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.
@wonky
I chose to be compliant, but the stress doesn’t end there when I’ve now realized that I’ve entered a system that even if I renounce can come back to bite me at some point.
There’s always the possibility that the IRS will continue ignoring its non-resident citizens as they’ve always done. I don’t know of any non-resident who’s received a letter from the IRS as a result of FATCA, but then we don’t know who was included in that first batch of data handed over to the IRS early last fall. I will know for certain very soon whether as a result of signing a W-9 at my bank mine has. The IRS may not have the resources to chase down a group of taxpayers who for the most part wouldn’t owe any tax, but then what does it cost to sent out a bunch of computer generated letters to shake the trees for loose fruit? The threat of FATCA itself has already brought a few “into compliance”. Maybe that will be enough for the IRS?
That’s the million dollar question.
Well I tried to use my last year’s 1040 and 1116 as a guide …. So I will drop it in the mail by the end of this week … Only fear is making some stupid mistake and getting word back from them..or if I don’t send anything at all I almost I have s better chance of never hearing anything back..I think!
But if I do hear back and its not good is ignoring it a dropping the notices in the garbage and never cross the border again ? I’m sure it’s been asked by me before but something so dumb as this has me not knowing she’s up or down anymore! I still feel in my gut no more compliance is the only way to be able to deal with beyond lost still. So thought s and suggestions would be extremely appreciate d on what one might do ? Sorry if i have asked before
I have come to conclusion all of us who have gotten into compliance in the few year’s seem to be the fools .. As in well the 15years prior to not. Filing when I moved out of the states cause I was told you don’t have to ..I never hear a peep no letters no nothing just the devil accountant that scared the hell out of me when I went to get my Canadian taxes filed few years back .. I think those that don’t get sucked into the compliance and ignore will be the ones who live happy!
That seems to be the case, wonky – so far, But I see a lot of angst ridden people on both sides of the fence, including those who’ve renounced already.
The US will NEVER get the compliance levels it needs to make CBT work – but it doesn’t mean they won’t stop trying for awhile. They might get near 100% compliance if Americans cease to live outside the US, though.
@Wonky and @Bubblebustin, I suspect that you’re correct. I doubt if the IRS have the resources to aggressively pursue minnows abroad. I fell for the scary tactics of the accountant. 😛
Or really care to… Unless your making over the 100,000 threshold .. Where the might have a chance to possible get you to pay them .. Which Im way way way way far away from… So who knows because I don’t .. I go back and fourth about 10 times a day whether I’m gonna drop my forms in the mail to why bother like 99% of people I have talked to here in town only ones the do comply r the ones getting social security or a military pension of sourt thats it just the ones getting money from the states
after much hesitation i got my DIY forms sent yesterday….
And i haven’t heard anything about the ADCS law suit in along time am i missing something?
seems to have gone silent..
I wonder if anyone can help me with an expat tax related question, I have searched the internet with little success.
My NRA spouse has a retirement account located in the USA. The account holds IRAs, 401(k) and 403(b) plans.
If he predeceases me, all the US assets in his estate will be automatically transferred to me, his spouse.
When a NRA spouse inherits so-called “US situs” (US located) assets there is a US transfer tax of 40% on these assets (a US citizen spouse would receive the estate assets free of this transfer tax). Assets that are deemed by the IRS to be ‘US Situs” include US real estate, shares in US companies and tangible property located in the US such as automobiles, art, jewels etc.
There are some US located assets which the IRS deems “Non-US situs” and, as such, are exempt of the 40% transfer tax. These “Non-US situs” but US located assets include US bank accounts, CDs and life insurance policies.
https://www.irs.gov/individuals/international-taxpayers/some-nonresidents-with-u-s-assets-must-file-estate-tax-returns
I can find nothing on the IRS website or on any tax law website that indicates the “Situs” determination of US pension funds or retirement annuities in an NRA’s estate. My spouse has called the pension fund who declined to give him such tax information even though they are the tax withholding agent on his retirement account and would know the funds “Situs” determination and pertaining IRS regulations. This information is important as we need to decide on a protocol with respect to Required Minimum Distributions or a protocol to deplete the funds at a more accelerated rate.
If anyone on Brock has faced this situation, or if anyone can point to information that would be important to many of us, I would be very grateful.
Heidi. 5.4 million of worldwide assets are exempt from US estate taxes. The exemption for his US assets is prorated. E.G. Value of world assets 5 MM. No estate tax. Value of world assets 10MM. Value of US assets 1 MM. The first 540K of US assets are exempt. ( This is somewhat simplified- I’m not a CPA). These can change at any time. The estate tax rates are graduated. I’m also not sure how these rules apply in non-treaty countries or countries other than Canada.
However, filing a US estate tax return is intrusive, abusive and expensive even if no taxes are owed. They require professional help and they demand copies of the wills and on and on.
Better to have no US assets when the time comes.
http://www.bdo.ca/en/Library/Services/Tax/Documents/Tax-Bulletins/US-Estate-Tax-Issues-for-Canadians.pdf
DofD
Thanks for your input.
The 5.4 million exemption on estate applies only to US citizens. For NRA it’s only 60,000 exemption on US situ assets, except for certain exemptions, ie bank accounts, cd’s, life insurance BUT it does not mention pensions.
“Better to have no US assets when the time comes.”
It is impossible to move a US 401K outside the US. Although as a non covered expat, my spouse only pays tax on his distributions in our country of residence, (it’s 40% for covered expats), if he predeceases me, I am unclear if his estate (pension only) will be taxed before I receive it. The term US situs or non US situs is key.
Just to confuse, the IRS use the non situs term to apply to US situated assets that do not carry a US tax burden.
The estate tax on Canadian NRA’s snowbird Florida properties would carry a 40% US tax burden on the total value of the property, with only a 60,000 exemption.
Heidi. I don’t know where you got your information but a lot of it is incorrect. Especially your comment on the snowbirds Florida property. The tax treaty entitles Canadian NRAs to essentially the same exemptions as US residents.
‘ better to have no US assets when the time comes’. By that I meant ‘ better to deplete the funds at an accelerated rate’. Good luck with your research.
Heidi. The BDO article I cited includes a Florida condo example.
Johnny Canuck dies and owned a Florida property worth 1.25 million. His non US assets were 5 million (US$) for a total of 6.25 million.
Estate tax liability in this example is $22,000. I.E. 1.76%.
The accounting fees will double the cost.
Heidi
Most sources suggest that 401ks, IRAs and similar are US situs for the US estate tax. For example, this one. However, DoD is right to point out that if you are Canadian (and domiciled in Canada), then you can take advantage of the US/Canada estate tax treaty, which gives you the same exemptions as US citizens.
So provided you’re worth under USD 5.45mm in worldwide assets you should fall clear of any US liability. You do still have to run the gauntlet of intrusive (and potentially, delaying) IRS form-filling, though.
Folk in non-estate tax treaty countries get a pretty unpleasant deal from the US. One that’s hard to differentiate from confiscation, in fact.
@ watcher
Thanks for update, we are unfortunately not resident in Canada. The only Tax treaty for Switzerland I can find a brief reference to was written in 1952 , which someone remarks as “useless”.
Heidi
Ah, right. I couldn’t recall if you lived in Canada or not. Not, then, it seems.
The US/Switzerland estate tax treaty does appear to resemble Swiss cheese, but I don’t think all is lost for you. It’s noted as PR-UC — that’s pro-rata unified credit — meaning that you should get the same USD 5.45mm (or whatever) exemption as US citizens. There’s an article here that describes its shortcomings — the main one seems to be lack of reciprocal tax credits, and that’s a serious outage if you’re going to run into it — but also indicates that you get the full citizen exemption, so if that covers you then you’re okay. Well, unless and until the rules, limits, and exemptions change… again, of course. And all bets are off if you move to a non-treaty country.
The treaty being soooo old, it’s really hard to find a copy online. I haven’t yet found a usable one. Shrug. Oh, and one final fun fact: one of the authors of the article I linked to above renounced his US citizenship a few years ago.
@ Watcher
Thanks for that link, you guys are the best. I am not fond of Swiss cheese, I prefer English or Canadian cheddar, but I will digest it and see if it’s palatable. Sure don’t like the idea of more US form filling either. Maybe an accelerated withdrawal is better than an annuity
@ D of D
Sorry didn’t realise that Canadians got a sweetheart deal 🙂
Heidi,
I found this useful guide to worldwide estate/gift/wealth tax rules (dated 2013) http://www.ey.com/Publication/vwLUAssets/2013-international-estate-and-inheritance-tax-guide/$FILE/2013-international-estate-and-inheritance-tax-guide.pdf
It clearly states that deferred compensation/pension accounts are US situs for estate tax purposes.
Heidi. AFAIK Swiss NRAs get the same deal.
@DoD
Strictly, Swiss NRAs get some of the same deal as Canadians.
The US/Switzerland estate tax treaty is really old, and lacks several of the more useful provisions in the Canadian and other newer estate tax treaties. However, it does (apparently, haven’t actually read it) contain the pro-rata provision, and that seems to be the one that Heidi needs here. Crappy treaty in general then, but probably good enough in this particular case.
Also notable is just how few US estate tax treaties exist, and consequently how small the proportion of NRAs is that will be protected by them. Combining this with a US estate tax exemption that is only just over 1/100 of that given to US citizens produces a toxic combination for many NRAs. Even owning sufficient Apple or Google shares can produce problems, and 99% of NRA investors won’t see the US tax minefield.
Current US estate tax enforcement for NRAs is weak, not least because by its nature it often won’t involve any US organizations. I am pretty sure though that we will see the US ‘clampdown’ on this ‘loophole’ once it finds that there is no pot of gold at the end of the FATCA rainbow. Now that the US has a stranglehold on non-US financial institutions over US income tax and information reporting, extending that to US estate taxes is only a small step.
@watcher
Spouse took a look at the IRS NRA estate tax form last night. He said it had the question, “has the decedent ever renounced US citizenship” Not sure of the significance of this question, maybe to identify covered status?
I have limited internet access at present, but will check form later.
Heidi
That would mostly, I think, relate to expatriates covered under the old rules that existed from 1995 until the exit tax arrived with HEART in 2008. Prior to 2008, covered expats got a weird US estate tax deal to accompany their weird US income tax deal for ten years after renouncing. Only after the ten years was up did they properly revert to true NRAs. Page 1 of the form 706-NA instructions actually lays it out relatively clearly.
All that was swept away with the exit tax in 2008. From then on covered expats get a clean — but perhaps expensive — break. Before, covered expats got a messy break that took years to unwind, but with care they could usually avoid any actual tax liability, and just got stuck with a ton of burdensome but pointless paperwork.
You don’t say when your spouse renounced, but if it was after HEART passed in June 2008 they should be treated as any normal NRA. And if it was before that then they only have to make it for at most two more years before the ten year weirdness period expires anyway (if it hasn’t already).
With that all said, entanglement with US tax at any level is clearly a royal PITA. Like fly paper, once you have touched it you might never, ever be able to get truly free.
…and I found a readable PDF of the US/Switzerland estate tax treaty here. Article III is the part that gives you the pro-rata exemption of that allowed to US citizens and residents. Provided your/your spouse’s total net worth is under USD 5.45mm or so in total then even if you held it all in US situs assets the pro-rata rules would still mean no US estate tax liability. (If net worth exceeds that, you need professional advice — I don’t swim in those waters!)
@watcher
Thanks again for your continued help. I am travelling at present with limited internet access but will look at the treaty ASAP.
Both of us expatriated post 2008, but we do know of the long arduos situation of a friend who expatriated pre 2008. He was hit with an audit in his last year of servitude.
I believe under the new rules, a US person cannot inherit from a covered expat without a 40% withold, so wouldn’t that question also relate to the status of the deceased estate under the new rules?
Heidi
Receipt of bequest by a US person is the subject of the section 2801 tax included in HEART in 2008, but I am not sure why this is bothering you. Your original question asked about transfer between spouses, and you have both renounced. So it shouldn’t matter if one or even both of you are ‘covered expats’ under the 2008 HEART definition, inheriting between you won’t trigger section 2801. Of course, if you are ‘covered expats’ then you have a strong motivation to be sure not to include any US citizens in your will, but apparently congress never thought this through so they get all of the unintended consequences here (and in fact very likely get none of the intended consequences).
Also for what it’s worth, we are now eight years past HEART and the IRS has only got as far as ‘proposed rulemaking‘ on section 2801, which seems to indicate a reluctance to actually, you know, try and collect on it; perhaps because they too realise that it is just plain dumb. Form 708 does not yet exist. And section 2801 is not applied to the estate but rather to the individual recipient, and should be extremely rarely paid anyway — because when you see it coming you simply cut out the US person(s) from your will! — so I can’t imagine brokers and 401k providers being required to withhold on distribution of estates for it.
Speculation at this point, of course. The worst case I can think of is that the 401k provider does withhold tax and you have to jump through some paperwork hoops to recover it from the IRS. (I have no doubt that congress will be able to think up something even worse than I can, but who knows what it will be, or when, so for now I find it best to concentrate on the knowns and known unknowns.)
Watcher
I was just trying to discern the whole inheritance picture as I am covered and we do have US infected children who at present are living/ working in the US. I thought 2801 was in operation, if so, it looks like I will have to die first or failing that I will find a suitable charity to benefit. How utterly stupid and short sighted those idiots are.