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
The arguments above about tax forms,statutes of limitaion,penalties depends on which optics you using. If you are an accidental or one with little or no financial ties to the US , then the US can be on the moon as far as one is concerned but if one has US sourced income ,then even if their laws are foreign ,one’ s US sourced income is not foreign to them and the US can dish out some pain at the source or, at least ,they have the potential to do so.
So whether you go through the process or not depends if the US can ‘lien’ on you.
Yes – a citizen of France or Germany or Australia who has US-source income can be taxed by the US on that income – usually by the US payer withholding the tax at the appropriate rate.
As I understand it, if the recipient also has US citizenship, they may be able to get a partial refund of the tax withheld, by filing a 1040 to report worldwide income and claim deductions, tax credits, etc.
What I am referring to is the touchy issues of 8854s ,peace of mind, ,etc, above and the need or obligations to fill them and then the answer that the US can’t touch or punish them even if they are covered or not.
However,that isn’t really the point. IMO, covered or not covered,compliant or not compliant isn’ t the issue. What is relevant is one’s financial ties to US. If you have no financial ties ,peace of mind is that much easier and renunciation only if banks cause problems.
The US taxing of US source revenue is not what concerns me ? In fact there is nothing wrong with that. But what if the US ,sometime in the future, decides to punish covered status by collecting penalties from US sourced income. Mind you, it’s very unlikely but the fact that the revenue is earned on US soil and reported to the IRS and possibly ‘touchable’ by the IRS should be of some concern.
As I said above, IMO what matters is for people who haven’t been filing US tax returns to be aware that they can renounce without first filing US tax returns.
That’s what solves the banking problems caused by FATCA.
Then they can decide whether to file Form 8854. Clearly, if they have no US assets or income or other US financial involvement, the US can’t force them to file the form or punish them for not filing the form.
The question of whether the US could (or would) take legal action to try to confiscate assets of a non-resident non-citizen for not filing Form 8854 is moot, until/unless such a case is initiated by the US. The former citizen who owns the assets will doubtless take whatever action s/he thinks best.
S/he just needs to be aware that the form isn’t connected to the renunciation process, and has no impact whatever on the validity of the loss of citizenship.
“what if the US ,sometime in the future, decides to punish covered status by collecting penalties from US sourced income. ”
Non-filing would-be renouncers aren’t likely to have US income.
Renouncing and tax are two separate issues. US citizens need to be aware that they can renounce immediately, without having to file US tax forms, if they can pay the fee.
Those who have been filing US tax forms, and/or have US income/assets, may have US tax issues to consider,
Those who haven’t been filing and don’t have US income/assets, won’t have any US tax issues to worry about.
OK, I get that renouncing and tax are separate. Sorry for being so dense, but what I don’t get is the whole covered expatriate thing. Sure I can go and renounce, but is there anything to wanting to avoid covered expatriate status? That is the point for me. Are you saying it’s a waste of time/money to try to avoid it? That’s the only reason I would start to file. I’m supposed to check the box whether I’ve been “compliant with last 5 years tax returns/6 years fbars”, otherwise I would be hit with a bill for exit tax, is that not right?
All the time I’m thinking, Boris Johnson, they came after him for taxes, why did he have to pay?
Also. If I move back to the country where I’m dual and become a resident, would I then re-qualify for exemption from covered status? Someone in the comments mentioned a minimum 2-year waiting period?
I’ll cut and paste something I saved from a Facebook group:
Thank you Heitor David Pinto for this! Appreciate your rational, pragmatic critical analysis!
Being a “covered expatriate” has absolutely NO criminal, civil or immigration consequences. There are only tax consequences. They are:
1. If you have unrealized capital gains above approximately $700,000 when you renounce, they are taxed at that time at the normal capital gains tax rates.
2. If you have deferred income when you renounce (such as a future pension with a defined value), it is taxed fully at once at that time, at the normal income tax rates.
3. In the future, if you leave gifts or inheritance to US citizens or residents, they are taxed at the highest estate/gift tax rate at that time (currently 40%), with a minimal annual exemption (currently $15,000).
If you don’t have unrealized capital gains above $700,000 or deferred income, and won’t have heirs who are US citizens or residents, the “covered expatriate” status makes no difference.
The immigration consequence that you may have read is the Reed amendment, but it has nothing to do with being a “covered expatriate”. In theory, the Reed amendment bans entry to the US of people considered to have renounced US citizenship to avoid taxes. However, since people are not obligated to tell the reasons why they are renouncing and the US government is not allowed to infer them, the provision is unenforceable. The US government has confirmed this limitation multiple times. Only three people have EVER been denied a visa due to the Reed amendment, because they actually told the consular officers that they had renounced for tax reasons, and two of them were able to overcome the decision and later received a visa.
I also note that the tax on gifts and inheritance from “covered expatriates” has still not been implemented by the IRS, more than 10 years after the law was enacted. I highly suspect that there is also a legal limitation preventing it, similar to the Reed amendment.
@fillinchen
Boris Johnson sells his books in the USA, he needs to have access to US markets. He was also exposed as being a US citizen on an interview on US television so well on the radar.
I don’t know how complex your US returns may be but if it looks like you may be in ‘covered territory ‘ then think very carefully before giving them financial info that they don’t already have.
Dual status from birth will only excuse you from an exit tax if you meet the residency requirements in the country of your other citizenship. It also will not excuse you from past US ‘deemed’ tax debts.
Take time to read the last few weeks threads here, they cover most of your questions.
Fillinchen:
“is there anything to wanting to avoid covered expatriate status? That is the point for me. Are you saying it’s a waste of time/money to try to avoid it? That’s the only reason I would start to file. I’m supposed to check the box whether I’ve been “compliant with last 5 years tax returns/6 years fbars”, otherwise I would be hit with a bill for exit tax, is that not right?”
No. The IRS doesn’t have any power to do that. US tax laws do not apply in other countries; if you have no US income or US assets or US financial dealings, you’re in exactly the same position, following renunciation, as others in your country who don’t have US citizenship. The US can’t swoop down and bill you; you don’t owe them any money.
If you do have US assets or income, that may be a factor in your decision as to whether to file US tax forms following renunciation of US citizenship, since any US income or assets will remain vulnerable to whatever bizarre actions the US may take.
“All the time I’m thinking, Boris Johnson, they came after him for taxes, why did he have to pay?”
That’s a myth. Johnson was dual because he was born in NY. He kept a US passport and used it frequently. His accounts were almost certainly filing US tax returns for him all along, making sure he owed little or no US tax just like most non-US-resident US citizens. Then he sold his London property and the large capital gain was taxable in the US but not in the UK, hence no foreign tax credits.
So the IRS didn’t “come after him”. He grumbled, threatened to renounce (but didn’t), and eventually paid up.
Years later, when he became Foreign Secretary, he ditched the US citizenship, presumably because of the vetting. He was reportedly assisted amiably (over a decent bottle of champagne I don’t doubt) by his pal the then US Ambbassador to the UK.
Correction:
I said:
“His accounts were almost certainly filing US tax returns for him all along”
Should be;
“His accountants were almost certainly filing US tax returns for him all along”
@Fillinchen, it really depends on what your financial situation is. I suggest you read the 8854 form instructions carefully to see whether you would be a covered expatriate or not as far as finances go.
https://www.irs.gov/pub/irs-pdf/i8854.pdf
Whether you meet the financial criteria or not if you don’t file an 8854 you will still be a covered expat. Now, what that means in real life isn’t really much imho. If you don’t file the IRS have no idea whether you owe any tax or not and if you don’t have an SSN they’re even more in the dark since you’re not in their system. Although the Reed Amendment is law, it’s so badly written that no one’s been able to make it work despite his repeated attempts to force them to do so. So getting denied entry to the US because of that isn’t likely to happen.
Of course it’s your decision on whether you file or not. Whatever is going to be best for your peace of mind is the main thing. Some people are happiest complying and exiting the system cleanly. Others may file returns and not FBARs, others don’t file at all. Decide what is best for you personally and take it from there.
@ Fillinchen
We do not know if you have the income or wealth to make you labelled as covered and therefore at risk of having to pay an exit tax. (Please note even if you are covered and have not made over $699,000 in UNREALISED gains, there would be no tax to pay) . Only you can make that assessment.
BirdPerson:
(quoting Pinto)
“If you have deferred income when you renounce (such as a future pension with a defined value), it is taxed fully at once at that time, at the normal income tax rates.”
This seems to be the same as what would happen if a non-US-resident USC with a US-source tax-deferred pension (such as an IRA), moved the funds to their country of residence.
If that’s correct, it’s reasonable, – provided it’s a US-source tax-deferred pension.
It’s the attempt to apply the exit tax to non-US income/assets that is unreasonable. Plus the other unfairnesses such as taxing on the basis of net worth and/or previous tax liability, and/or previous compliance.
I’d say that to apply an exit tax to non US income/assets is immoral. That’s the main reason why I refuse to play that game and I’ve decided not to file a single thing.
@ Plaxy
“This seems to be the same as what would happen if a non-US-resident USC with a US-source tax-deferred pension (such as an IRA), moved the funds to their country of residence.”
US sourced pension funds CANNOT be moved to country of residence, they are immovable.
1. If one is a US citizen they are taxable in the US when distributions are taken.
2. If a NRA then they are taxable depending on the tax treaty in the country where resident
Heidi:
“Dual status from birth will only excuse you from an exit tax if you meet the residency requirements in the country of your other citizenship. It also will not excuse you from past US ‘deemed’ tax debts.”
A deemed tax debt is not a tax debt. You only have a US tax debt if a US tax debt has been assessed. You only have a collectable US tax debt if you and/or your assets are in the US.
@Plaxy
“A deemed tax debt is not a tax debt. You only have a US tax debt if a US tax debt has been assessed. You only have a collectable US tax debt if you and/or your assets are in the US.”
Of course!! I don’t need a 101 from you.
That is why I emphasized his/her dual status would not excuse past debts deemed payable to the IRS if Fillinchen decided to back file and give them all they want to know.
“US sourced pension funds CANNOT be moved to country of residence, they are immovable.”
Hmm. Can the person not take a lump-sum distribution?
It makes sense for the US benefit of tax-deferral to end when the citizenshi ends; surely there must be a legitimate way for the renouncing citizen to bring the deferral to an end during the year of renunciation? Declare and pay the one-time tax on the 1040 statement of the 1040NR? And (subject to treaty provisions) claim the foreign tax credit available to a non-US citizen from the residence country?
Useful piece by Hodgen on taxation of IRA held by a NRA.
https://hodgen.com/ira-distributions-for-noncovered-expatriates/
BirdPerson:
“I’d say that to apply an exit tax to non US income/assets is immoral.”
Absolutely.
With extra added immorality from the fact that the US can’t actually do it, so they try to trick the former citizen into signing this pernicious form agreeing to the immoral taxation.
FT piece on moving a US tax-deferred pension to the UK. Seems do-able, if the person is not a US citizen (thus entitled to treaty breaks) and has reached distribution age. Big tax hit, inevitably; possibly creditable by HMRC.
https://www.ft.com/content/7f15cb92-480f-11e6-8d68-72e9211e86ab
@plaxy
“Can the person not take a lump-sum distribution?”
I can take a lump sum distribution on part of the fund, but that would put up my tax rate precipitously here and Switzerland also has a wealth tax so that would also add to my wealth tax %!
The other part of the fund must be taken out over a minimum of 10 years.
@Plaxy
Thanks for Hodgen link, but thankfully Switzerland has a tax treaty with the US so my US pension is sent untaxed to CH in US dollars, and I pay my applicable Swiss tax rate. I would not wish to have anything to do with US taxation ever again.
I exchange the $’s to Swiss francs through a forex company whenever the rate looks favourable.