Key points
- US dual citizenship can create unexpected and ongoing tax obligations, even for Australians who have never lived in the United States, due to the US’s unique system of citizenship‑based taxation on worldwide income.
- ‘Accidental Americans’ face compliance risks and potential penalties, with US tax returns required regardless of where they live, and failure to file potentially resulting in fines, interest and future complications.
- Renouncing US citizenship can relieve future obligations, but may trigger significant costs, including consular fees and a possible exit tax for high‑income earners or those with substantial assets which makes early advice critical.
Renouncing a country’s citizenship, even if you have never lived there, can come with unexpected costs. Let’s take a look at what happens from a US perspective.
The hidden price of an American passport
Is the ‘Land of the Free’ secretly costing you a fortune?
For many Australians, the unexpected answer is a resounding ‘yes’, all thanks to a US passport they might not even use. While most countries tax residents based on where they live, the United States is a rare exception – alongside Eritrea, that taxes its citizens no matter where in the world they reside.
People who fall into this category are often dubbed ‘accidental Americans’, and usually have an American parent, or were born in the US while their parents were living there, meaning they automatically acquired citizenship. According to the 2021 census, about 100,000 people in Australia were born in the United States, of whom 66,000 are also Australian citizens.
This unique, citizenship-based taxation means thousands of ‘accidental Americans’ living in Australia face a hidden financial burden, even if they’ve never set foot in the US since childhood. These citizens are subject to tax on “worldwide income from all sources” according to the Internal Revenue Service (“IRS”) and are obliged to report all taxable income and pay taxes in the US. The IRS can also apply failure to file and failure to pay penalties for tax non-compliance as well as interest charges on amounts owed, which can quickly add up.
For someone who has spent their entire life in Australia without filing US tax returns, the news can come as a shock. While the US offers a range of exemptions for foreign-earned income or assets, that may reduce the person’s tax burden, they are still required to file a US tax return.
Goodbye to the American dream
Faced with the significant ongoing costs and complexities of simply holding a US passport, some people have decided to explore renouncing their American citizenship altogether. US records suggest about 6,000 Americans renounce their citizenship every year, a figure significantly more than 20 years ago. This desire to sever ties underscores a broader issue: renouncing a country’s citizenship, even if you have never lived there, can come with unexpected costs.
This includes a tax trap for people who are high income earners, own significant assets (with a combined value above $USD 2 million) or who have not complied with US tax obligations for the previous five years.
Renouncing US citizenship currently costs US$2,350, however from 13 April 2026 the fee will reduce to US$450. The process is completed through a US consulate, and some individuals may also be subject to an exit tax.
The exit tax is calculated based on the value of a person’s assets, as if those assets were sold the day before renunciation. In practice, people considering renunciation are advised to ensure their US tax affairs are up to date for the previous five years to reduce the risk of an exit tax applying to unrealised gains.
For many dual citizens, these rules come as an unwelcome surprise, particularly for those who have lived their entire lives outside the United States. Understanding your obligations early can help avoid unnecessary costs, stress and compliance issues.
For dual citizens unsure about their US tax obligations (or whether action is required at all) seeking advice early is critical. Our tax experts can assist in reviewing filing requirements and providing tailored guidance to help navigate what can be a complex and unexpected issue.
