Trump’s Plan to End Birthright Citizenship and the Potential Expat Tax Implications
In what is considered by many to be a politically controversial move, President Trump recently announced his plan to sign an executive order that would end what is known as “birthright citizenship” in the United States.
In this blog, we examine the potential implications this may have for so-called “accidental Americans” who find out only later in life that they have U.S. tax filing obligations despite having spent most, if not all, of their lives outside the United States.
Of course, if you’re looking for the political or moral implications of Trump’s planned executive order, this is not the blog for you. As expat tax experts, we try to stick to what we do best, so our brief discussion focuses instead on certain of the U.S. tax implications of the order for U.S. citizens living abroad.
Birthright Citizenship in the US
Currently, in the United States, citizenship is automatically granted to any person born in the United States, or born outside the United States to U.S. citizens, with certain exceptions.
Birthright citizenship is based on the Fourteen Amendment to the U.S. Constitution. The constitutional basis for the rule has legal experts analyzing the legality of the executive order.
From a tax perspective, the birthright citizenship rule is what has essentially spawned the “accidental American” tax profile. In a typical case, individuals living abroad inherit U.S. citizenship from their U.S. parents, without knowing the tax implications of U.S. citizenship. In other cases, non-U.S. individuals come to the U.S. for an extended business or employment opportunity, and give birth to a child, who is then automatically granted citizenship before leaving the U.S. for good.
In recent years, with the advent of FATCA, more and more accidental Americans are discovering some of the more painful tax aspects of U.S. citizenship – which can range from onerous tax reporting obligations to getting blocked from access to local bank accounts or loans after being identified as U.S. citizens.
Potential Implications for Accidental Americans
From a tax perspective, there are no certainties as to the implications of Trump’s planed executive order, which is mainly due to its unprecedented nature.
However, it seems that such an order could have significant tax implications for accidental Americans. First, it would essentially end the birth of accidental Americans moving forward, albeit the effects of this change would not be felt for many years to come.
Second, and more immediately, the change in law could make the process of expatriation easier for current accidental Americans. This could manifest itself in a less expensive legal procedure to renounce citizenship or perhaps elimination of the so-called “exit tax” in the case of Americans who obtained citizenship by virtue of the birthright citizenship rule. An easier exit from the U.S. tax net would allow accidental Americans to purge the effects of FATCA and the tax reporting obligations associated with being a U.S. person with interests abroad.
With U.S. governmental politics in constant motion, Expat Tax Professionals will continue to stay on top of the U.S. tax reforms that affect expat tax compliance. We will continue to provide you with the latest tax news affecting your expat tax filing obligations.
By Joshua Ashman, CPA & Nathan Mintz, Esq.