Today (11/16/2017) the floor of the House passed the House tax reform bill. The earlier version is here .
Today also the Senate Finance committee passed the Senate tax reform bill. See link
Do not yet have the final versions of either bill but suspect that we are not helped in the bills. Will post here final versions when they become available.
Listen to the C-span clip found by BB in which Residence-based taxation is mentioned by Golding and Brady in the House tax bill debate — none of this however, appears to have been incorporated into the House or Senate bills passed on 11/16/2017
Republicans Overseas (RO) continues to press on, to make changes in the final tax package that will help us. The fight is not yet over, but it continues, right from the beginning, to be an uphill battle — and the odds don’t seem very good right now. RO says: “Again we need to focus on the Senate side since this fight is far from over.”
Personally, it makes no sense to me to blame Solomon and the handful of people at Republicans Overseas for trying to make a change and, so far, failing. Yesterday a friend reminded me that there was this Ismene, who kept telling her sister Antigone that it was pointless to even “try”: “…but you’re bound to fail…No sense in starting a hopeless task…Go then, if you are determined, to your folly, etc. etc.” Antigone responded: “When I have tried and failed, [then] I shall have failed.”
@UK Rose: “They won’t be able to enforce this then anymore with new rules anymore then they can enforce it now.”
Pretty much true, I’d say.
FATCA does give the US some control over non-US brokers, and that or perhaps a small tweak to it is the lever they think they can use to fully enforce estate taxes on NRAs. But as you correctly point out, there are simple ways to mitigate this, and every right-minded NRA will use them.
In fact, there is a cogent argument that the US estate tax on NRAs already does more harm than good and so should be entirely scrapped. It doesn’t sound like that is going to happen any time soon, though.
While I’m sure the US will be able to collect some extra tax if they start enforcing the estate tax on NRAs, I wonder how much they’ll really be able to collect. If NRAs purchase their exposure to US equity through foreign mutual funds or through trusts or corporations, how will the US even know that a death of the beneficial owner has occurred? The ones who will be caught are either those who cannot afford the advice to structure their affairs to minimise tax, or those who have assets that cannot be held other than directly (like US retirement savings).
For those of us in countries with estate tax treaties, having more than $60k of directly owned US assets may not trigger the estate tax, but it will trigger the need to file a US estate tax return to prove that we owe no tax – which will be a costly exercise and will require reporting world wide assets to the IRS in order to compute the pro-rata portion of the exemption that is available for directly owned US assets.
@Karen
“I wonder how much they’ll really be able to collect. If NRAs purchase their exposure to US equity through foreign mutual funds or through trusts or corporations, how will the US even know that a death of the beneficial owner has occurred? “
A British friend of mine living here in Japan had to certify via a lengthy questionaire to his brokers in the UK that he had no ties to the US. I do not know the steps nor why, but before they closed out his accounts, (due to residing in Japan) he went through the trouble of telling all his mutual fund managers to NOT deal with anything remotely associated with the US.
He said he was lucky that he did not happen to have any shares in US companies via his mutual funds. If he had, he would have to file returns to the US.
Seems his brokers were reporting to the IRS based upon the answers to the questionaire they sent him. This was 3, maybe 4 years ago.
@JapanT: “He said he was lucky that he did not happen to have any shares in US companies via his mutual funds. If he had, he would have to file returns to the US.”
I am pretty sure he got something wrong here in the detail. Holding US shares in a non-US domiciled mutual fund or ETF is a standard way to isolate oneself from the US estate tax. Folk in countries that lack US tax treaties regularly use Ireland-domiciled ETFs such as VUSA, Vanguard’s EU and UCITS-compliant S&P500 tracker ETF. Provided your friend held non-US domiciled mutual funds, he would remain safe from US estate taxes no matter what the funds themselves held.
The converse is also possible, although it seems entirely silly. An NRA could hold a US-domiciled mutual fund or ETF that invests purely in non-US stocks, and yet still be liable for both US income tax on dividends and the US estate tax on its value. All because it is superficially a ‘US stock’.
In essence then, US estate tax laws for non-residents already generate a whole heap of counter-intuitive outcomes. Apparently, the plan may be to worsen this, rather than to improve it. Shrug.
@Watcher
It may have been that the survey that he had to answer and provide proofs by a deadline that was just a couple of weeks away or have his accounts frozen scared him into making sure he had not even the slights connection to US entities.
@Watcher
Thank you for clarifying the estate tax better for readers than I could. the main issue is again with people outside the IRS jurisdiction and it is always going to be a challenge to enforce. Tracking people around the world and forcing them to pay up is fruitless when you are understaffed This is why CBT has not been able to be fully enforced. Fatca helps find people but I see no real change. Most of the people I know affected didn’t file before Fatca and are still not filing after Fatca. A few like me renounced because we wanted to protect our UK families. The system remains as it is because of some crazy notion that people need to pay for the privilege of being US citizens. What has happened instead is that US citizenship has been devalued and become a liability.
TTFI may not have been considered because they want to pass tax reform as quickly as possible and adding that may cause a delay or cause the whole thing to collapse. They may still not be able to pass anything at all.
Also they are trying to keep Trump’s campaign promises. What they mean is what Trump went around preaching during the campaign days, thinks like obama care repeal and tax cuts, and I don’t ever remember Trump himself mentioning citizen tax or Fatca. so this is almost the last chance to get a win in for one of these campaign trail promises.
People also need to remember what you are dealing with here. Change can happen and then be undone so easily. One needs to weight up their relationship with US citizenship and how much it is worth keeping to stay on this merry go round. I realise that some have limited choice but there is always the choice to not comply or comply in the least damaging way.
My finance guy at a big 5 bank’s brokerage arm wanted me to buy some US shares directly. I reminded him about the 60,000 limit and the US requirement to file an onerous estate tax return even though no tax would be due. He didn’t know about it but promised to check with their tax dep’t . They told him they never paid any attention. I still hope to be able to liquidate any US position before I finish the back nine.
UK Rose wrote:
“Everything looks to be a right mess now but not sure what taxing the US assets of foreigners after death has to do with TTFI.”
That’s something Anthony Parent and Solomon Yue might be musing about right now. I think closing that estate “loophole” is simply a means to improve the scoring to make TTFI more likely to fly. Perhaps it is just another deadend. I don’t know. There hasn’t been anything about it on the IRS Medic youtube channel yet. On FB Anthony wrote yesterday:
This being in reference to the following exchange between Anthony and Solomon:
https://www.facebook.com/groups/AmericanExpatriates/permalink/885389338293806/
I hope IRS Medic will do a follow-up and clarify some things here.
@Embee
Thanks for the reference to the Anthony Parent’s comments.
To me, this just looks contradictory. We expect TTFI to drive significant foreign investment out of the US. This would promptly destroy the base that the US estate tax for NRAs seeks to tap in order to ‘pay for’ TTFI in the first place. Under TTFI, there simply won’t be much direct NRA investment left for the US to then expropriate with its estate tax.
@ Watcher
I really don’t want to guess at what NRA’s would or would not do with their US assets in lieu of Anthony’s idea. I just want to see TTFI score well and improve its chances of becoming a reality … although that ship may have already sailed. It doesn’t seem unfair to me that if an NRA puts a portion of his assets in the USA (possibly simply because they are safer there) then he might consider the US taxing his estate a good trade-off, if the tax rate is not excessive (no idea what that would be). Sorry, I don’t know all the ins and outs of having assets in a country you don’t live in — I don’t have anything like that because everything I have is within touching distance.
Sorry … I meant to say “unrealistic” rather than “unfair”.
But this is just it, it has not been enforced because it is extremely difficult to enforce. that won’t change. The IRS is understaffed. If enforcement was easy, so would enforcing CBT be easy. These are residents and citizens of other countries. The ones with estates worth taxing are already taking measures to migrate this. Some NRA will move investments out of the US if it means a 30% tax or being double taxed. Treaties as they stand now don’t take any of this into consideration so there is the whole nightmare of re-negotiating with all the treaties. But more importantly, the US residents themselves, the wealthy ones in particular will move investments, portable income out to the lowest tax jurisdiction.
the only real system that will mesh best with what existing countries are doing is residence-based system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. and then treaties decide who has first taxing rights.
@ UK Rose
The USA doesn’t report to other countries (FATCA is not reciprocal, CRS is not applicable) so I don’t think the estate would get double taxed on US assets. Enforcement is the IRS’s problem so I’m sure they’ll figure something out … something that requires others to do their work for them. Remember these assets are IN the USA so tracking is easier than if they are overseas. It’s all pretty hypothetical anyway, being merely an idea tossed out there by Anthony. I’d rather have real, unadulterated RBT too, but that’s farther from reach right now than TTFI which in itself seems to be slip sliding away.
re: Death Tax on non residents, non American citizens.
I am thinking that this would disproportionately fall on the population of U.S. persons overseas which has disproportionate numbers of non U.S. spouses and non U.S. family members. The investments may have been initially made by the U.S. person when they lived in the U.S., but who have since called another country home.
There may be in wills going forward requests to liquidate assets that are bequeathed. The U.S. cost basis of the assets gets reset (so no capital gains reason not to liquidate) and once liquidated and the money sent overseas then there is no fear of the $60,000 death tax level.
How will they catch the non residents/non citizens? There is no FATCA reciprocity or CRS in the U.S. to help uncover them. Once the change is made and “the word is out” non residents/non citizens will simply shift investment from a personal name to a trust or company structure. Oopps, the U.S. is missing PFIC company/trust treatment of non residents/non citizens. And when can a foreign corporation be considered a U.S. Person if there are no U.S. person beneficiaries or U.S. persons as spouses? Simpler yet, just set the company up in Delaware which is probably less expensive than setting up and maintaining company structures than in many countries.
Those overseas persons with direct investments in the U.S. may be at a higher level of sophistication than U.S. persons living in the U.S. who happen to end up living in another country, so as a group the “foreigners” will be better able to dance around the rule.
A theme here is the sophisticated/foreign get away with it all, the less sophisticated & American bear the brunt of new rules and new enforcement. How about that Patriot Act. It is a reason why companies such as Fidelity and Schwab deny/drop accounts of U.S. Persons overseas. So if you are not a U.S. person overseas then it appears investment opportunities in the U.S. are more open to you.
A logic of putting this statement in is to keep CBT as is:
“For individuals, the test for residence may depend upon nationality, or a physical presence test.”
Yet the document is lacking in symmetry of argument. If the above is stated to keep things the way they are for individuals, then a statement should have been in there saying that most countries tax their companies on a residence basis and such statement would support shift away from global taxation for U.S. companies to territorial taxation for U.S. companies.
Help me understand this. Suppose my elderly USC mother dies, leaving me some money. Would I be better off inheriting as a USC, or a non-USC? Or does it even matter? (Maybe this new development doesn’t apply to this situation.)
@Zla’od Yes you would be better off inheriting as a USC, if (is it a single asset, or collections of assets?) >= $US60K. Complications come in if you have non USC children and they are also included and above the $US60K level.
I am thinking at some point the USG will want to apply this to companies, especially companies owned by individuals. So then how about the big multinational with a multi billion investment in the U.S., who will die to trigger this? If the rule is slanted toward real estate, what if the investment is a multi tower entity in New York?
I think they may just be aiming at individuals, thus not really closing the loophole.
Their plan may work better if it is just transactional and not linked to death. We know Vancouver has a chunk of tax for foreigners buying real estate. Australia is starting along those lines with higher purchase stamp duty, and discussion of a tax on vacant properties.
Zla’od
For the “transaction” where you inherit from your USC mother, your citizenship does not matter. Once you’ve inherited assets, they are US assets. If you’re a USC at that point, all income generated by those investments after they are distributed to you will be reported to the IRS on a 1099 (unless it’s real property) and taxable to you. If you’re not a USC, best to liquidate everything ASAP (before distribution from the estate if possible), and invest in assets outside the US (including non-US mutual funds that invest in US equities if you want exposure to US investments).
JC – the issue here is the citizenship of the decedent, not the heirs. Once NRA heirs have the property they will want to make sure to take their investment out of the US so that they have no US property when they are the decedent.
Zla’od If you did get this inheritance, death tax free, then you would be next up. You die and if there are non USC in the will then the tax will apply (if above $60k) for inheritance to them. Therefore, this rule will provide incentive for you to liquidate an inheritance and get the funds out of the U.S.
@Karen thanks for correction, citizenship of the decedent. That makes it less of a worry.
So if Zla’od has renounced and is not a USC, then the $60K threshold would not apply but could apply to his estate if the assets above $US60K (Karen is that a single asset or a collection of assets?), and he passes, (no spouse exemption to apply, as not a USC). So the incentive for Zla’od is to liquidate and get the funds out of “Dodge.”
@Embee
The US estate tax rate for NRAs is currently between 26% and 40% of any assets situated in the US above $60k in aggregate. I’ll leave it up to you to decide whether or not this seems “excessive”.
@JC
Without a US estate tax treaty, the NRA exemption for US estate tax is $60k in aggregate US holdings. Everything above that is then taxable at between 26% and 40%. That would on the full asset value, not just accrued or as-yet untaxed capital gain.
@Zla’od
I think it may be clear, but just in case… what’s being discussed here is improved enforcement of the existing laws. In other words, even if TTFI and all the current tax reform plans go down in flames, then if or when you inherit from your USC mother you are still motivated to move your inheritance out of the US sooner rather than later, and for the same reasons. Israel (right?) has no estate tax treaty with the US.
@JC – BTW, Australia DOES have an estate tax treaty with the US. If a NRA resident in Australia dies with more than $60k of directly held US assets, then their estate is supposed to file form 704-NA reporting worldwide assets. But the actual exemption would be computed as (current estate tax exemption for US residents)*(US assets)/(total worldwide assets). With a $5.4m exemption, if 10% of worldwide assets are US-taxable assets, the exemption is $540k rather than $60k. Better not to have any direct US assets when you die. The compliance cost would be horrendous.
@UK Rose
“the only real system that will mesh best with what existing countries are doing is residence-based system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. and then treaties decide who has first taxing rights.”
Why? The default position with this is double taxation. It may be mitigated via treaties but treaties reactive. Many will be double taxed until enough of them make enough noise to be heard for a change to be made at the next scheduled treaty renegotiation.
Why should those rich enough to have assets aboad have to put themselves at greater risk of having their finsncial data and other information leaked?
Why not tax it where it is earned and leave it at that?
@EmBee
There is (was?) a court case of two bankers’ associations, Texas and Florida, suing the Treasury Dept. over REGULATIONS requiring them to report to foreign governments under FATCA.
@ Watcher
A hasty decision I’ll admit but I’ll say that’s excessive. Only because somehow I think the really huge estates can find a way out of all or most of this tax and it would be the lesser to midlands, as usual, which would pay Uncle Sam.