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.
@George – “A long term resident outside the USA who has the sole citizenship of the USA is up the creek and without a boat.”
And…we’re without a paddle due to the fact that we don’t have money due to being doubly taxed. First by our country of residence, then by the USA.
We’re definitely up excrement creek without a paddle.
Many thanks to all the Isaac Brockers who have helped me in this very long and tedious journey towards relinquishing my U.S. citizenship. I didn’t think this would happen but it has: a nice gift for the season. Good luck to all of you on your journey.
@greg, same to you and Merry Christmas and a very happy 2017.
I have a quick question regarding my IRS obligations (and I just received my CLN). I am frustrated at the thought of spending yet 2K to complete the 1040 and the 8854. In the past, I have deferred to a knowledgeable (and costly) accountant who has done a fine job with all my tax filings. I have looked at the forms and am a little intimidated: there is a lot of specific terminology that I don’t understand (e.g., nonmarketable securities and stocks) . Any advice in terms of trying to complete the forms myself or handing over 2K to my accountant? If I decided to try to do this myself, is there some decent tax software I could purchase or on-line sources explaining some of the terminology? Thanks for any and all advice. Cheers, Greg
@ greg
I would just ditto DoD’s advice here:
http://isaacbrocksociety.ca/2011/12/14/about-the-isaac-brock-society/comment-page-16/#comment-7763349
And add that my husband did exactly that for his final filings. I had always filled in his US tax forms before to ensure they were more legible but I wouldn’t do the finals knowing that with my husband’s script it would make the IRS struggle a bit to decipher them. Didn’t want to make it easy — insert evil grin here. He’s received no correspondence from the “service” since then — going on 3 years now. No news is good news, they say. As for deciphering their lingo he figured if he didn’t understand the term he probably didn’t have one of those. RE: 8854 — For our house value he just used our property tax assessment. For household items he took a wild guess. I don’t know how complicated your finals will be. It will depend on your investments. Luckily my husband only had chequing and savings accounts — nothing fancy. Good luck!
Greg,
I am in your situation and must also file the final returns in 2017.
I have never had to pay any tax to IRS, but even with a college degree I have never figured out how to do all of the calculations for the IRS 1040s, and so will have my accountant fill out the final year 1040 and 1040NR.
My accountant, who only does my US filings and has never charged me much, insists that I fill out the 8854 myself and “just follow the simple instructions” and I will do so. For the 8854 I am guided by the information provided in Phil Hodgen’s blog and in the citizenshipsolutions.ca blog that gives examples of different 8854s, and which is helpful in ensuring that you answer the questions. Also, following Hodgen’s advice, in January I will be filing, on my own, the simple IRS 4868 form to give me extra time in 2017 to file these forms — just in case I need it.
@greg
I’m in my ninth year of filing 8854, so you’ll have to believe me when I say that it’s really not that hard. The balance sheet is the most excruciating part, but the key observation here is that provided the end figure is comfortably below $2mm you have no tax liability on this and so no need for any great precision or accuracy here, meaning you can hand-wave any of it that isn’t obvious or clear in any way. (Above $2mm is exit tax territory, which you should avoid at all cost, if necessary by gifting assets away before renouncing.)
Approach it by first listing out in broad terms every investment and ‘asset’ you own (‘asset’ here would be house, car, perhaps any expensive jewellery or other collectibles, but not the contents of your sock drawer!). Then find a slot for each of them on the 8854.
Cash is easy to define. Marketable stock issued by foreign companies is all the stocks you own outside retirement accounts that aren’t US ones and are listed on non-US exchanges (include units of non-US domiciled mutual funds here). Marketable stock issued by US companies is any US stock you own (AAPL, GOOG, etc) and any US-domiciled mutual funds, again outside retirement accounts. Non-marketable stocks would be anything you own that isn’t publicly traded (private equity); not common. Again split into non-US and US. Pensions are straightforward; 401k, IRA and the like are US, RRSP or whatever is not. If pre-tax just put N/A for basis. Partnership, trusts, intangibles and loans are likely very uncommon, so just ignore those. Real property is your home and any rentals, as usual split into non-US and US. Business property is irrelevant unless you own a business in or out of the US (if you’re self-employed this might run to the cost of a laptop and printer!). And other assets is the value of all the other stuff (sock drawer, etc!) you excluded up top. Just guess it.
For each item, your basis is simply what you paid for it, and as with values you can guesstimate this to a reasonable degree, because provided you are below $2mm and so outside exit tax territory the actual numbers don’t really matter here. If you have a mortgage and/or car loan put them in the liabilities section. Add up the numbers to obtain something comfortably less than $2mm on the ‘Net Worth’ line, and you’re done.
One final note. The IRS is so disorganised that you have to do their own internal communication for them. Take a look at the 8854 instructions and you’ll see that you have to include this form in your final 1040 return and also mail a separate copy to Philadelphia. A few folk have been caught out by this, so it seemed worth mentioning.
Embee –
RE: 8854 — For our house value he just used our property tax assessment.
If you are going to do the paperwork and try to comply, why do something flat-out sketchy like that? Unless the world is in a just-past-overall-economic-meltdown scenario, where actual value has plummeted since assessment. Not the case except maybe for very recent history in certain places.
Bottom line: Property tax assessment ≠ Fair market value
Truth test: you’d be willing to sell for property tax assessed value. No? Then you cheated.
Greg Don’t be put off by watcher or USX. You will only file 8854 once. Also. If your net worth is comfortably below 2 million US, you are not a ‘covered expat’ and there is no real need to fill in column c,d, or e of the balance sheet ( part V schedule A) They won’t worry about a minnow who lives XUS.
@ usxcanada
You want truth? We would love to get what our property tax assessment says our house is worth. Less than 40% of our house is completed but, despite my protests, they assess it as 90%. So no, he did NOT cheat. The grand total was way, way below the $2M mark. Here’s something else to get on your high horse about. He only filled in column “a”.
@DoD
I agree that there is no strong motivation to file a completely accurate 8854, but there is for making some attempt to produce one that looks believable. A rough attempt at the right-ish figures is the easiest way to achieve that. It also helps that any round-number guesses made in non-USD will immediately become non-round when multiplied by a non-round USD exchange rate.
As we have both said, if well below $2mm the actual numbers don’t matter a jot. It’s just that a bunch of suspicious-looking numbers that sum to under $2m might raise queries, whereas non-suspicious numbers that sum to the same amount probably would not. Why take the risk?
@usxcanada, re your comment to @Embee;
“..If you are going to do the paperwork and try to comply, why do something flat-out sketchy like that? .”
What??
That you broke silence to make that comment means to me that you have some other idea about how the house value should have been arrived at.
So, how did you arrive at a value, or, what are you proposing other than the government assessed “fair market” value? If that value is one which works in favour of the person reporting, and it was done by a government body who regularly defends the assessments in property tax cours, then why is that ‘sketchy’?.
For several years in the past, I was present during many property tax assessment appeals of all types. They were all over the place. @Embee is correct about the scenario where they assess a building as if it were completely usable, even when it is not complete. And those who can pay property tax appeals lawyers and specialists can often get a significant reduction ( case in point http://www.cbc.ca/news/canada/you-win-some-you-lose-some-1.1060052 ).
Are you saying that one should pay for a qualified property assessor? Or use a hand wavy figure from a real estate agent? Or????
If the IRS doesn’t specify how the value should be arrived at, and we are under no obligation to help them. As long as the value is defensible, then why shouldn’t those reporting choose whatever is most helpful to them, least costly, rational, and accessible to ordinary people? We owe NO duty to the US.
The only reason to file a Form 8854 is to establish that your net worth is below the 2 million threshold, thus avoiding covered expat status. If your net worth is far enough over 2 million that there is no way to get it under by massaging the numbers then you are a covered expat. If that is the case, then there is no point in filing the form at all because failing to file it simply makes you a covered expat which you already are anyway. (There might also be a $10,000 penalty for that failure but who cares? They have no way to collect that, either.) If you can’t avoid being a covered expat by filing 8854, there is no point in giving the bastards a shopping list. No good ever comes from volunteering information to the IRS.
That’s why if you are going to bother to file it you must use numbers that are advantageous to you. They really don’t have the budget, the time, or the personnel to check these things. (Assuming you are not foolish enough to still have US assets.)
Even though I was well under the 2 mil threshold I decided not to file 8854 because I found it grossly offensive. I guess that makes me a covered expat but so what. They don’t have a clue what I own or where it is located. That was 3 years ago and I have heard nothing from the IRS.
I subscribe to the Nancy Reagan school of thought. Just say no.
I agree 100%. Don’t tell them anything they don’t already know.
@Maz57
There are some that although above the $2,000,000 and who have no way or no desire to reduce or gift to get below that sum, may not owe the irs anything IF their unrealized gains are below the$680,000 threshold . Then why risk another $10,000 fine especially if one wants/needs to travel to the US risk free in the future?
Well, you could do a trial form to see if you can make the $680,000 c.g. threshold and owe no tax. But remember, even if the numbers look good, if you actually file that form, you have just given the IRS all the information they need to screw you should they disagree with those numbers. Every interaction with the IRS entails risk. The more interaction=the more risk. Its a risk to file and its a risk to not file. There are those in Congress who, if they had their way, want to ban all who renounce whether they file Form 8854 or not.
As far as an extra $10,000 fine is concerned, I owe so many of those one more doesn’t make much of a difference to me. (As in all those never filed FBARS for however many years and God knows what else.) They have no way to collect anything. Personally, I’m sick to death of trying to comply with their stupid rules and I have come to believe it is actually safer to not comply.
Traveling to the US and the words “risk free” don’t really belong in the same sentence.
I will be renouncing the 6th of January 2017 – for the IRS I am considered “non-covered”.
Question: As a non-covered renunciant, how will I be taxed? Will I have to pay tax based on what I earn in the first 6 days of January based on my January payslip? or will the IRS look at what I earn in 2017, then divide by 365 and multiply by 6?
The latter would not make sense, since anything earned after January 6th will be earned by a non-American. But hey, the IRS is impervious to logic anyhow…
I also own stocks in U.S. based companies, when I sell them after I renounce, how will the sale be taxed?
Any help and advice is greatly appreciated. Merry Christmas!
Fred. There is a case to be made that you do not need to file any 1040 for 2017. I presume your Total worldwide income for the 1 week in Jan will be less than the filing threshold and that you will also be under any threshold for US source income for the balance of the year.
I don’t think they prorate your annual income- do whatever is easier.
Why sell your US stocks? Delay for another year and simplify. If you sell after You renounce, I would only report any capital gain on my home country return. FBARS are another subject. . Petros never filed any because they come under a different code. ( fincen as opposed to IRS)
Fred, Can you share how long you waited for your appointment and where it is ? We’ve been waiting 4 months and haven’t heard a word. ( Vancouver)
@DoD – thanks for the reply. Yes, as my earnings will fall below the filing requirement threshold, I take it that no 1040 is required. Can I just send in the Form 8854 and FBAR for account values as per January 6th?
Regarding stocks, I need the money, and I would sell after renouncing. What benefit (simplification) is there by waiting a year to sell them? Wait till 2018?
To answer your Q: embassy in Bern, around a 2 week wait. Your 4 month waiting time sounds preposterous. One would expect expedient service for an extortion fee of $2,350. I hope your ordeal will be over soon!
I guess the rule is: whatever financial relevant events happen AFTER a “non-covered” person renounces has no bearing on that person’s tax liabilities, as that person is no longer U.S. citizen.
Fred. In that case, no need to wait to sell the stocks. I agree that what you do after Jan is none of their business. Send in the 8854 and FBAR as of Jan 5. Good luck. P.S. The 4 months delay is to hear from them. There will be a further wait for the appointment.
I will be renouncing early January 2017 and am considered a non-covered renunciant, I’m in my mid 30’s so nowhere near retirement. From an IRA account perspective, when would it be most advantageous to cash out (liquidate) my IRA? Prior to renunciation, or after renunciation?
Have any IBers done this, or have knowledge on this matter?
I’d obviously like to pay as little taxes as possible and figured a W-8BEN might reduce the amount of tax owed.
Additionally, I believe that if you relinquished after June 3 2004 and before June 17 2008 the filing of form 8854 was necessary to stop being subject to US taxes. So if you’re going for a backdated CLN, this may be something to keep in mind.
From https://www.irs.gov/pub/irs-pdf/i8854.pdf – Expatriation After June 3, 2004, and Before June 17, 2008 :
Badger – Silence … a noted side effect of noxious offgassing.
Fair question on property tax assessment vs fair market value. Much to your credit, you like data. Even if you might let your ressentiment entice you to cut a corner. (Notice how nobody else cared about data?)
Short answer. Best available professional advice said do not plug PTA into that slot. So I got monthly avg data for type of property from the local real estate board, used actual month of PTA to establish relationship to avg data, then used relationship to interpolate FMV for month of renunciation.
To repeat. PTA ≠ FMV. Sauve qui peut.
@usxcanada, I – and probably other readers appreciate the details of your rationale and the method you chose to use, which gives readers the opportunity to think about what factors and methods they might consider and weigh in deciding how they might personally choose to approach arriving at a valuation figure for the deemed sale of their home for the purposes of the 8854, and I also appreciate that you included information that your approach was based on advice by whatever type of professional you retained – who advised NOT to use the property tax assessment figure.
I see this in the IRM re valuation of real property in general;
‘4.48.6 Real Property Valuation Guidelines ‘
…………
………….
” 4.48.6.2.4 (07-01-2006)
Analyzing
1 In developing a valuation conclusion, valuators should analyze the relevant information necessary to accomplish the assignment.
2 Determine the Highest and Best Use of the property as vacant and as improved.
3 Approach to Value — The Valuation Process. The valuator should determine which methodologies are to be utilized in developing the opinion of value of the subject property. The valuator should consider the appropriate valuation approaches, such as the market approach, the income approach and the cost approach. Professional judgment should be used to select the approach(es) ultimately used and the method(s) within such approach(es) that best indicate the value of the property.
4 In the Market or Sales Comparison Approach, properties similar to the subject properties sold close to the valuation date are compared to the subject property. Adjustments are made for financing, condition of sale, date of sale, physical characteristics and location to indicate the value of the subject. Care should be taken to consider the number of sales available, their relative comparability, the degree and rationale for adjustments to the sales and the relative correlation and reliability of the value indications from the sales.
5 In the Cost Approach, an estimated reproduction or replacement cost of the improvements is computed and then reduced for physical, economic and functional depreciation. This value should be computed as of the date of valuation. To this result, an amount is added for the value of the underlying land. This approach is generally useful for specialty properties where other approaches lack sufficient supporting data and where land value and depreciation amounts are reasonably determinable.”………….”
And,
I understand that for ex. in Ontario, MPAC’s method and assessed value will not in most cases be close enough in time to the IRS imaginary deemed date of sale as if it took place on the day before a person’s expatriation date unless that expatriation date falls close to the month and year of the MPAC assessment date of January 1st of specific years in their four year cycle
https://www.mpac.ca/PropertyOwners/FourYearCyclePhaseinProgram
but,
OTOH,
For an ordinary expat with limited or modest assets and income – if one is nowhere near the covered or exit tax threshold, how practical is it to go to the utmost scrupulous lengths? How likely is it that the ordinary non-covered expat will ever hear back from the IRS challenging the reported deemed value of their Canadian family home as if it were sold on the exact day before expatriation – and the method used for the valuation, if it and they are nowhere near an total overall deemed worth that would be worth the trouble the IRS would have to go to in questioning, then delving into and ultimately challenging the exact basis for the reported deemed value?
The lengths you went to might be more urgent for someone close to or over the exit tax or covered threshold, or capital gains tax threshold, or someone more likely at risk to be selected for additional scrutiny. And if, in addition to those risk factors, they also must maintain the ability to travel into the US, had US sited assets within reach of a lien, or who might have future estate issues involving inheritances and US resident taxable persons.
For most people of modest means, who are DIY 8854 filers outside the US, I think it unlikely that they will ever be challenged on their method of valuation and should do the best they can – and most importantly, file it on time. The IRS doesn’t have enough resources to follow up on minnows and krill, and it is very difficult to find affordable and informed/competent professional help with the 8854.
The 8854 instructions do say:
”
Schedule A–Balance Sheet
…….
Columns (a) and (b)
“List in U.S. dollars the fair market value (column (a)) and the U.S. adjusted basis (column (b)) of your assets and liabilities as of:
………….
“You can use good faith estimates of fair market value and basis. Formal appraisals are not required.”…….