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.
Participants will need to provide their e-mail address (real or fake) and an alias. The only written rule is that participants must use a same alias each time they post (and not “anonymous” or derivatives thereof).
Bear in mind that any responses that you get from participants is peer-to-peer help, and it is not intended as a replacement for professional advice. Also, the Isaac Brock Society provides this disclaimer: neither the Society nor any of its members are professionals. We offer our advice here only in friendship and we recommend that our readers seek professional advice if they need it.
If you wish to receive an e-mail notification of comments, check the box to that effect when making your first comment.
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
Heidi – thanks, that seems logical.
Let’s see, is this a correct summary?
1. There’s inevitably going to be a big tax hit however it’s done, as taxing rights move from source country to residence country.
2. Depending on treaty provisions (if there’s a treaty), the tax hit may be mitigated by residence-country FTCs, and/or exacerbated by higher residence-country tax rates.
3. Transfers may be subject to limitations even after pension age. (Though perhaps these are conditions attached to particular types of US tax-deferred pensions?)
Heidi:
“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’m speaking generally, not with reference to anyone’s particular situation.
The US exit tax treatment of tax-deferred pensions is horrendous in its attempt to tax the future pensions of citizens of other countries.
If the renunciant can move all US income/assets (or as much as possible) to their home country and pay the resulting tax with the 1040NR, and then simply ignore the 8854, that may be a good solution, for some, depending on their individual circumstances.
The final severance, if all US funds can be shifted. Peace of mind.
@Plaxy: “Hmm. Can the person not take a lump-sum distribution? It makes sense for the US benefit of tax-deferral to end when the citizenship ends; surely there must be a legitimate way for the renouncing citizen to bring the deferral to an end during the year of renunciation?”
Full withdrawal of any worthwhile pension would put one at a US marginal tax rate of around or above 30%. On top of this, there is another 10% early withdrawal penalty if under age 59.5. So an instant potential 35-40% or so hit on retirement savings.
Compare with the likely 20% or less one might pay in UK tax for steady annual non-lump sum distributions under the treaty, and also with the much less than 35-40% US tax that would have been sidestepped when building up the pension, and you can see that while lump-sum is indeed an option, it is likely to be one of the worse ones on the table. (In fact, even the appalling deemed-distributed exit tax treatment might be less financially damaging, since at least that does not come with an added 10% early withdrawal penalty.)
Despite the inference in the FT article — and it’s a bit hard to see what they actually conclude — pensions cannot realistically be moved out of (or into) the US and remain as pensions. And once funds are outside of the pension wrapper (or at least, what remains of them after immediate and hefty taxes), gains in them become annually taxable, the balance liable to any local wealth taxes, and so on. Again then, generally damaging relative to the alternatives.
Yes, one can’t expect to move the money away from the US yet keep US tax benefits.
“pensions cannot realistically be moved out of (or into) the US and remain as pensions. ”
No.
Moving US assets may be a solution for some and not for others.
Getting back to Fillinchen’s situation and the dual-from-birth “exemption.”
I just want to point out that for those with no US income/assets, this is not in any way an exemption.
The US can’t impose an exit tax on non-US income/assets without the consent of the owner of the non-US income assets.
No need to sign a pernicious form in order to claim an exemption from tax that is not due, and can’t be assessed as due.
It’s kind of like the FEIE. The US can’t tax non-US earnings without the earner’s co-operation, so they create this phony “exemption” to get the earner to report the income and agree to pay.
@ Watcher
Thanks for explaining everything so succinctly, much appreciated.
@ Plaxy
Glad w are getting back to Fillinchen’s situation as that is what most of us are primarily here for, we are hopefully ‘sorted’ 🙂
Heidi:
As I said above – I’m talking generally, not about the specifics of anyone’s personal situation.
Fillinchen has asked about the “dual from birth” exemption and the exit tax. That’s what I’ve been talking about: the “dual from birth” exemption, and the exit tax.
Going back to the question of filing or not filing Form 8854: Some comments from Hodgen:
https://hodgen.com/filing-form-8854-late/
@Plaxy
There is nothing new in the quoted extract from Phil Hodgen. It reiterates precisely what Tdott, Heidi and I have been saying all along about form 8854. I know you always have to have the last word (and often, more than one last word) but even for you this is becoming a touch extreme.
Watcher:
“There is nothing new in the quoted extract from Phil Hodgen. ”
No – it’s Hodgen’s comments, from Jan 30 2018, not a new development.
“I know you always have to have the last word (and often, more than one last word) but even for you this is becoming a touch extreme.”
I truthfully don’t have a clue what you’re talking about.
@Plaxy
“I truthfully don’t have a clue what you’re talking about.”
Then, let’s put it to the test 🙂
The following is a general comment, not intended as a response to any other comment.
Hodgen concludes, in effect, the US can’t (yet) assess an exit tax liability against a former citizen who consents (albeit tardily) to the assessment, and provides the necessary shopping list, but doesn’t trip any of the three triggers.
It follows (if one accepts Hodgen’s conclusions) that the US can’t (yet) assess an exit tax liability against a former citizen who has not agreed to the assessment and has not provided the shopping list.
What the US can do, indubitably, is tax a former tax-resident on US-source gain accrued while tax-resident
This is why countries want to know when a tax-resident stops being tax-resident. Filing the 1040NR during the year following R-year (together with sending signed W8 forms to payerd if needed) would seem to be an easy way to do this. I hazard a guess that this may have been what happened, in the days before Form 8854 was invented.
So – no need to file Form 8854 if you don’t want to and have no US income/assets, but if you do have US income/assets you should let the IRS know you’re no longer tax-resident, either by filing Form 8854 or some other way.
Heidi – “let’s put it to the test ”
I truthfully don’t know what you’re talking about.
@Plaxy
QED
Heidi – I see – you think I’m trying to have the last word in an argument. I’m not. I’m not arguing with anyone or trying to upset anyone. I’m just making comments about the exit tax form.
I have further thoughts about this which I wish to post. They aren’t aimed at you, or at anyone else.
Further to my comment at http://isaacbrocksociety.ca/renunciation/comment-page-397/#comment-8541170:
It’s possible that Form 8854, and indeed its statutory underpinnings, were created by Americans who never gave a thought to the potential consequences for renunciants living outside the US, with worldwide income/assets largely untaxable by the US without the consent of the owner.
Former citizens who don’t meet the exit tax thresholds aren’t required by the exit tax statutes to hand their information to the IRS to be assessed for the exit tax; but (reasons Hodgen) the IRS has general authority to require those subject to US tax law to provide the information needed for assessment.
NRAs with no US income or assets are clearly not subject to US tax law – (a) because they’re NRAs and (b) because they don’t have income over which the US has taxing rights.
So they have no obligation to provide the IRS with information about their non-US assets and income; and since they have no other income, they don’t need to file the form.
Just some considerations in support of the view that former citizens with no US income/assets don’t need to file Form 8854, which actually (IMO) may never have been intended for them.
“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?”
You have to move to a country where you were BORN dual and become a resident.[*] I don’t know anything about a 2-year waiting period.
If you have no US heirs, no assets in the US, no assets in a country where the US can obtain collection assistance, and don’t visit the US,[**] I don’t think the US can collect anything that they might demand from you as a covered expatriate.
[* If I understand correctly, if you’re born in Switzerland to a US parent and a Canadian parent and become a US-Canadian dual at birth, then you can move to Canada and become a tax resident of Canada and qualify for the exemption when renouncing US citizenship, even if you never before set foot in either the US or Canada.]
[** If your citizenship is one that lets you make a normal visit to the US then you probably can do so, but if the IRS has a levy against you they can seize your clothes and sell them on eBay.]
@fillinchen
https://hodgen.com/dual-citizen-exit-tax/
Dual at birth exemption.
It does seem a bit drastic to change your life and move to Canada to be a tax resident and avoid the exit tax (if you qualify).
You mention Boris and the exit tax. Boris was a dual at birth resident in the UK, as far as I know he qualified for the dual at birth exemption. The tax he paid was for a UK house sale capital gain which would have been taxable in the US while he was a US citizen. Boris needed to be compliant to continue to sell his books, give lectures etc in the US
The dual at birth exemption will not exclude you for past tax debts the US may assess,ie RRSP’s etc, IF you send them all your financial information.
If you have no US assets or business, then safer to ignore the back tax filing.
“If your citizenship is one that lets you make a normal visit to the US then you probably can do so, but if the IRS has a levy against you they can seize your clothes and sell them on eBay.“
Very funny, but in the interests of not scaring readers, I feel compelled to point out that US border folks (CBP) have no authority to collect anything. There is supposedly a system in place called TECS that allows them to identify incoming travellers with a significant tax debt, who would then be taken aside so that their contact info while in the US can be given to the IRS. That’s all. No restrictions on leaving, no detention, no passport seizure (passport revocation/cancellation is a different program). Of course criminal charges for tax evasion are a different and more serious matter, but one could travel to the US even if the IRS had a lien. Might be a bit nerve-wracking but it won’t result in arrest or the seizure and sale of one’s wristwatch.
“I feel compelled to point out that US border folks (CBP) have no authority to collect anything.”
No kidding. As I said, the IRS can do it if they have a levy against you.
I don’t think the IRS has the authority to seize your personal effects on a visit to the US.
They do if they have a lien.
My feeling is that if the lien is for tax then the 16th amendment says they can, and if the lien is for penalties then the 5th amendment says they can’t without due process of law, but courts don’t care about either the constitution or my feelings. And the IRS doesn’t care about the constitution, my feelings, or courts.
Well unless you’re wearing a very expensive watch, or Paul Manafort’s ostrich jacket, it’s not a real-world concern. Readers, do not be alarmed, you will not be stripped to your underwear at the airport, nor after arrival at your hotel.
Just your Huawei phones then?
Thanks again all. I appreciate your points of view. I am still poring over the all the posts but my stomach is all tied up in knots just trying to do this.
“It does seem a bit drastic to change your life and move to Canada to be a tax resident and avoid the exit tax (if you qualify).”
I would do it if I had to. But first I need to figure out whether I really qualify though.
“[* If I understand correctly, if you’re born in Switzerland to a US parent and a Canadian parent and become a US-Canadian dual at birth, then you can move to Canada and become a tax resident of Canada and qualify for the exemption when renouncing US citizenship, even if you never before set foot in either the US or Canada.]”
I was born in US to Canadian parents, registered as a birth abroad for Canada within a year or two of birth. Is there any argument here that this isn’t “dual at birth”, i.e. was I first US only, then Canadian upon registration of birth abroad and therefore not *simultaneously* dual at birth?
“So – no need to file Form 8854 if you don’t want to and have no US income/assets, but if you do have US income/assets you should let the IRS know you’re no longer tax-resident, either by filing Form 8854 or some other way.”
I have past US income because I worked remotely for a customer in the US for a few years. I never went to the US for work. It was minimal and I have since stopped. Do you also mean past income when you say “US income”?