Last fall, Nina Nelson went to the U.S. Embassy in Paris and renounced her citizenship to the United States of America.
Now 67, Ms. Nelson called the decision “painful” and one that she wasn’t happy about. She had not lived in the United States since she was a young girl. And to be an American citizen who lives abroad can be taxing — literally.
The United States is one of only a few countries that levy taxes based on citizenship rather than geography. This means that Americans living abroad must file a tax return, and they may find it more difficult to open a bank account, because of reporting rules for foreign banks imposed by the U.S. government.
“I did it because of the permanent stress,” Ms. Nelson said of her decision to relinquish her U.S. citizenship.
The process to obtain what is known as a certificate of loss of nationality, which included taking an oath of renunciation after several months on a waiting list, cost her $2,350, a fee that the United States began to impose in 2014 on those trying to renounce their citizenship. For four years before that, the fee was $450. And before that, the certificate was free.
On Monday, the State Department announced a proposal to return the fee to $450, a move it signaled earlier this year. Now, Ms. Nelson and others who paid the higher amount would like some of their money back. She and three other plaintiffs, including citizens of Germany and the Netherlands, filed a class-action lawsuit against the State Department to get the difference of $1,900 refunded.
The lawsuit calls the higher fee “arbitrary, capricious and illegal because, among other things, it was used to fund governmental functions completely unrelated to renunciation services.”
The State Department declined to comment on the lawsuit. But in its proposal announcing the fee shift on Monday, it said that citizenship renunciations were “extremely costly for the department, requiring consular officers and employees overseas,” as well as in the United States, to “spend substantial time” handling those requests. It said that in 2010 the $450 fee “represented less than 25 percent of the cost to the U.S. government.”
Fabien Lehagre, the president of the Accidental Americans Association, a nonprofit in Paris that spearheaded the lawsuit, said in an email that he estimated around 30,000 Americans would be eligible for refunds if the lawsuit succeeded, based on the number of renouncers provided by the State Department.
The group uses “accidental Americans” to refer to Americans who live outside the United States and have little connection to the country. In 2020, the organization filed another lawsuit challenging the $2,350 fee. This year, that suit was dismissed.
There are no precise numbers on how many Americans live abroad, but the State Department estimated in 2020 that the figure was around nine million.
“For 200 years, it was possible to renounce American citizenship free of charge,” Mr. Lehagre said. “The renunciation procedure was made profitable by the State Department when they saw that more and more U.S. citizens were renouncing their American nationality.”
For Mr. Lehagre’s group, the lawsuit is the latest battle in aiming to shift American tax policy away from a citizenship-based one. In 2010, Congress passed the Foreign Account Tax Compliance Act, which placed a requirement on foreign banks to report information to the Internal Revenue Service about accounts held by Americans and increased financial reporting requirements for Americans living abroad.
The act made filing taxes compulsory for Americans with foreign assets living abroad, despite the fact that many of them do not have strong ties to the United States.
Banks that do not comply with U.S. reporting requirements face steep financial penalties. The law was aimed at deterring Americans from hiding taxable income, but opponents of those measures say that they have had adverse effects on many Americans living abroad. Some banks, for instance, decline to take on U.S. clients, creating difficulties for Americans seeking mortgages in other countries. The rules have also created bureaucratic headaches for U.S. executives working for foreign companies.
Ms. Nelson was born in Fort Wayne, Ind., to an American father and a French mother who met at the end of World War II. Her father moved the family to France when she was 12, and Ms. Nelson has remained there since, eventually becoming a French citizen. Because of the U.S. reporting requirements, Ms. Nelson said, she had to use a specialized accountant to file her tax return every year, at a cost of $1,500, even though she did not have income to report.
Ms. Nelson said she deliberated for years whether or not to renounce her citizenship. When she finally did, Ms. Nelson said she felt bad, “like I had done something against my own will.”
“I felt compelled to do it because it seemed to be the only solution for me to back out of the situation that I couldn’t control and that I didn’t like,” Ms. Nelson added.
Esther Jenke, another lead plaintiff in the lawsuit, grew up in Iowa and moved to Germany almost three decades ago after meeting her future husband in graduate school. She renounced her citizenship in November 2018, citing the financial reporting requirements.
“My husband and I bought a house. If we sell the house, even though it is our primary residence, because from a U.S. perspective it’s foreign property, we would have to pay capital gains tax on it,” Ms. Jenke, 55, said.
According to the State Department, the demand for citizenship renunciations rose to 3,436 in 2014 from 956 in 2010. The increase in demand for consular services, the State Department argued, merited an increase in the fee.
Others who have renounced their citizenship citing America’s tax laws include Boris Johnson, the former prime minister of Britain, who did so in 2017 when he was foreign secretary. He left the United States for the United Kingdom as a boy and had been a dual citizen.
The proposed lowering of the fee is small consolation, said Ms. Jenke, who spent the first 26 years of her life in the United States. She never wanted to give up her citizenship in the first place. And she cannot get it back.
“It was extremely emotional because I am American,” Ms. Jenke said. “I still get angry. I feel emotional and angry because my own country forced me to make a decision that I probably never would have done otherwise.”