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
“that doesn’t mean that filing this form is ill-advised and so should not be done in every case, yet this is a line that you appear to have been pushing relentless for some time now.”
I don’t think I have. I don’t recall pushing a line of any kind.
Can you point me to an example of the kind you’re complaining about?
The problem with the California bar proposal is that if it ever came to pass we would all be screwed. Couldn’t expatriate without first settling with the International Robbers Society
It would be unconstitutional but they wouldn’t care. Sauve qui peut.
“Once an exit tax is assessed, the IRS has authority to place tax levies on the person’s domestic accounts, but has limited authority to collect the amount owed from any property held overseas. This leaves the IRS largely unable to enforce the exit tax against expatriates without their voluntary cooperation…”
Now that’s exactly what I mean. The IRS has to be able to assess a liability before it can take enforcement action.
If the former citizen doesn’t owe any US tax, the IRS can’t just assess them as liable for the exit tax as a penalty for not filing a form.
Sorry. Didn’t mean to bold the whole damned thing.
“Put simply, a clean exit will always beat a messy one where there is no financial difference between them for the individual concerned.”
I completely agree.
In my view, a clean exit is simply to renounce.
I do understand that some may prefer to file Form 8854, but there’s nothing clean about it. It’s really messy, to pay $2350 for the right to not be treated as US-tax-residents by banks, only to file a form the following year agreeing to be treated as US-tax-resident.
@Plaxy
“only to file a form the following year agreeing to be treated as US-tax-resident.”
That’s absolute nonsense.
By submitting the 8854 I am agreeing that my US untaxed pension fund meets the criteria for the tax treaty and can be taxed in Switzerland. If I didn’t submit this form proving I had under $2,000,000 etc. it would be taxed in the USA for the rest of my life and further when the distributions reach CH it would be further taxed as income as it would not qualify for the US/CH tax treaty.
I gave you the link for treatment of tax deferred compensation items here on Brock archives which I believe are important considerations.
http://www.renunciationguide.com/expatriation-and-tax-details-of-current-law/exit-tax-on-renunciants/
Now YOU may opine that the IRS does not have the ability to inform my pension fund to withhold tax in the US, but I and I am sure many others in my situation would not want to take that risk just to prove a plaxy point.
IF these funds were outside the US I wouldn’t care a fig for completing the 8854.
Nuff said
I said:
“Could the foreign recipient (who is not subject to US tax law) lose eligibility for treaty benefits by not signing a form agreeing to be subject to US tax law as if resident in the US?”
No. But by renouncing US citizenship the renouncer becomes ineligible to invest in US tax-favoured pension plans. But may become able to claim treaty benefits whereby the source country concedes taxing rights on payments from the plan (but probably not lump sum distributions).
If that’s the case (I am only speculating), it might be better to leave the funds in the US plan and claim the treaty benefit, rather than move the funds to the residence country.
It appears to me that this would be the same regardless of whether the owner of the funds did or didn’t submit Form 8854, if the former citizen’s net worth and/or past tax liabilities didn’t exceed the threshold. The IRS couldn’t assess the exit tax unless Form 8854 was filed, consenting to the assessment. But naturally no one is likely to want to test this hypothesis 🙂
So I agree that for renouncers with US investments it’s advisable to file Form 8854.
Thank you all for your patience. I will say no more (about Form 8854) 🙂
@Plaxy
Pax 🙂
Heidi:
Our postings crossed, so I will just respond to your comment before entering on my vow of 8854-silence. 🙂
It’s not nonsense. It’s clearly messy, to pay to shed US-tax-residence only to go back the following year and consent to being treated as US-tax-resident to avoid a tax hit. Understandable, but certainly messy.
A clean exit that is completed in the Consulate on the day of renunciation, is perhaps not a practical option for anyone who will be continuing to hold US investments after renouncing.
I was not treated as a US tax resident the following year, all my taxes were paid in Switzerland!
This really has to be the end of this.
Heidi:
“I was not treated as a US tax resident the following year, all my taxes were paid in Switzerland!”
The US obviously retains taxing rights over a US pension plan. If the recipient loses US citizenship, the US can tax the payments without allowing any US tax-favoured treatment; unless there’s a treaty provision whereby the US concedes the taxing rights.
However, the IRS might be able to assess exit tax liability, unless the renunciant signs 8854 agreeing to be treated as if US-tax-resident. So it’s prudent to sign 8854 and comply with its requirements, as if US-tax-resident.
plaxy wrote:
As far as the US is concerned, you are on the hook for any outstanding liabilities (assessed or not) you accrued while being a US citizen, even after renouncing. 8854 is a backwards looking document to the point of renunciation, so you are not agreeing to any additional liabilities/taxes/status/whatever by filing it.
tdott:
“As far as the US is concerned, you are on the hook for any outstanding liabilities (assessed or not) you accrued while being a US citizen, even after renouncing. ”
I don’t think so. CBT is a citizenship obligation, not the law of the land.
Here’s my view:
1. You don’t have a liability unless a liability has been assessed.
2. The IRS can’t assess a US tax liability for a non-US-resident’s non-US income, because the US is neither the source country nor the residence country and therefore does not have the taxing rights.
3. But a non-US-resident US citizen can file a 1040, reporting worldwide income and claiming credit for tax paid on non-US income.
4. The IRS can then assess tax on US income, and can also assess tax for any untaxed or under-taxed residence-country income (i.e., no tax credits have to be allowed).
5. Consequently, a renunciant who has not been filing US tax returns will not have any outstanding US tax liabilities on R-day. A renunciant who has been filing US tax returns, may indeed have outstanding US tax liabilities on R-day.
6. If a renunciant files a dual-status 1040/104NR and/or Form 8854, after renouncing, they may or may not get assessed for US tax liabilities as a result.
The above is, of course, only my opinion. IANAL
tdott:
“8854 is a backwards looking document to the point of renunciation, so you are not agreeing to any additional liabilities/taxes/status/whatever by filing it.”
I don’t agree. If a former citizen doesn’t file the dual-status form or 8854, the imaginary garage sale never gets imagined.
I said:
“4. The IRS can then assess tax on US income, and can also assess tax for any untaxed or under-taxed residence-country income (i.e., no tax credits have to be allowed).”
That is, the US only has to give credit for the actual tax paid, so the filer will be assessed for US tax on the portion of the non-US income which has not been taxed by the residence-country.
So, a person in the US who earns income that is not reported to the IRS does not have a liability for the unpaid taxes on that income? Ditto for Canadians in Canada and the CRA? E.g. I’m a small business person in Canada, I earn income by providing my service. This income is not reported to the CRA, but I’m legally obligated to report it and pay taxes on it – yet you would claim I do NOT have a tax liability for this income because said liability has not been officially assessed? If that’s your claim, it’s not only wrong, but goes against common sense. Canada and the US operate under self assessment (see: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra.html), but just because you refuse do to the assessment yourself, does not mean you’re magically relieved of the associated taxes/filings/etc.
@Plaxy: “If that’s the case … it might be better to leave the funds in the US plan and claim the treaty benefit, rather than move the funds to the residence country.”
Just FYI, there isn’t really any choice in the matter. The US does not participate in QROPS or similar international pension transfer programs, so the only way a non-resident alien can move money out of a US pension plan is by taxable (to whomever, depending on treaty and so on) withdrawals. Where there is a tax treaty, this is often the fiscally better course of action anyway.
The fly in the ointment is an increasing reluctance on the part of US banks and other financial institutions over the past decade or so to allow non-resident aliens to continue to hold products with them. Some of this is FATCA, and some just general money-laundering and KYC (over-)compliance to the point of timidity on the part of the bank. A few institutions have gone as far as forcibly ejecting customers who are no longer ‘US persons’. This can be financially disastrous, as not only is the full balance taxable at a high marginal rate as one lump in the current year, but if below age 59.5 there is an additional 10% early withdrawal penalty on top.
Relying on a US pension for retirement when you are a non-resident alien is an increasingly precarious state of affairs. If I had my time over again and knowing what I know now, I am fairly sure that I would not save for over a decade into a 401k or IRA. Unfortunately, those years cannot be relived differently.
tdott:
“So, a person in the US who earns income that is not reported to the IRS does not have a liability for the unpaid taxes on that income? ”
US tax law is the law
of the land in the US, obviously.
“E.g. I’m a small business person in Canada, I earn income by providing my service. This income is not reported to the CRA, but I’m legally obligated to report it and pay taxes on it – yet you would claim I do NOT have a tax liability for this income because said liability has not been officially assessed.”
You’re not legally obligated; it’s a citizenship obligation, not a legal obligation under Canadian law.
Watcher:
“Just FYI, there isn’t really any choice in the matter. The US does not participate in QROPS or similar international pension transfer programs, so the only way a non-resident alien can move money out of a US pension plan is by taxable (to whomever, depending on treaty and so on) withdrawals. Where there is a tax treaty, this is often the fiscally better course of action anyway.”
I was assuming a pre-renunciation withdrawal; but there would probably be a tax hit anyway, as US treaties don’t usually allow for a tax break on a lump sum distribution. So if the treaty does allow for tax-free or tax-reduced payments, that would be worth having.
Of course you’re *legally* obligated to pay your taxes, etc. Why in the world would I (and millions of others) pay the tax if I wasn’t legally obligated?
And, it is not a “citizenship obligation”, it’s a tax residency obligation. Permanent residents in Canada (and Green Card holders in the US) are just as obligated, not because they’re citizens, but because they’re tax residents. Ditto for Canadians living outside of Canada who have not officially severed their tax residency. And, ditto for USA citizens living outside of the US (who retain US tax residency as long as they’re US citizens).
Note that I am NOT arguing in favour of CBT. I’m arguing the law as it stands as far as I understand it.
tdott:
“And, it is not a “citizenship obligation”, it’s a tax residency obligation. ”
It’s a citizenship obligation; only US citizens are treated as US-resident wherever they live and regardless of whether they ever set foot in the US. Get rid of the citizenship and the obligation goes with it.
CBT is a different matter altogether. Tax residency is what causes the obligation. The fact that US citizens are by definition tax residents is irrelevant.
If you’re a tax resident of a country (US, Canada, whatever) you have a legal tax obligation to that country. And, for better or for worse, a country has the right to construct the criteria that determine who is and is not a tax resident.
All of which has gotten away from the claim, that I dispute, that filing 8854 results in additional obligations. Those obligations exist whether or not you file 8854. And 8854 only looks at the time you were a tax resident (i.e. up to the point of renunciation) to determine those obligations.
[again, I’m not arguing for CBT, I’m arguing what I think is the law. Like everyone else here I have nothing good to say about CBT – which I why I renounced]
tdott:
“If you’re a tax resident of a country (US, Canada, whatever) you have a legal tax obligation to that country. And, for better or for worse, a country has the right to construct the criteria that determine who is and is not a tax resident.”
We must agree to differ.
US law doesn’t extend beyond its borders, fortunately.
Well, it’s not just the US that says that. Canada considers those Canadians (and PRs I believe) who live outside of Canada *and* are Canadian tax residents to have legal tax obligations to Canada. That’s why you have to sever your Canadian tax residency to relieve yourself of those obligations. If you don’t sever your tax residency, it doesn’t matter where you live and how long you’re there for – you’re subject to Canadian taxes. I imagine it’s more or less the same for most (all?) developed countries.
And, for good measure, when you sever your Canadian tax residency you’re subject to the Departure Tax, which is what the US’ Exit Tax was apparently based on.
See: https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html
tdott: Canada doesn’t tax US residents on US income, I assume.
Canada taxes leavers on gain built up while the person was resident in Canada, I believe.