The Globe and Mail published this article a few weeks back about Americans living in Canada who are abandoning their citizenship for tax reasons. In the US, citizens are taxed based on their citizenship, wherever they are in the world. In Canada, by contrast, we are taxed based on residency. For example, an American citizen living in Toronto will be taxed by both Washington and Ottawa, while a Canadian citizen living in New York will only be taxed by Washington. There are tax treaties in place to avoid a situation where an American citizen living in Canada has to pay taxes twice, but at the very least, American citizens must file a US tax return every year, whether or not they are living in the US.
The added wrinkle is that the IRS has been bearing down particularly hard on Americans with foreign bank accounts over the past few years in an attempt to combat money laundering. Unfortunately, innocent Americans living abroad with bank accounts in their adopted countries are being swept up in this crackdown. So that American living in Toronto will be caught by the movement by the IRS simply for having a bank account at RBC.
And, to make things even more complicated, Americans living abroad who have children may have unknowingly passed on their citizenship to their children, and those children will also have to file their returns each year once they turn 18.
Tax is a very complicated area of law; just ask Kelly Phillips Erb, aka @taxgirl. If you are concerned about your situation, you should definitely speak to a qualified tax lawyer. In the meantime, start thinking about filing two sets of taxes each year.