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What happens to the debt owed due to taxes when living abroad if you renounce your American citizenship? Does the debt get cancelled or not?

I heard that U.S. citizens living abroad don't have to pay any federal or state income tax on the first $105,000 you make. There’s a special tax law that allows for US citizens who are working abroad to have their tax exempt as long as they pass the physical presence test.

Let's assume that the person went above the limit by $1,000 before renouncing his citizenship, does he still owe the government $1,000?

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Yes, of course you still owe it. There's no logical reason why ceasing to be a citizen should relieve you of existing obligations.

The State Department mentions this explicitly

Persons who wish to renounce U.S. citizenship should be aware of the fact that renunciation of U.S. citizenship may have no effect on their U.S. tax or military service obligations (contact the Internal Revenue Service or U.S. Selective Service for more information). In addition, the act of renouncing U.S. citizenship does not allow persons to avoid possible prosecution for crimes which they may have committed or may commit in the future which violate United States law, or escape the repayment of financial obligations, including child support payments, previously incurred in the United States or incurred as United States citizens abroad.

I think the "may" is just to cover their butts - I can't find any indication of any provision that would forgive tax debts when you renounce.

Indeed, renouncing your citizenship may cause you to owe more tax, because of the expatriation tax. Basically, all your unrealized capital gains are treated as if they were realized and taxed on the day before your expatriation, and you owe capital gains tax on them.

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You will be banned from re-entering the US, under 8 USC 1182(a)(10)(E)

Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.

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  • This isn't really an answer to the question. The provision you cite would only be triggered if in fact the purpose is to avoid taxation (and if the AG makes a determination of this). The OP is asking whether any taxation is due at all. If no tax is due at all, then there is no avoidance. Converseley, if tax is due, then it can still be paid in which case there is also no avoidance.
    – JBentley
    Aug 16, 2021 at 16:07

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