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.
@ Anincog84,
Re your observations, here’s mine, pretty similar. Takes me just over an hour to do my taxes in Canada, but I still use calculator and pen at the kitchen table. I think this would sound really odd to an American – it’s just a neutral annual ritual in my life, nothing complicated *or unpleasant* about it – used to be I got more out of the system than I put in (years ago as student) but I knew that someday I’d be returning the favour. This obsession with tax seems to be an American (and I think fairly recent American) thing.
And the institutional mentality with Canada Revenue Agency is if you’ve made a mistake, you are not automatically and immediately threatened and suspected of fraud. They are definitely most interested in just straightening the matter out – which is a pleasant way to get compliance and cost-effective for the government as well.
Oh, another thing I should mention. If you decide to keep your US citizenship then be aware that by law you are supposed to enter/leave the country on a US passport. They’re beginning to get a bit narky about this these days so if you travel on your European one and it has a US birthplace gshown you may get some grief.
@Medea: Interesting. Thanks for your comments!
I’ll pose some more concrete questions to get a feel for how correct my general understanding is (again, these are not to be read as “questions for a tax lawyer”, but rather “does this sound about right?” and “how do I approach this, roughly?”):
1) If my income from work is below the FEIE limit (currently USD 95,100), I should use that to owe nothing?
2) Should my income in the future (one can hope…) rise above whatever the limit is then, I can expect to still pay nothing as long as I pay a higher rate in my home country?
3) Bank accounts with more than USD 10 000 in deposits are reported on the FBAR?
4) Probably a stupid question, but what about physical assets, such as a home? And how does that home being mortgaged enter into the equation? How about other debts? Feels strange to report assets and not liabilities – one might end up sounding wealthy when that is far from the case?
5) If other income, such as profit from selling an asset which value has increased since it was bought, is taxed in my home country (at a higher rate than it would be in the US), is it also given a credit, like with income tax?
6) How do interests, both on deposits and debts, enter into all of this?
@pacifica777: You could just as well be describing my home country! Of course nobody enjoys paying their taxes, but certainly people aren’t at all nervous when doing so. It’s just a little annual ritual – clickity, clickity – and if you make a mistake, the equivalent of the IRS will either say “oh, you made a mistake, here’s X money back for you, with interest” or “oh, you made a mistake, according to our calculations you owe us X with interest – please pay or challenge this”.
@MedeaFleecestealer
I don’t believe that SSN’s are issued at birth, although it appears that 90% of parents request them during birth registration:
“In August 1987, SSA began a three-state pilot of the “Enumeration at Birth” (EAB) process in which the parent of a newborn can request an SSN as part of the state’s birth registration process. Additional states began to participate in EAB in July 1988. By the end of 1991, 45 states, the District of Columbia, Puerto Rico, and New York City had signed agreements (Long 1993, 83). Today, over 90 percent of parents use the EAB process offered in all 50 states plus Puerto Rico and the District of Columbia. SSA receives nearly three-quarters of original SSN applications through the EAB process and issues over 4 million SSNs via EAB each year (SSA 2006). No microfilm SS-5 exists for a record created through the EAB process.”
The SSN has had a checkered history:
“In 1938, a wallet manufacturer in Lockport, New York, the E.H. Ferree Company, decided to promote its product by showing how a Social Security card would fit into the wallet. The company vice president thought it would be clever to use a sample card with his secretary’s actual SSN. The wallet was sold at Woolworth’s13 and many other large department stores, and the SSN was widely distributed. Many purchasers adopted the SSN as their own—5,755 people were using it in the peak year 1943, and 12 were still using it as late as 1977. In all, SSA received 40,000 incorrect earnings reports under this SSN, which had to be reassigned laboriously to proper SSNs. SSA voided the much-used number and issued a new SSN to the secretary (SSA n.d. c).”
From “The Story of the Social Security Number”:
http://www.ssa.gov/policy/docs/ssb/v69n2/v69n2p55.html
Registering US birth abroad and application for social insurance number, separately: http://canada.usembassy.gov/consular_services/birth-abroad.html
@medea, bubblebustin, calgary411: I don’t know the details, but I have been given a copy of a registration of US birth abroad, and an SSN (that looks to be from the same time).
It appears from the link /consular_services/birth-abroad.html that both can be done at the same time, but two different processes. A social security number is needed for a passport which is needed for travel across borders, including the US?? So, if parents were travelling to the US with their foreign born children, born dual citizens …
@anincog84
Just a couple of quick answers.
3) No, it’s the aggregate value of accounts which matters, i.e. if the total value of your accounts have more than $10000 then you have to report all of them, even if there’s only $1 in some of them…
4) Capital gains on real estate is taxable in the US. It doesn’t matter to the IRS if it’s not taxable in your home country. Generally the IRS doesn’t care about what you already pay taxes on elsewhere.
@iamquincy
“If you have interest, investment or pension income, you may need to do form 1116 to claim a foreign tax credit. These amounts would have to be greater than your personal exemption and the standard deduction ($9750 for 2012) before you would need to worry about 1116. Form 2555 is only for income you earn at your job. You would also have to do schedule B for interest and investments.”
Thanks for your input again – I was wondering about the deduction on line 6a of 1040. Because I called the irs again today and yet anothetr helpful person guided me through the 1040 and said why don’t I take the deduction. The only pensions I have are the right to the state pension here, plus the pension from my job and a privat small pension I started some years ago. The amount of the private and job pension varies according to the investment returns – some years they lose money, some years gain. However none of them are going to let me lead a luxurious life and I am not yet able to draw them since I am under retiremnet age. Do I have to declare these on the Fbars (there are some treaty agreement) and do I have to decla
@anincog84;
re – “This cost thing is interesting and shocking. It’s so foreign (no pun intended) to me to not file one’s own taxes in less than an hour entirely online (as long as you don’t own a company or have significant stock holdings)”….
The cost of keeping US citizenship for those born and/or living outside the US, isn’t just the associated filing costs as in a run of the mill return in the country where you live. For example, see http://renounceuscitizenship.wordpress.com/2012/08/21/letter-of-a-canadian-businessman-to-his-dual-u-s-canada-citizen-son-on-the-occasion-of-his-high-school-graduation/ and http://www.youtube.com/watch?v=CfWk6yRdwMo http://renounceuscitizenship.wordpress.com/ http://isaacbrocksociety.ca/2012/05/10/american-citizenship-a-cost-benefit-analysis-5-2/
I just did my Canadian tax return. Took only an hour or two – using commonly available and inexpensive tax software. Cost: less than $35.
My income is very limited, and I will owe no US tax. Yet, to have a common chain of tax preparers to do my US return, plus an FBAR, plus a 3520/3520A (?) refer to this chart of their fees: http://www.hrblock.ca/services/US_tax_pricing.asp For a ‘typical’ US return from those of us living outside the US, they are charging $350. – and that is the base rate.
That is one reason why so many are renouncing or relinquishing. We pay vastly more to comply with the unreasonable demands of the US, face more jeopardy, and receive zero benefits from the US and from our ‘US taxable’ status. We have very few ‘rights’, but heavy US obligations. Our non-US country of residence and/or citizenship provides us with actual services, benefits, rights, etc.
Even in a common scenario where the filer from ‘abroad’ owes not one cent of US tax, the IRS financial reporting forms are crazy, complex, and full of potential jeopardy – depending on multiple factors – including differences between the US dollar value and the currency of your country (phantom gains due to currency value fluctuations), the language your support documents are in (must be officially translated in to English), potential conflicts between how the US tax system works, and the one in the country where you live. The US forms for those of us living abroad are exponentially more complicated, and most come with extremely punitive or confiscatory sized fines if errors or omissions result. The burden is on the filer to prove that the error or omission wasn’t ‘willful’ or intentional, and there is often just too much riding on this to take on.
The default US position is that any bank account or savings or financial assets accessible, owned by, associated with us – where an IRS defined ‘US taxable person’ or US citizen (ex. even if only an inherited US status via parentage) is involved is inherently suspect if held outside the US (therefore deemed a ‘foreign’ account) – and the IRS imposes the complex burden on us to prove over and over annually, that it is legal, and that no US tax is owed on it. Our home country does not assume that we are criminals and force us to prove annually that we are not. The US assumes we all are, and forces us to prove that we are not.
The US tax ‘professionals’ are very expensive; they know we need them due to the complexity and the size of the potential jeopardy for any errors, there are not that many of them outside the US, and because a really competent one has to have certain training and experience – and keep up with all the IRS changes, and they may face certain potential liabilities as well.
The US reserves the right to treat most savings/investments in a very punitive and complex manner – both for financial reporting purposes, and for tax purposes. Things that are not taxable, or are tax deferred where you live, may be the opposite in the eyes of the IRS. Sometimes the US tax occurs on ‘phantom gains’, and you lose money paying US taxes on a gain that you didn’t actually have. Or spend money reporting a type of savings account that the US has decided is a ‘foreign trust’ – and treats punitively – as if is is taxable, and as if it is suspect until you prove otherwise.
Even if your situation is simple now, as life goes on, and you save, or buy/sell a house, or inherit money, or marry and open a joint account abroad, the US makes it more and more complex. And requires complex and sometimes duplicative financial reporting even on non-personal accounts, joint accounts, etc.
Selling your principle residence ‘abroad’ – anything over a certain threshold is taxable in the eyes of the US as a capital gain.
And some (many, most? ) types of ‘normal’ savings are just not worth having outside the US – because of complex forms and high penalties for errors, but also because the gains are taxable by the US, or the accounting fees for assistance with the filing exceeds any interest or benefit that accrued from the investment.
Renouncing is much simpler BEFORE you marry, have significant income, bank accounts, etc.
There is effectively a US ‘marriage penalty’ if your spouse is a non-US person, and you elect NOT to report as ‘married filing jointly’ – and refuse to subject their income to IRS reporting and US taxation. You have to avoid holding any joint accounts, or holding a power of attorney for finances, or co-signing on an employer or other non-personal account – as you will have to report their accounts and savings as if they were your own, and any penalty can be based on the total value – or a fine of 10,000 per ‘account’ in some cases – even if actually owned jointly or not owned by you, or if you don’t even have any ‘financial interest’ in the account . http://isaacbrocksociety.ca/2013/01/20/u-s-citizenship-and-a-possible-marriage-penalty/
Ultimately it is your decision about whether to remain a US citizen, but it pays to do your research now, and think hard about your options, and whether US citizenship is really worth the price.
@calgary411
From my own experience of obtaining a passport w/o a SSN, you only potentially run into problems if you have one and don’t include it on your passport application. My SSN hadn’t arrived before my consulate appointment but I learned elsewhere that I could put a series of X’s instead.
I like that concept, bubblebustin, putting XXXX’s into US forms (and not, yet, being criminalized).
@iamquincy and @medeafleecestealer
“If you have interest, investment or pension income, you may need to do form 1116 to claim a foreign tax credit. These amounts would have to be greater than your personal exemption and the standard deduction ($9750 for 2012) before you would need to worry about 1116. Form 2555 is only for income you earn at your job. You would also have to do schedule B for interest and investments.”
If you have interest, investment or pension income, you may need to do form 1116 to claim a foreign tax credit. These amounts would have to be greater than your personal exemption and the standard deduction ($9750 for 2012) before you would need to worry about 1116. Form 2555 is only for income you earn at your job. You would also have to do schedule B for interest and investments”
Once again thank you for your input – I was wondering about the deduction on line 6a of 1040. I called the irs international advice center again today and yet another helpful irs person guided me through the 1040 and said why don’t I take the personal deduction.
The only pensions I have are the right to the state pension here, plus the pension from my job and a small privat small pension I started some years ago. The amount of the private and job pension varies according to the investment returns – some years they lose money, some years gain. However none of them are going to let me lead a luxurious life and I am not yet able to draw them since I am under retirement age. Do I have to declare these on the Fbars (there are some treaty agreements regarding pensions)
Do I have to declare the interest year by year – what about the years I lose money?
I assumed that if I just took the foreign income exclusion, which is more than my yearly gross income reported in my country of residence(here gross income includes all interest on bank accounts, and pension plans are not taxed until they begion to be paid out) that would be ok.
Once again the irs advisor informed me “just send us the 2012 return and do the previous ones when you can” Which is somewhat reassuring that they are not interested in the small minnows already paying plenty of tax to resident countries.
There is some perverse pleasure in plowing through all this, I have certainly learned a lot – the irs certainly has a lot of publications – especially publication 54 is relevant.
@anincog84
Well first of all try and read my posts as we/my kids have the same situation.
The last irs international person I spoke to today said file for 2012 and catch up with the other forms when you can – if you decide to do that you can find all the information on the irs website. You can download all the forms and make a “US tax package” on your computer and work backwards – or forwards , as you please. You can also contact an internet based firm and let them do it but that will cost you at least $1200 to do the forms to use the streamlined program . And you will have to do most of the work anyway and upload it to them – so your decision. If you earn/earned less than about $90,000 in 2012 (you have to convert your local currency to US, the conversion rates are on the irs website) then it seems DIY doable.
This DIY process is very timeconsuming, however it can also be an interesting learning experience. Sort of like “do you give a man a fish, or teach him how to fish?” I guess I have to learn to fish – at least for now – good luck
@anincog84
“My current attitude is: Go as if nothing has changed, then when back home, file with the IRS and actively check with them if everything is OK. Then after that, stay current, and only renounce my citizenship if I end up in a situation where the US citizenship would start costing me (more than the paperwork) or prevent me from taking a job or similar.”
I just read this post of yours – personally I think this is a good solution. However unless the US system becomes RBT (resident based tax) like almost every other country, then you will probably eventually end up over the exclusion limit and then tax returns become more complicated and expensive to do. The exclusion apparently makes no distinction between whether you earn for example the equivalent of $90,000 in Vietnam or in Norway – but your cost of living would be vastly different depending on where you lived. Good luck again.
@calgary
Actually it might have been a series of 0’s. I’m not at home and can’t check so if its really important to some readers, there’s lots of info on the net about it.
@anincog84, on top of all badger’s points there is also the situation with banks outside the US if you are an American citizen. Now you are probably okay because your bank doesn’t know that you have American citizenship (I hope), but whatever you do don’t tell them you have it. My main reason for renouncing wasn’t the fact that I suddenly found out I was supposed to have been filing for all these years, though that was shock enough; it was that all the banks in Switzerland, apart from 3, started dropping their American clients and/or requiring them to sign a waiver form so they could pass on account details to the IRS. As you can image it’s pretty much impossible to live/work these days without having a bank account; salaries are paid in, bills paid out, saving accounts, mortgage accounts, pensions. Americans are being cut off from all these here in Switzerland, apart from being allowed to have a current account at UBS, Credit Suisse or PostFinance. These are the only 3 banks that will still take/keep American clients. If you don’t want to sign the waiver form then it’s goodbye, thank you for your custom but please take it elsewhere within 30 days and that includes the 3 I’ve mentioned. I literally renounced on the Monday and got the waiver forms through from my bank the following Friday. Luckily when I explained the situation they gave me a grace period for returning the forms as it takes 2-3 months for the CLN (Certificate of Loss of Nationality) to be processed, but they are happy now and the accounts are safe from closure. I think Americans in Switzerland have suffered this discrmination the worst, but other countries are also requiring signature of the waiver form, although they may not go as far as closing your account/s if you don’t. But it wasn’t worth the risk for me. I left the States in 1968 and apart from a few holidays since have never been back. My life is here in Switzerland for the foreseeable future and I couldn’t risk it.
@badger: That is some of the scariest stuff I’ve read in a while. I’ll have to think long and hard about this. Whether or not I should actually go on my upcoming trip is again thrown into question in my head…
@allou: Thanks for your input. I’ll go back and read some of your posts. Thank you!
@Medea: Oh my! That sounds horrible! As far as I remember, banks where I am just ask whether you’re a citizen of this country or not (which is “yes” in my case). But thanks for the advice. Your situation certainly sounds extremely stressful and difficult.
To all: I know I’m late to the “party” here and you’ve all probably been over this a million times, but truly, how on earth can this go on? I mean, for me personally, it’s not the biggest deal in the world. I’m only attached to the US through some family – it’s not nothing, but I don’t consider it my homeland. On the other hand, for the system to essentially force someone like Medea to give up his/her home country in order to live a normal life elsewhere is absolutely despicable and a disgrace! I’m sorta steaming with (late) anger here… One thing is the US’ attitude to foreign countries, but I never thought it would treat its own citizens in this way.
@banany
There is at least one tax accountant in Ottawa that deals with US taxes and is registered/certified in the US. They have done mine and I rate them highly. I am sure they can advise you with the form 8854. However, I am not sure this board permits me to give names. Perhaps someone can advise. Also is there a way to send private emails to those who post here?
Everybody –
This thread has already busted the WordPress functionality limits and needs another restart. This thread should be broken into month-by-month segments. It’s not rocket science.
anincog84 –
This extraterritorial US person remained compliant for 3-4 decades. I never maxed on FEIE, so nothing near a fat cat. You only imagine that provision will cover your problems. Imagine again. An ever more burdensome and incomprehensible wad of paperwork plugged the pipeline of my life. Halfway along that slog I reached a point of inability to cope with the interplays and started to pay the professionals. They made quite a few mistakes which it was still my job to try to catch. Hit a glitch and you generally fork over anything the US wants in payment just to make it all stop, since the IRS is a blind and ravenous beast that wants chomps of flesh and no backtalk. Talk back and it’s all just likely to cost you even more, if not with IRS, with the professionals. Through renunciation I’m almost out of the “system” after a year and a half of hassle and agony. Hindsight is so great. I wish I’d done this sooner. Phil Hodgens promises it will all get worse and the evidence for his prognosis just keeps on piling up. US personhood, at least in my case, was not worth the exponentially growing nuisance of trying to “comply,” always wondering if you did get it all right with best efforts, knowing that there is severe ill will always aimed at your heart even in assessment of reasonable cause. Despite tax treaties and hype about no double tax extraction, there is a raft of mismatches, and duals are guaranteed to reap the worst of both tax systems. (The dual nuisance applies only to Eritreans and to US persons, who are very special persons.) Welcome to the departy. Retaining US personhood is not a triviality. Sauve qui peut.
I’ll follow up with another question, since everybody’s been very helpful so far: I’m having a hard time gauging whether or not I’m overreacting when it comes to my upcoming US trip. I don’t feel like I have any way to objectively evaluate whether or not I should go. At this time I last year I wouldn’t even have thought twice about going – now my brain has convinced me that I’ll be arrested for tax evasion. Could someone say something to yank me back into reality again? :-/
allou writes: “The last irs international person I spoke to today said file for 2012 and catch up with the other forms when you can – …”
@allou, did you mean “other years”, not “other forms”? I’m trying to understand if a IRS person told you to file for the current tax year and not get too worked up about the previous years (file when you can).
TIA
Sigh – obviously that was meant to be “IRS person”, not “IRA person”.
@anincog84, If your European passport doesn’t have a US place of birth on it, then don’t worry. They don’t know. They have no idea you have an SSN or that you are American. As far as I know they can’t check for US births registered abroad and unless you tell them you were how would they know? You are a European travelling to the US on a European passport, nothing more.
Once you start filing returns, then obviously you should apply for a US passport and use that when travelling to America and use the other one for all other travel.
Everyone has to make choices anincog84 and I made mine. I’m lucky that I was born a dual national so it was easier for me having another citizenship/passport I can use straightaway. I didn’t have to wait years to get citizenship of another country. But many Americans aren’t so lucky and a few are caught in the most terrible situation of all – if they have joint accounts or signatory rights on accounts. They have to choose whether to sign the waiver forms which may mean a looming divorce because the OH doesn’t want the IRS to know about their accounts or refuse to sign in which case the accounts will be closed. It sounds unbelieveable, but there have been several stories of near marriage breakdowns here in Switzerland over this situation with the banks, even when the other half is a Swiss national. The banks still insist that the forms must be signed or else. There was even a case reported here on IBS of an American/Canadian couple in a very similar situation regarding disclosure of the accounts and the trouble it caused between them.
@allou, sorry I can’t help on the tax form side of things as I’ve never filled any out. I think I have read that foreign pensions aren’t exempt, but how you’d go about showing the losses I’ve no idea.