Renunciation and Relinquishment of United States Citizenship: Discussion thread (Ask your questions) Part Two
Ask your questions about Renunciation and Relinquishment of United States Citizenship and Certificates of Loss of Nationality.
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NB: This discussion is a continuation of an older discussion that became too large for our software to handle well. See Renunciation and Relinquishment of United States Citizenship: Discussion thread (Ask your questions) Part One
@Mannix,
Off the top of my head, maybe it’s 50-50 here at IBS for people filing before or after renouncing. Of course, nobody has heard back about their filing.
When you renounce, you could wait up to a year for a CLN. When you file, you never hear at all. The consul and the forms you sign say the renunciation isn’t valid until approved and a CLN issued (but it’s back-dated to the appointment date). If you wait a year for the CLN, you could miss some filing deadlines.
My take is that the _certification_ on the 8854 for the previous full 5 years of filing is as of the date you sign the 8854, not as of the date you renounce.
Looking at the 8854 instructions they do seem to specify the date of expatriation as being what you work to.
“You are subject to taxation under section 877 if you are a former U.S. citizen or former LTR and any one of the following applies to you.
1. Your average annual net income tax liability for the 5 tax years ending before the date of your expatriation is more than the amount listed.
2. Your net worth is $2 million or more on the date of your expatriation.
3. You fail to certify on Form 8854 that you have complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation.”
and
“The date on which you are considered to have expatriated determines which Parts of the form you must complete.”
http://www.irs.gov/instructions/i8854/ar01.html#d0e53
I renounced and then did Streamlined to file 6 years of FBARs (didn’t need returns as I have no income). Will file the final one in June and the 8854 to confirm compliancy – and it’s been done with the help of a US tax preparer here so he doesn’t see anything wrong with filing after you’ve renounced. The FBAR I’ll be filing only covers up to my expatriation date.
Thanks for your take on that – I should have entered this forum long ago.
One additional question for you: when you filed the tax forms for 4 and 5 years ago, did you a) include an explanation for the late filing; and b) mention that the forms were being submitted in order to come into compliance for the purpose of form 8854?
@monalisa1776,
Another confusion regarding income on 1040/1040nr and form 8854 on my part. Since you had no U.S. source income before expatriation, where did your accountant list your income on form 8854 part V, schedule B – on line 2 (gross income effectively connected with conduct of U.S. trade) or line 9 gross income from all other sources? I’m unclear because if I file 1040nr and list all my income there in the section for “effectively connected with conduct of U.S. trade/business” even though none of it is U.S. source income, then should it also appear on line 2 of schedule B part V of the 8854?
@all,
We’ve been discussing here about filing other forms like 8891, 8938, and FBAR only up till expatriation. My question is, have people been filling in specific dates at the top of the 8891 or 8939 (not possible to do for FBAR) to show that it is a partial year filing?
For Canadian RRSPs on form 8854, what is the consensus of which line to put it on? How do we figure U.S. adjusted basis on RRSPs? Is it the total of all contributions to the RRSP? If so, is there a way to get that info?
@AtticusinCanada, @Calgary411,
Can you please comment about if your tax preparer entered income data on the 1040 “statement” and then transferred that data also onto the 1040nr “tax return” or did they only enter U.S. sourced income on the 1040nr?
That is encouraging news – I appreciate you taking the time to reply.
Best of luck with your exit.
@Mannix,
The accountant did not include any cover letters for the filings for 4 and 5 years ago.
Of course, since she had no filing obligation due to low income, there was no tax owing for any of the years. There could be issues if you owe tax or if you claim a refund (I have no idea why…).
@Mannix,
I agree with WhatAmI and others on this site that believe that the certification only needs to be true at the time you file the 8854. I have a friend who renounced and had never filed any tax forms (he was under the filing threshold). He decided to file 5 years of tax forms even though he didn’t have any obligation to do so and owed no tax just to be okay for the certification and then a few months later he sent in the 8854 – no letter of explanation with any of the forms.
With the IRS, it’s often best not to give them too much info. I’m not sure I’d want to call attention to the fact that I was filing late for purposes of form 8854. Maybe others have done this though.
I take your point that less information can be better when dealing with the IRS. I wonder if my situation differs from your own and that of WhatAmI in that, even though I don’t have any tax liabilities for previous years, my income was above the filing threshold? The lack of clarity in these forms and regulations is maddening….
That is probably the smartest approach. I wonder if my situation is any different because I was above the filing threshold, and therefore required to file? In which case I would have to at least include an explanation for the late filings in order to avoid a late filing penalty…?
Mannix. There is no late filing penalty if no taxes were owed. There was a very wise man on IBS a while back. His advice was terrific. ” Don’t tell them anything they don’t already know.” You are a true minnow. There is no chance they will bother you.
@Mannix,
Think of it this way. It is perfectly legal for you to come into compliance with the IRS by doing what you have already done, which is to file 3 years of back taxes into the Streamlined Filing Procedure. Therefore (not that I like to apply logic to anything IRS), you can’t possibly be penalized for those _extra_ 2 years when you are already deemed compliant by virtue of the Streamlined Filing Procedure.
As KalC posted, if you don’t owe any taxes then all the more reason to believe that they won’t have any interest in you or your filing.
Sorry, moonstruck — I can’t tell by looking at both 1040 Statement to attach to Form 1040NR and I sure don’t want to give any misleading information for anyone to base how they do theirs.
Thanks for your reply, and the bit of shared wisdom. The only sane individual I ever encountered on the IRS ‘help’ line once told me the same thing. I plan to take it to heart.
I believe the IRS departed the universe of logic soon after its founding, but your advice is sound nevertheless. One can’t help but feel a little paranoid after going through this process, but all of my instinct tell me I should be fine at the end of the day.
Can’t help with first question.
Re questions #2/3, I would *think* that the ACB is indeed the sum of all contributions (assuming there have been no withdrawals). Note that you would have to use the exchange rate appropriate for each year’s contributions; i.e. you’d need to first convert each year’s contributions to USD and then add them up. A simple spreadsheet would be helpful.
Re question #4, copies of your previous returns or NOAs should have the contributions for each year. If you are missing these, call up CRA and ask for missing NOAs (though I don’t know how far back they can go). If they ask you why you need this, just tell them why.
OTOH, an acquaintance’s accountant said to just put $0 if you want. I imagine the theory is that the ACB only comes into play if you’re a covered expat, and this person was not. Personally, I’d want to put down a number that’s at least a best attempt, if at all possible.
It is not possible to figure out the ACB of a RRSP. The reason is that all of the reinvested income is part of the ACB but no record is kept of this reinvested income.
What KalC said. Cost basis is essentially meaningless for pure pre-tax retirement savings. Every year I put “N/A” in the cost basis and gain/loss columns. Problem free across six years worth of returns, so I’m pretty comfortable with this approach. As noted, if you’re not a covered expat then what you write here doesn’t matter anyway.
@Kalc and Watcher
I respectfully disagree (at least to some extent). Now I am not an accountant or anywhere close to one, but here goes:
Re reinvested income: reinvested income would often increase the ACB. In an unregistered account you would normally, immediately be taxed on that gain. As such, *as I understand it*, the reason for adding it to the ACB is to prevent double taxation when you sell the asset (normally a mutual fund, I imagine). Since you are not being taxed on the gain in a registered account, it would *not* increase the ACB. So, reinvested income is irrelevant to the (A)CB calculation of an asset in a registered account. Would love a real accountant to chime in on this.
@Watcher, yes, *in Canada*, cost basis is essentially meaningless for RRSPs. However, we’re talking about the alternate universe that the IRS inhabits. Now obviously those assets had a cost, no? Thus they would have a cost basis (however, calculated); the fact that this cost basis is irrelevant to the CRA is neither here nor there. Now, in retrospect, I do believe that the cost basis is also irrelevant in IRS-land even for covered expats (see below). However, *if one wants to be pedantic*, unless the IRS instructions or some hard-to-find statute says otherwise, putting down N/A in 8854 wouldn’t be strictly correct.
Having said all that, there is, I believe, an actual reason why the gain is irrelevant to 8854. *As I understand it*, for pensions and pension-like doohickeys, 8854 requires that covered expats be taxed on the full amount, *not* the gain. The rationale, I imagine, is that since you were not taxed on the money that went into the pension/RRSP/etc, you need to be taxed on it now. And, just for good measure, this money is treated as a form of income and the $668K capital gains exclusion can not be used. And, I believe, (carried-over) FTCs cannot be applied. In other words, a covered expat with a pension/RRSP/etc of any size is f***ed. [is this how others understand it?].
[Aside: since the $2M threshold for being a covered expat is NOT indexed to inflation, more and more relinquishers will fall into this category. Perhaps it would be nice of the Canadian government to allow people to collapse their RRSP and then fully restore it later. This way they would NOT have to pay tax to the IRS; although they would I have to cough up the tax for the CRA until the RRSP was later restored. Seems like a win-win to me.]
My 2 cents. IANAA and IANAL. Do your own diligence. Take with an appropriate grain of salt.
@tdott, I don’t disagree with you (though I’m not an accountant either). The salient point seems to be that it genuinely doesn’t matter for most cases, and for those there is no point in getting twisted up in the form’s lack of logic.
The US has the concept of a post-tax 401k and IRA, also Roths, and here it would make a difference. And if Canada had something similar then that is where you could carve off at least a small portion of the US Reichsfluchtsteuer exit tax. Sounds like there’s no analogue in Canada, though. Ditto the UK; closest is an ISA, approximately the same as a TFSA and not a retirement account. Given this the ‘right’ value for cost basis is probably $0, because the basis is what you get to deduct before arriving at the taxable ‘income’, and for pre-tax retirement savings the entire lot is ‘income’.
(I don’t worry in the slightest about writing N/A instead. If the IRS wants me to change this to $0 they are more than welcome to contact me and request that I do this. It will not make a jot of difference!)
BTW, your idea about collapsing an RRSP, paying tax to the CRA, slicing this off the US Reichsfluchtsteuer, and then recovering it from CRA later sounds, well, inspired. Win for the individual, win for Canada, and lose for the US, so nothing whatsoever about it to dislike. I’d suggest it to Canadian lawmakers. Seriously.
tdott –
*As I understand it*, for pensions and pension-like doohickeys, 8854 requires that covered expats be taxed on the full amount, *not* the gain.
Out of respect for the good understandings that you seem to have, I offer this more specific confirmation. As authoritative a source as could be had (due diligence and dutiful drudgery) — far more expert than any Brocker and therefore never ever brocking — said that the total current value of a defined contribution pension plan must be included in the 8854 calculation of net worth.
@Uscanada, if true, this could make it extremely risky to renounce without certifying five years tax compliance on 8854 if one has a defined contribution pension fund. I fear it could also give an impetus for the IRS to aggressively audit recent renunciants because I could imagine that any mistake on their tax returns would nullify that they’d been fully tax-compliant and, thus, cause them to be ‘covered’. The pension issue would be a nasty way of hitting even minnow expatriates.
@monalisa1776, it’s true. Having a pension issue and owning a home, both entirely normal, when combined can easily turn ‘minnow’ expatriates into ‘covered’ ones. Add up just those two and folk of quite modest means will get to experience the full horror of the exit tax. Defined benefits pensions will probably be an even larger trap.
As if that were not bad enough, once ‘covered’ by the exit tax the entire balance of pension savings has to be added to your US return as if final year income (that is, as if taken all at once, even though you didn’t — and very likely couldn’t — take it). Not reduced by the $600k or so exemption either. In other words, decidedly middle-class expatriates might have to wave goodbye to as much as 30-40% of their retirement savings.
@ usxcanada – Your comment to tdott RE the calculation needed RE pensions for the 8854 is correct – – it is the current (forward) value of the TOTAL pension that you are owed – – even the money that you have not yet received and wont receive for many years.
There are ways to figure this out (I think I posted a detailed explanation a few weeks back – – hubby, the economist wrote it out) but I cant provide a link right now – – maybe another Brocker can provide?
Good luck Tdott
@ LM, All,
Here’s is your comment with the details about pensions and 8854. Thanks, LM and Mr. LM!
Submitted on 2014/03/31 at 3:00 pm
They could use the pension issue as a weapon to deter future expatriations. If my pension fund were hit, I’d imagine that I’d wind up owing around $20,000!!!