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.
“A few of you have mentioned renouncing without filing taxes/becoming compliant but I haven’t been able to search the comment thread well enough to find out how. How do you avoid covered ex-pat status?”
You don’t avoid covered ex-pat status in such a case. Some people think you won’t get caught, but you might want to keep it a secret and hope you won’t get caught.
If you’re a covered ex-pat when you die, and if an heir is a US citizen[*], the heir will have to pay the US a tax of around 40% of the amount they inherit from you. This encourages your children to renounce along with you.
If you’re a covered expat then you’re supposed to pay the US a tax on your pension benefits and stuff like that. Some people comply, most notably Roger Ver. But if you keep your assets in a country where you’re a citizen, the IRS probably can’t collect.
As Portland said, you can simply renounce and walk away without any tax filings. That may make you a covered expatriate but so what, this does not matter.
Your need to renounce is really determined by your country of residence and country of birth. If your are not US-born then you can basically ignore all this and continue flying under the radar if you wish. If US-born there’s a case to be made for renunciation, in countries where the banks are strict.
It goes without saying that you should never admit to US citizenship when asked by a bank, since you want to avoid FATCA reporting.
If you’re a covered ex-pat when you die, and if an heir is a US citizen[*],
[* I’m not sure if green cards and other US immigration statuses might hurt them too.]
“I am an accidental american–had a US passport as a child/teenager (parents insisted) but have flown under the radar ever since.”
It’s your right to renounce, provided you follow the procedures laid down under the law of the country whose citizenship you are renouncing. Under US law, if you pay $2350, provide the required forms and documentation, and swear the renunciation oath in front of a US consular officer, you lose your US citizenship then and there; but you then have to wait for a few weeks or months while various watchlists get checked to make sure you’re not a fugitive from justice. Then you get the CLN, documenting your loss of citizenship; a copy gets sent to the IRS.
And that’s it.
What you do about US tax law is a completely separate matter. If you haven’t been filing US tax forms, you may feel there’s no point in starting; you may choose to go on ignoring the whole extraterritorial tax business. Or you may choose to comply, by backfiling five years and filing the 8854. Or you may choose to file only the 8854.
@portland I was born in Canada, but I do have a US SSN number that my parents got when they registered my birth as one abroad. I worked for my aunt for a few weeks in the US when I was like 15–I think I might have been paid using that SSN number but can’t be sure/don’t remember.
@norman diamond — my kids are also Canadian born, and I assume (hope hope hope) that they aren’t US because I’ve never had US residency so I wouldn’t qualify to pass on citizenship like my mom was able to do.
@nonymous — I once open up a USD credit card with my bank to avoid currency exchange on a trip I was taking and then got a letter from my bank asking if I was a US citizen. I simply wrote back and said I was Canadian-born and raised. I assume they would have no other reason to suspect and I have zero intention of ever telling anyone. Hope that was the right call — was mildly worried about perjury at the time.
@plaxy — Ugh, too many options. I’m inclined to think that if I bother to pay the money to renounce that it might be worth filing the forms for certainty/closure, but I really resent the US government’s overreach here.
I don’t owe any tax, although I do have some wonky accounts (some mutual funds in a TFSA) that I didn’t think about US implications of before opening. Can anyone clarify: is the streamlined program for anyone who wants to bring themselves forward or is this only if you owe any tax? Debating between that and a quiet disclosure, but would likely only do this if I decide to renounce. If I decide not to renounce, I guess I will just continue to hope for the best.
Streamlined is really for people who want to become compliant and then continue in the system, though you can use it just to get up to date with your tax affairs if you want. I used it for my FBAR back filing when I renounced (paper copies then, electronic now). But quiet disclosure will work too.
“I’m inclined to think that if I bother to pay the money to renounce that it might be worth filing the forms for certainty/closure, but I really resent the US government’s overreach here.”
If you’re more comfortable with that option, that’s a very good reason to go with it. Whatever you decide to do, be aware that CBT is more bark than bite. The IRS doesn’t really know who is required to file and who is not, so if you stick to backfiling, and keep well clear of the streamlined programme with its pernicious tricky “non-wilful” form, you should be fine.
My advice is to do precisely nothing. You told your bank the right thing. The US has no way to know anything about you.
IF you feel you must renounce at a cost of 3000$, there is no need to file any taxes unless you have or are likely to have US citizen heirs.
IF you feel you must file, do as little as possible. Do a quiet disclosure for 2014-2017. File 2018 next spring and renounce early next year. Oh. You forgot to mention your TFSA of TFDA on your returns? Good! That’s the only sensible way to deal with them. Streamlined was designed for thosewho wish to come clean and stay un the system. Streamlined carries with it the implication of guilty behaviour- not you.
Hi all, it’s been a while. So, I’m finally getting around to filing my final tax return (tax year 2017). I read through all the advice and wonder now if I even have to file the 1040NR form at all since I had no US source income since I renounced last August. Would it mean that I only need to file a regular 1040 and form 8854? Or should I still file the 1040NR with zeroes??? Thanks much in advance!
We’ve been down this road many times. we don’t blame you for being confused because it makes no sense.. According to the IRS, your filing status depends on your status at the end of the year.
You file a 1040NR as your tax return for the final year. Write ‘duai status return ‘ across the top
Your 1040 up to the renunciation date is not a tax return. It is a statement.
You write ‘dual status statement’ across the top.
Fill in the numbers as if it were a tax return and then carry all the numbers over to the 1040NR.
There are several sources. Google ‘ taxation of dual status aliens’
Pay no attention to the sentence that says ‘dual status does not refer to citizenship ‘
In order to make sense of these irs instructions, whenever they say US resident alien you substitute citizen in your mind and when they say non resident alien substitute non citizen. Only then do their instructions make any sense.
The fact that they don’t even bother issuing instructions speaks volumes.
They well know former citizens can’t be forced to fill in US penalty of perjury tax forms.
@plaxy I’m a bit confused that you filed 8854 but not tax returns? I thought the 8854 specifically asked about the five years?
I’m relinquishing/renouncing (hope to argue for the former backdated to 1993, but I don’t think I’ll win) in September. Although I have a SS number, I’ve never filed US tax returns in my life, and I emigrated to the UK in 1988. The only thing my SS number is linked to is my self-publishing on Amazon, which makes well under the threshold filing limit (US$2000 probably for this year). I plan to update the Amazon tax information with my UK NI number in due course.
I’m really loathe to put my neck into the IRS noose. My income and assets are laughably low. My total income is less than US$40K per year, and my assets are around US$200K. Although I’d like to leave something to USA citizen nieces and nephews, I’m not certain it’s worth avoiding ‘covered expat’ when there would be so little, plus who knows what the law will be if I live another 30 years or so. I’d have to take out a loan if I wanted to pay someone to fill in these tax forms, and I’m a bit frightened to do them myself because they are so complicated.
I guess the question is, how does the IRS know if you’re covered or not, if you’ve never even filed?
“I’m a bit confused that you filed 8854 but not tax returns? I thought the 8854 specifically asked about the five years?”
My income during the five years was UK-source and taxed by the UK. Since the purpose of the tax treaty, allegedly, is to avoid double taxation, I proceeded on the assumption that I could not be required to pay tax twice on my non-US income so I treated it as exempt from US tax by treaty. Therefore, in line with the 1040 instructions, I excluded from the calculation of US-taxable income and concluded that since I had no US-taxable income, I was not required under US law to report my income to the IRS during the five and a half years preceding renunciation. Following renunciation, there was no need for me to file a 1040NR since I had no US income or assets.
If I had understood the situation then as well as I understand it now, I would have just renounced and filed nothing, as I’ve never had any US-source income or assets since the day I left the US. Filing nothing would have been both right and legal. Took me a while to understand.
“how does the IRS know if you’re covered or not, if you’ve never even filed?”
“Covered expatriate” is just a label.
Suggestion: invite your relations to visit you while you’re still alive, and give them their bequests in person so they have the opportunity to express their appreciation and affection there and then. 🙂
Let them figure out what they want to do about their tax affairs. It’s really not your concern (IMO)
“I’m a bit confused that you filed 8854 but not tax returns? I thought the 8854 specifically asked about the five years?”
The 8854 asks about 5 years of compliance. If your income was below the threshhold that requires filing, and if you didn’t have any other reason that required filing, you complied.
“My total income is less than US$40K per year,”
In that case, if you want to comply, you have to back-file. I don’t know the exact threshhold but it’s a lot less than US$40K.
“Although I’d like to leave something to USA citizen nieces and nephews, I’m not certain it’s worth avoiding ‘covered expat’ when there would be so little”
I’d like to say leave them each $1.00 so the IRS will have to attack them for $0.40 each. But unfortunately it will be a bigger burden on them than on the IRS, so don’t do it. You’ll have to say that if they don’t renounce you can’t leave them anything. (This shows how much the US government values US citizenship.)
Thanks for the above. I like your reasoning, @plaxy! So you signed the 8854 stating that you’d been compliant for the previous five years? And you’ve not heard a thing?
I don’t really worry about who might inherit what when I die. Most likely it’ll all be eaten up by nursing home fees anyway!
“So you signed the 8854 stating that you’d been compliant for the previous five years? And you’ve not heard a thing?”
Correct.
“I don’t really worry about who might inherit what when I die.”
Hear hear. Lilies of the field innit.
@BirdPerson
I understand that you would qualify for the FEIE anyway, so you would owe them nothing.
https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
They can see from your 8854 that you are a minnow and not worth their time and effort of an enquiry.
A few here on Brock have done just that, filed only the 8854 (the Mom I believe being one?) and all quite on the Western Front…
This might be the way forward out of my dilemma! Thanks everyone!
If I exclude my income (paltry) via the FEIE, can I argue that I’m under the filing threshold since I have no other income? Or does technically the wages earned abroad help determine filing threshold.
@kitkatkate–do you want to be honest, or do you want to be pragmatic?
Remember that you’re taxed on worldwide income.
Remember that if you’re a minnow (I actually classify myself as a plankton) the IRS won’t worry about you.
That’s where I’m coming to.
“If I exclude my income (paltry) via the FEIE, can I argue that I’m under the filing threshold since I have no other income? Or does technically the wages earned abroad help determine filing threshold.”
You have to file in order to exclude your earned income by claiming FEIE or tax credits.
I excluded my income as exempt by treaty, because I took the view that I already paid tax on the income in my country of residence and paying more would result in double taxation. This, I didn’t have to file.
I was prepared to argue my case if challenged but didn’t really expect to be challenged and I wasn’t.
@plaxy – I’m coming around to your line of thinking.
Especially as I know I wouldn’t have any tax to pay to the USA, using either FEIE or tax credits.
BP. We filed 5 full yrs up to the yr before renouncing. (4 of them late). For the yr. in which we renounced we filed 8854 but not 1040/1040NR
In your case, I wouldn’t file anything.
@Portland – Yes, it does feel a bit odd to sign out of something in which I’ve never taken part.
Just worried about this whole ‘covered’ business.
If you don’t file anything, they won’t know whether you are a’covered ‘ expat or not. Since you are krill they won’t care They have their hands full with the likes of Manafort and Cohen and perhaps even the dotard himself.