US expat tax and FBAR: Discussion thread (Ask your questions) Part Two
Please ask your questions here about US Expat tax and FBAR.
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NB: This discussion is a continuation of an older discussion that became to large for our software to handle well. See US expat tax and FBAR: Discussion thread (Ask your questions) Part One.
1) In completing form DS-4079, question 9 re oath etc, i am wondering if a Canadian Government security clearance such as secret would be relevant? See the wording in part B of this link. It appears on the certificates for that.
http://www.tbs-sct.gc.ca/tbsf-fsct/330-47-html-eng.asp
2) DS-4079, question 11 – is contract work at a crown corporation relevant? I was presuming to mention it, then if it is not relevant, they can ignore it.
3) Wondering how form 8854 relates to 2015. The instructions about which part to complete seem to end in 2014.
@MostlyCanadian
Re: 3) Form 8854 is updated every year. The version that addresses tax year 2015 won’t be available until January 2016.
Form 8854 is released in draft form every year several months in advance of January 1. The Draft for 2013 was published June 4, 2013, and the Draft for 2014 was published June 9, 2014. The Instructions for the Draft are published a month or two later (August 1 for 2013 and July 21 for 2014).
http://apps.irs.gov/app/picklist/list/draftTaxForms.html
Enter 8854 in the “Find” box. Draft forms remian on the site until replaced by the next draft release.
The final 2014 Form 8854 and instructions were posted November 24, 2014. The document itself is dated October 28, possibly indicating that changes were indeed made after the draft.
http://apps.irs.gov/app/picklist/list/formsPublications.html
This article seems targeted to the situation faced by actual US residents – rather than those living outside the US with fictiveUSresidencyforconvenientUSTreasurytaxablepersonpurposes:
http://blogs.wsj.com/totalreturn/2015/05/06/minimize-the-bite-of-the-3-8-net-investment-income-tax/
I am not endorsing it, and merely skimmed it. Caution, as we know, what may apply to those living inside the US often doesn’t for those outside. I merely include it just in case there is anything useful there.
The US Treasury and IRS refuse to raise the aggregate reporting threshold on any given day during the year – for the purposes of the FBAR/now FinCEN Form 114 to account for inflation in the years since the reporting requirement was enacted. Thus needlessly engulfing many/most of those abroad in the FBAR morass than would have been originally included back in 1970 when 10,000. was a proportionately much larger sum. “…The $10,000 FBAR threshold is not adjusted for inflation, which causes more and more people to be subject to its reporting requirements due to the continuous devaluation of the dollar…” ( http://www.internationalman.com/articles/cruel-and-unusual-is-the-only-way-to-describe-it ).
In terms of other disproportionate “form crime” penalties likely to be incurred by those abroad merely for not filing a form, there are the penalties for other forms that require reporting but are not necessarily directly a report of an actual taxable sum (ex. the penalty for not filing the 3520A “Annual Information Return of Foreign Trust” on savings that the IRS considers to be ‘taxable foreign trusts’ (although NO actual direct specific ruling has been made to that effect apparently) like our Canadian RDSP, or RESP – even when no actual distributions have been made because the RDSP and RESP have not yet been tapped.
Funny then that the IRS/US Treasury apparently is updating some penalties to account for inflation – and increasing them because they state that the penalty should be proportionate to the crime:
http://federaltaxcrimes.blogspot.ca/2015/05/amendments-to-sentencing-guidelines.html
Jack Townsend says;
“…another proposed amendment wherein the Sentencing Commission proposes to adjust financial levels and thresholds for inflation. This will affect most prominently for federal tax crimes, the Tax Loss Table in S.G. 2T4.1, the current version of which is here….”
,,,,,,,”Due to inflationary changes, there has been a gradual decrease in the value of the dollar over time. As a result, monetary losses in current offenses reflect, to some degree, a lower degree of harm and culpability than did equivalent amounts when the monetary tables were established or last substantively amended. Similarly, the fine levels recommended by the guidelines are lower in value than when they were last adjusted, and therefore, do not have the same sentencing impact as a similar fine in the past. Based on its analysis and widespread support for inflationary adjustments expressed in public comment, the Commission concluded that aligning the above monetary tables with modern dollar values is an appropriate step at this time….”..
So, despite many years of expats bringing the issue of the FBAR reporting threshold problem to the attention of the IRS and Treasury and others in the US government, the now extremely artificially low 1970 era FBAR reporting threshold – much lower than was first intended, in contrast to inaction on the FBAR, the sentencing Commission is concerned that for some federal tax crimes the penalties have become too low due to inflation over time, and want to increase them accordingly.
There is no justice for expats.
I’m getting ready to file my final US taxes and I was wondering if anyone has recently filed a form 2555 for the Foreign Earned Income Exclusion with their final 1040?
I’ve always filed a 2555 with my 1040, since all of my earned income is foreign and has always been below the threshold of the Foreign Earned Income Exclusion. I’d like to file the 2555 for the 8 months of 2014 that I was still a US citizen, but someone commented earlier that their 2555 was disallowed for the year of expatriation and I cannot understand why.
We had this conversation here at least once before. Just to see, despite Brockers warning that it might not work, I tried this last year for the half of the year I was still a citizen in 2013. It was disallowed, even though we could not find a rule which said you couldn’t do it. So I had to refile and use tax credits from the UK to cover the tax the U.S. would have charged. That was acceptable. You can try, since the rule must be in a grey area (what isn’t?), but if you’re paying someone to do it, save your money and go straight for credits for foreign tax paid.
@Rev Susi
Thanks for the quick response. Yes, we did have this discussion several months ago, but I still cannot find a reason why your 2555 was disallowed. I was hoping someone else (sorry if that sounds rude) might comment. Never used a pro tax preparer and will not now. If they come back, I’ll have to look at the tax exclusion, but I’ve used 2555 for 30 years now, and would like to do so this one last time.
No, my tax man couldn’t find a reason either, so we just gave it a try. IRS doesn’t care if you’ve always done it that way. The 1040NR is your final return, and it disallows the 2555, and you include the 1040 as an attachment, and no 2555 is allowed on an attachment. Because they said so, that’s why. Good luck.
If by any chance you make a treaty claim, btw, we found out that you have to cite not only the article number, but the specific paragraph that you are claiming on. Or else they disallow that too. And you get a bill, six months later, for $8000 plus interest. Not a pleasant experience.
Sounds then that it would be better to renounce/relinquish at the beginning of a year than at the end? To minimize the effect of loss of FEIE.
I did the following as a final year DIY in 2013.
1040 – printed DUAL STATUS STATEMENT across the top. Filled in income info and attached Schedule B and 2555 EZ as in previous years when I was a full year USC. All income was non-US source. I did not fill in any date info at the top of the form.
1040 NR – printed DUAL STATUS RETURN across the top. I did not fill out any date info at the top of the form. Filled in lots of nils/zeros since I had no US source income of any type.
8854 filled in the information to the best of my knowledge and ability.
SENT IT ALL OFF IN ONE PARCEL WITH REGISTERED POST AND TRACK AND TRACE. MADE COPIES OF THE RECEIPTS AND CONTROLLED THAT IT WAS RECEIVED.
I have just been listed on the name to fame list, so it has all been processed – I assume. I have heard nothing from IRS/treasury.
Good luck – you can do it!
PS Additional clarification on final year filing (this was a DIY)
Since I was a USC for part of the year, I wrote the number of days I was a USC in Part IV line 14 on the 2555 EZ, on line 15 I checked “no” and calculated the amount of the FEIE for the part of the year when I was still a USC and thus eligible for the FEIE. Luckily this amount was less than my earned income for the part of the year , so my tax amount ended up as “0”. This resulted in all the 0’s on the 1040 NR.
@allou Thank you for your posts. I am in a similar position to TokyoRose and had intended to file exactly as you describe. For what it’s worth for others in this situation I found this IRS manual online http://www.irs.gov/irm/part3/irm_03-038-147r-cont01.html#d0e3889
This is what Paragraph 10 under the Dual Status Taxpayer – General Information section says:
“10.Dual-Status taxpayers with a valid Form 2555 and Form 2555-EZ, Foreign Earned Income Exclusion, Housing Deduction, and/or Housing Exclusion may exclude income on Form 1040 whether it is the controlling document or statement. Income earned during Form 1040NR period may not be excluded with Form 2555 and Form 2555-EZ. All income should be brought forward to the controlling document and the tax figured on Form 2555 tax worksheet, regardless if the controlling document is Form 1040 or 1040NR.”
@Verity – Good that you found that information. I didn’t know of it when I filed, perhaps it has been published within the last year? At any rate it describes what to do and I did exactly as decribed. Perhaps the link you provided can be saved for future filers asking similar questions.
As allou says, good find, Verity.
@allou
Thanks for the info. I contacted an acquaintance who filed his final return last year and he did pretty much the same as you, except no schedule B. I also sent an email to Phil Hodgen asking if the FEIE could be claimed in the year of expatriation and he replied that it was an interesting subject and he would post it on his blog. So that will also provide useful info.
@Verity
That is certainly a great find. Interestingly, it is from the Internal Revenue Manual and the section is dated 01-01-15, so it is very new and not found in the available download of the entire Internal Revenue Manual. So maybe they have belatedly realized that they were incorrect in sometimes arbitrarily disallowing the FEIE in the past? It is also interesting that I find the instructions in the Internal Revenue Manual, which is written for IRS agents, to be easier to understand than the instructions written for people trying to file their tax returns.
I’ll be interested in hearing what Phi Hodgen has to say on the issue, but if he doesn’t post it by around the end of the month, I’m planing to file 1040, 2555-EZ, 1040NR, and 8854.
Good for all of you! I filed in June, then when the filing was unacceptable, filed an amended return in December. Just before all this was published. What I had originally filed would now be acceptable, I guess. Over to you to test the new guidelines.
@Rev Susi Thank you for all the information about your experience. I’ve found it really helpful to hear about what’s happened to others and how they dealt with it. Like everything connected to renunciation, the best thing to do seems to be read, read and read before making up your mind about what’s best in your individual situation.
@TokyoRose
I filed the same way as allou for the 2011 tax year and my 2555 was accepted. Been over 3 years now and not a word.
I just finalized 5 years of taxes with my accountant. I have asked him about FORM 8965 – the health coverage form. He insists that I do not need to fill it out as I do not make the required $250K minimum… I am confused. I cannot find any information about this minimum, the instructions on the form itself leave me less than enlightened, and I would love some feedback from others. My accountant is an Enrolled Agent and has annual cont ed from IRS. Am I misunderstanding it all or are there gaps in his knowledge? By the way, he did check number 61 on the 1040, stating I had minimum essential coverage in 2014. I just still don’t understand if I have to file form 8965 or not. Thanks everyone.
I tried to read the instructions for 8965. They are incomprehensible. (as are most IRS forms) . Go with your enrolled agent. If you are in the process of divesting your US ness it isn’t going to matter.
@Duke of Devon “Incomprehensible” is right! As usual, everything is clear as mud. It made a day in which I should be dancing for joy (I found an accountant that charged me a tiny fraction of what others were demanding) into a stressful, nail biting evening. I am SO READY to be free of all this #?!%&! Sorry, forgive the language 🙂
@ readytogo
My understanding was that checking the box on Line 61 completely eliminated the need to file form 8965. If that understanding is correct, then no need to worry further. If not, then they can feel free to inquire of me about it, since my insurance certainly surpasses anything they might be referring to based on US standards. From what I’ve read Canadian health insurance is among the best in the world, so maybe you should check the box on Line 61 twice!!!
Thanks @TokyoRose The instructions are certainly confusing! They seem to imply both that you are covered if you have a foreign health insurance, AND that you have to file the form to claim that exemption from US coverage. What’s new? I decided to include the exemption form (at least it is straightforward to fill out) with a note attached saying I was uncertain whether I had to file it or not. And yes, Canada Health has issues, but it has always been there for me when I need it and I am thankful for it!