taxes to the U.S. government on their worldwide income, regardless of where they live or work. This can lead to double taxation, as American expats are often required to pay taxes to both the U.S. and their country of residence.

American citizens living abroad must also comply with a complex web of U.S. tax laws and regulations. This can be a significant burden, as the rules and requirements can be confusing and difficult to navigate. Failure to comply with these laws can result in significant fines and penalties, which can add to the already high cost of living abroad.

Another challenge facing American citizens abroad is the impact of the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign banks and financial institutions to report information about their U.S. account holders to the U.S. government. This can lead to difficulties for American expats, as some foreign banks may be unwilling to do business with U.S. citizens due to the regulatory burden imposed by FATCA.

In addition to these general disadvantages, being an American citizen can also be problematic in specific European countries. For example, in France, American citizens are subject to strict regulations regarding foreign bank accounts, which can make it difficult to manage finances and access financial services.

Similarly, in the United Kingdom, American citizens may face challenges with obtaining mortgages and other loans, as many financial institutions are hesitant to work with U.S. citizens due to the regulatory burden imposed by FATCA.

While there are certainly benefits to being an American citizen when living abroad in Europe, there are also significant challenges and disadvantages that must be considered. The burden of complying with U.S. tax laws and regulations, the impact of FATCA, and other challenges can make life abroad difficult and costly. As such, those considering relinquishing their American citizenship should carefully weigh the pros and cons and seek professional guidance to make an informed decision.

Final Thoughts

Being an American citizen when living abroad in Europe comes with both advantages and disadvantages. While the protection and support of the U.S. government, access to certain benefits and services, and the ability to vote in U.S. elections can be beneficial, the burden of complying with U.S. tax laws and regulations, the impact of FATCA, and other challenges can make life abroad difficult and costly.

The increasing number of expats relinquishing American citizenship reflects the growing complexity of the global economy and the changing landscape of personal finance. As more and more individuals become global citizens, the issue of citizenship and taxation will continue to be a topic of discussion and debate.

In the future, it is likely that we will see further changes in the way that countries regulate expat citizenship and taxation. However, for the time being, those considering relinquishing their American citizenship should carefully weigh the pros and cons and seek professional guidance to make an informed decision.

Ultimately, the decision to relinquish American citizenship is a deeply personal one that depends on a wide range of individual factors. As such, it is important to approach the issue with an open mind and a willingness to explore all options in order to make the best decision for oneself and one's family.