Not applicable to adult emigrants. No other proposals to simplify income taxes for individuals who don’t live in the United States. No help with the insane reporting requirements on foreign retirement & medical & disability savings plans. Some people may hope it’s a start from an administration which up until now has been totally deaf to the “special concerns and issues of Americans abroad” which the president claimed he would address when he was campaigning for our votes. Others will take it as what it appears to be at face value: a chance to get out while the getting is semi-good. At page 282 of the “Green Book” (all links added by me):
Individuals who became citizens of both the United States and another country at birth may have had minimal contact with the United States and may not learn until later in life that they are U.S. citizens. In addition, these individuals may be citizens of countries where dual citizenship is illegal. Many of these individuals would like to relinquish their U.S. citizenship in accordance with established State Department procedures, but doing so would require them to pay significant U.S. tax.
Under the proposal, an individual will not be subject to tax as a U.S. citizen and will not be a covered expatriate subject to the mark-to-market exit tax under section 877A if the individual:
1. became at birth a citizen of the United States and a citizen of another country,
2. at all times, up to and including the individual’s expatriation date, has been a citizen of a country other than the United States,
3. has not been a resident of the United States (as defined in section 7701(b)) since attaining age 18½,
4. has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,
5. relinquishes his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen, and
6. certifies under penalty of perjury his or her compliance with all U.S. Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.The proposal would be effective January 1, 2016.
This didn’t appear to be covered in the table of revenue estimates. Correction: As Tim points out, the revenue estimate is in the summary tables file on the White House/OMB website, rather than the Treasury website. They estimate it would cost $400 million over ten years, with more than half of that coming in the first three years as people scramble to take advantage of the offer.
Details of revenue estimates
| Deficit increases (+) or decreases (-) in millions of dollars | Totals | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Heading | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2016 – 2020 |
2016 – 2025 |
| Provide relief for certain accidental dual citizens | ……… | 60 | 103 | 55 | 23 | 24 | 25 | 26 | 28 | 29 | 30 | 265 | 403 |
I am quite interested to know the underlying number of relinquishers OMB used make these estimates (and for that matter, whether they have offset those estimates by the $2,350 fee that many accidentals are going to have to pay because they only qualify for renunciation and no other method of giving up citizenship). I assume that the estimates for ongoing deficit increases past 2018 are attributable to one-time losses of revenue from additional relinquishers,rather than ongoing loss of revenue from the initial group of relinquishers.
For example, they may be using the utterly false (and late again for this quarter) Federal Register relinquishment numbers and assuming that all of them would qualify for Obama’s plan. (That would also mean they’re assuming that no non-accidental Americans have ever given up citizenship because of the FATCA mess that Obama signed into law — clearly an incorrect assumption.) In that case they would be saying that in 2020 they’re expecting an average annual revenue loss of $8,000 per person, rising to $10,000 per person by 2025.
If OMB understands that only a small proportion of recent relinquishers qualify for Obama’s plan, then they’re trying to claim that the revenue loss per person would be much higher — which I don’t think is supportable. On the other hand, they may also understand that the actual number of relinquishers is higher and that only a small proportion of them will qualify for Obama’s plan. Though given the dubious earlier models of the effect of cancelling the FEIE, I get the sense that the government does not have this much of an in-depth understanding of emigrant tax issues.
Treatment of businesses owned by American emigrants
Another small mercy: the proposed 19% minimum tax on foreign earnings only applies to CFCs owned by “entities taxed as domestic C corporations” — finally, an implicit acknowledgement that some owners of CFCs are human emigrants rather than multinational corporations. Unfortunately the 14% tax on “previously untaxed” foreign earnings does not appear to include that same acknowledgement.
Will not affect ADCS lawsuit
Update, 6 February: Stephen Kish has already spoken with Mr. Arvay about the Obama budget proposal, and states:
Some you have expressed concern that should the Obama budget proposal, if ever enacted, provide some relief to duals-at-birth, like our two Plaintiffs Ginny and Gwen, this could mean trouble for our lawsuit — because both Plaintiffs are duals-at-birth. Apparently, Canada’s Mr. Roy Berg himself, a U.S tax compliance professional, is mentioned in an article (which I have not seen) which states that should the tax code on duals-at-birth change for the better, this might “spell the death-knell” to our Canadian lawsuit.
Please do not worry. The Arvay team has been quite aware of the issue of specific characteristics of plaintiffs from the very beginning.
Today Mr. Arvay also has confirmed with me, yet again, that our legal strategy is not limited to the specific characteristics of the two plaintiffs, that additional plaintiffs can be added to the lawsuit should this ever be necessary, and that our aim has always been to include affidavits from people who span a range of differing characteristics.
Also, FATCA reciprocity is (again) at p219
http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2016.pdf#page=232
Far from complete even if he gets everything he asks for (hint: not a chance in snowball’s chance in hell with the Republicans in control of both houses); only covers individuals and “certain passive entities”
More disturbing (but not unexpected) is the proposal to tax money held by US companies (their subsidiaries) overseas to raise an estimated 2 Trillion in additional tax revenue. The problem is that this flies in the face of moving to a residence based tax structure, and that, at least in theory, the money held by offshore subsidiaries has already been taxed. The take away from this is that Obama is keeping to his word and will not move to a residence based tax system and get rid of the citizenship based tax structure (for companies and individuals). His budget has no chance of passing in this Congress, but sadly, he will also likely veto any rational proposal submitted to his desk by the Republican congress.
If i understand well, if we fit with this description we would still have to fill up the tax forms for 5 years, FBAR etc… ??? The only relief is that we would not subject to expatriation tax???
There already is relief for accidentals born dual regarding exit taxes, this is not new. However, regarding
Point 6 can someone tell us if ” …the individual had been a nonresident alien during that period.” the interpretation of this is that we would not be taxed as citizens but instead as nonresident aliens which I believe means taxes on US sources not worldwide. This doesn’t sound like having to used Streamlined.
To call this relief is wrong and only serves to demonstrate just how low expectations have fallen. C.B.T. is still maintained. Only a move to R.B.T. will be an act of justice. No one should have to care about whether or not s/he was born in the U.S. or happened to have held a green card at some time.
Are not the key words in the last point: ‘certifies under penalty of perjury his or her compliance with all U.S. Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.
‘if the individual had been a nonresident alien during that period.’ When I filled in my final tax return after renouncing I was assessed on the worldwide income during the period of the year I was a citizen and for the remaining part of the year assessed as a NRA – which meant only on income arising in/from the US. (I had none). So IF this is adopted wouldn’t it mean that duals at birth who fulfil the other criteria would only have to file for 5 years on any income arising in/from the US? Not on their worldwide income. This could make renouncing much more sane for children born in a ‘foreign’ country who never lived or worked in the US at all and don’t consider themselves American in any way.
Interesting proposal, much of it already in existence, not new.
It would, as now, not affect or provide relief to those who because of a “mental incapacity” and unable to understand the concept of *citizenship* would not be able to expatriate by renouncing their US-defined US citizenship. Unless there is more, nor is there any provision for a parent, a guardian or a trustee to act upon the behalf of such a person.
And, yes again, thanks for this, Eric.
And, yes, recalcitrantexpat, this does not address that the real requirement for *US Persons Abroad* (however defined) is for Residence-Based Taxation instead of that based on citizenship, the real problem!
That seems to indicate to me that Accidentals would have no tax obligations or even filing requirements except as non-resident aliens, who only must report on U.S. source income..
In addition, the statement about passport requirements is encouraging::4. has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,
That seems to indicate even those who got a US passport because they were bullied into doing it can take this route.
Perhaps the Boris Johnson got their attention. Perhaps the Canadian who is pursuing legal action in the US got their attention. Perhaps Ginny and Gwen’s lawsuit got their attention.
This is not yet in effect and does nothing for those Accidentals whose banks may have already asked if they were born in the U.S. or whose banks may do so before they formally relinquish.
In addition, it seems the person would still need to travel to a Consulate to formally relinquish and wait for the CLN.
Yeah, I guess it’s not quite “new”, just an extension: it’s better than existing treatment, but it applies to a much narrower group of people than 877A(g)(1)(B) does. wonder if passport thing (very carefully worded so that applying for a US passport because you wanted to go to the United States disqualifies you) was specifically intended to make sure BoJo couldn’t benefit.
@Steve: the proposal to tax overseas earnings could hit individuals abroad harder than U.S. companies, because they consider a Canadian company owned by a Canadian U.S. Person as equivalent to a Bahamian company owned by Apple. Worse, normally if an individual gets dividends from a CFC you can make a Section 962 election to be treated as if you were a corporation for that purpose (so you get foreign tax credits for the taxes paid by the CFC), but I seriously doubt Obama’s plan will cover that because Section 962 is so obscure and because Everyone Knows that individuals who own CFCs are tacks evaders.
@Eric,
Can you please confirm that a similar statement was NOT in the FY2015 budget proposal?
@Eric, Thank you very much for finding this. The budget document I had read from the White House website doesn’t have nearly as much detail.
The whole presidential budget, including this proposal for accidental citizens, has absolutely no chance of even being considered by Congress. However, it shows that the Democratic party is starting to pay attention as well. The proposal would exempt accidental citizens from US taxation, not just the expatriation tax (from which they are already exempt), and the compliance required from them for the previous 5 years would be as nonresident aliens, which in most cases means doing nothing. Also, the use of the term “accidental” suggests that whoever wrote this proposal has been reading about Americans abroad. Finally, the proposal is listed under “simplify the tax system”, which suggests that they view this subject as a technical correction based on logic and fairness, like Republicans, and as I’ve always said. I’m glad that both parties acknowledge the subject for what it really is, instead of inventing unrelated reasons such as competitiveness or the economy.
Moreover, although the presidential budget doesn’t do anything else for nonresident citizens, it also doesn’t make things worse. The FEIE isn’t mentioned anywhere so it’s allowed to remain unchanged. So now both parties agree that “accidental” citizens should not be taxed by the US at all, and that other nonresident citizens should remain exempt from US taxation to a large extent. This is remarkable. I’m very hopeful that CBT will be abolished sooner or later.
@Stephen: didn’t see one in the FY2015 budget proposal. Here’s a link
http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf
It’s certainly possible I’m just missing it. But I figure if this was really there last year someone else would have noticed it when we discussed it back then:
http://isaacbrocksociety.ca/2014/03/05/obama-administration-asks-congress-for-fatca-reciprocity-in-latest-green-book/
I had to go to page 282 itself to read it all to understand what is being said. I agree with @heartsick’s interpretation: Point 6 says that such a relinquisher only has to certify tax compliance as if she were a non-resident alien, which is to say: “nonresident aliens are taxed on certain income derived from U.S.
sources and on income that is effectively connected with a U.S. trade or business. ”
Question: if a person has no US source income, are they exempt from filing or do all the zero-balance forms for 5 years have to be submitted? I think filing is not required, as in http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens
Question: Do NRAs have to file FBARS? My search leans towards the answer “NO”.
Question: it says: “Many of these individuals would like to relinquish their U.S. citizenship in accordance with established State Department procedures, but doing so would require them to pay significant U.S. tax.” Since most such people have no past relinquishment claim, I figure they’re mostly talking about renouncing. However, a person could still join the military or take on government employment to relinquish and take advantage of a US$2350 signing bonus. 😉
If I understand this correctly, this is _huge_huge_huge_ for born dual-citizens (who have no US source income). They can renounce and not have to get a SSN or file anything, or they can claim a relinquishment based on government employment or military service even after 2004 and don’t have to file.
Obviously, it’s far too narrow and should provide relief for many more people, but would be a game changer for born dual-citizens.
I know nothing of the US budget system. What is the chance of this “relief for accidental duals-at-birth” to pass, and when would the passing take place?
@Stephen Kish, Last year’s document is here. It doesn’t contain the proposal for accidental citizens. This is new.
@Eric, Just use the find function in the PDF, and search for “citizen”. Only 3 unrelated instances. You’re not missing it, the proposal is really not there.
I think Recalcitrantexpat said it best:
“To call this relief is wrong and only serves to demonstrate just how low expectations have fallen. C.B.T. is still maintained. Only a move to R.B.T. will be an act of justice.”
This “limited relief” is nothing more than a small piece chocolate to keep the kids from crying too loud.
@Eric
Didn’t catch that bit about a US passport to EXIT the US. Makes no sense. So, if your ‘foreign’ born dual child held a US passport as a baby/child in order for their US parent to take them INTO and out of the US – say for the purpose of visiting grandparents – they would be disqualified from this proposed relief? If that is the case I think that probably eliminates many ‘foreign’ born dual children from benefiting at all and still penalises them for simply having US relatives.
@Eric,
Re excluding Boris. US law requires a US citizen enter and exit the US with a US passport.
Imagine what this means to people who became Canadian duals at birth when Canada made changes to its Citizenship Act that allowed certain children born outside Canada to claim Canadian citizenship at birth through a parent or grandparent. Before it only made a difference to whether you’d pay an exit tax or not. Too bad it has little chance of passing…but it is an indication that they’re listening.
Again, if any of this happens, those of us like my husband who were railroaded into OVDI and paid significant taxes in order to comply with a laws they knew nothing about will likely see little benefit.
I read up on the US budget process to try to determine when we’ll know if this “relief” passes. Clear as mud, but maybe bewtween April 15 and September 30?
http://en.wikipedia.org/wiki/United_States_budget_process
@Eric and Shadow Raider, thanks for confirming that this proposal seems to be “novel”.
Awesome! Maybe my snark letter with my exit tax form helped. This is exactly my situation. We are the ones stuck forking out renunciation fees, when other accidentals lucky enough to have had government jobs, or former homelanders who chose to move as adults,and take another citizenship, get to relinquish fee-free.
Now if they keep reforming this mess, they may win back a bit of my respect. Maybe.
@The Mom,
Just to be clear, a born-dual with no past relinquishment claim would still have to pay the US$2350 renunciation fee. It appears the SSN and tax-filing requirement would be gone though, if one has no US source income.
We don’t want this “novel” to be fiction.
You’re absolutely right, bubblebustin. For this proposal to have occurred to someone / anyone, *they* have to have been listening to increasing noise from *US Persons Abroad* — most of it originating right here at Brock and Sandbox! We have been the voice for many — those without a voice, those who think none of this absurdity caused by US citizenship-based taxation would pertain to them. Education and advocacy and even lobbying is what we’ve been about.
Does this affect our lawsuit? If this proposal is adopted it gives people like our two plaintiffs a relatively easy out – no back filing, no FBARs, no penalties, no FATCA, etc. So, would it make it possible for the Canadian government to successfully argue that the IGA inflicts no real damage on them and thus the lawsuit is unwarranted?