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
@plaxy
The US would know about US pension income distributions, the pension fund is a witholding agent for the IRS, you have to prove you are a US resident taxpayer or a non resident alien eligible for a tax treaty to get the funds released.
But you have been told this by watcher, tdott and myself all of whom have had experience dealing with this situation.
@BP
Other counties mostly have uncomplicated tax treaties that involve the taxation of pension funds. I have a small pension from working in the UK (NHS), I live in Switzerland and it qualifies for taxation there not in the UK and visa versa for Swiss living in the UK. It’s only the US that has this nasty punishment for having the gall to leave that dysfunctional country.
Heidi:
“The US would know about US pension income distributions.
That’s what I said:
@Heidi
But at least we can rejoice that we have, indeed, left it!
I renounced in September, and as time passes I am happier and happier with my decision. The UK feels like home to me now. I hope you feel the same way about Switzerland.
@Plaxy: “… for US-source assets and income, which the US already knows about and for which it continues to have taxing rights.”
For treaty countries, the US agreed to cede taxing rights for some types of income. Pensions being a prime example, in the case of the UK and Swiss treaties. The problem with the US exit tax is that the way it is written can be construed as unilaterally reneging on this treaty treatment for pensions. The end result can be that both countries now claim taxing rights, but with neither willing to provide any credit for tax paid to the other. The US may take the view that it has overridden the treaty, but the UK and Switzerland are not necessarily going to just roll over and agree with that view. A mess, then, with a strong likelihood of double-tax at the end of it.
Personally, if it were me and I was feeling brave (or foolhardy), I might consider letting the US take a 30% withholding and then file a 1040NR at year end with a form 8833 that claims the entire 30% back under the relevant treaty clause (a W-8CE waives tax withholding but appears silent on tax liability). That would throw it all back at the IRS. They would then be forced to either refund fully, or deny the claim. In the latter case, one could then invoke the ‘competent authorities’ and the ‘avoidance of double-tax’ treaty clauses. (Of course, that might take years or decades to straighten out, so not exactly something to gamble one’s retirement on.)
But this is not me. I got out before the ‘exit tax’ law passed. In fact, precisely because of it.
@BP
Switzerland and the UK are both ‘home’ to me but I worry about civil unrest in the UK after Brexit.
@ watcher
You were wise.
I had to lower my net worth to protect my pension by taking a distribution and then gifting to a family member pre expatriation thus protectiing NRA pension treaty. I had a UK resident friend who left pre exit tax under the 10 yr rule, he was audited in his 10th yr! He had to comply as was in the entertainment business and needed access to the US film industry.
Watcher:
The point is, I disagree with Debra Rudd’s bland explanation of the US exit tax.
Ms Rudd says:
Yet in reality the US doesn’t need an exit tax or a pretend garage sale to keep taxing US-source income, and has no right to try to tax future non-US-source income – income from wealth “accumulated using the residence country’s infrastructure” (or, as most would say, wealth accumulated from working and investing in the residence country). As Ms Rudd acknowledges a little further on:
Quite.
I preferred Hodgen’s explanations, which generally didn’t bother trying to make the US exit tax sound reasonable.
And surely you ‘contributed to the infrastructure’ by paying tax whilst you lived and worked there?
I can’t see the exit tax as anything other than spiteful revenge for daring to leave ‘the greatest country on Earth.’
@BP
Yes and to the health of the inhabitants, which is more important, thats why its so spiteful.
BP – Indeed.
The exit tax was spawned in a fit of vindictiveness and has gradually morphed into the status quo.
@Heidi
That audit thing sounds needlessly frustrating, not to mention perhaps also ever so slightly disturbing. I’m actually ‘covered’ under the pre-exit tax ten-year rule too. It is one of the main reasons I haven’t returned to or even visited the US in the past decade. I have had the “joy” of filing a full 1040NR and an 8854 for every one of those years. 2017 was (or at least, should have been) my last year of filing this nonsense though. So far, as ever just deafening silence from the IRS. I doubt that I’m going to be worth auditing here, anyway. Total US income for the year was below $50, by design.
I do however now have to wonder if they will (incorrectly) send me an automatic fine for not filing this nonsense for 2018, which I won’t be doing. The IRS’s form 8854 instructions for my case disagree with the actual section 877 law. Under their instructions, I should do one more 8854. Under the actual law as written, not. I’m going by the latter. The IRS apparently cannot count up to ten accurately, so who knows what idiocy they have programmed into their computers.
Similar to bird person,
“The theory behind the exit tax is fairly simple: Without the infrastructure created by governments, individuals would not be able to obtain wealth. When you exit a nation’s tax system, that nation wants to be able to collect tax for the wealth you have accumulated using its infrastructure.”
So, what’s income tax for?
Also, There are those who accumalate wealth in areas of the world without government provided infrastructure.
Oh, and, as it is the taxpayer that pays for the so called ‘government created infrastructure’ the gov. is not providing it.
So, I guess it is not my spouse and I who provide food for our children. That would be done by the supermarket, if we apply this same “logic” to the dinner table.
@plaxy
Yes, Hodgen didn’t try to reason the tax treatment of expats, his blogs seemed to put him on the renunciants side, ie “ lets see how we can get you out of this unfsir situation with the least harm”
Ms Rudd seems to have changed tack with her explanation of ‘ a debt owed to a country some have never lived in!’
@Robert Ross
Hodgen seems like a reasonable chap. I’m sure that he lays out all the options to his clients, in private. I imagine it would be unwise for him to publicly recommend walking away from an exit-tax bill, or other forms of non-compliance.
@nononymous
May be true about the chap’s reasonability but it wouldn’t be a crime to mention IRS limitations as overseas tax collectors but I guess we can leave that to the people at IBS. .After all, the lad needs to earn a living.
“Personally, if it were me and I was feeling brave (or foolhardy), I might consider letting the US take a 30% withholding and then file a 1040NR at year end with a form 8833 that claims the entire 30% back under the relevant treaty clause (a W-8CE waives tax withholding but appears silent on tax liability).”
If I understand correctly, if you’re covered but didn’t pay tax in advance on fictional future income, Form 8854 already waived treaty benefits.
Hey, wait. What if you didn’t submit Form 8854?
Norman Diamond:
That’s my understanding also.
I assume it depends on the treaty.
Some treaties (UK, for one) allow the US to carry on taxing “certain” former citizens (the evil covered ones who renounced to get away from US eternal taxation) for ten years after losing citizenship. I surmise, rightly or wrongly, that this means that HMRC goes on giving credit for US tax withheld. After ten years, I suppose, the relevant treaty provision would at last come into play and US withholding might or might not be reduced, depending on the treaty provision for the particular type of income.
@Norman Diamond
Form 8854 does not waive treaty rights. Everyone, covered or not, is supposed to file that. It’s the W-8CE later that (purports to) waive them. This is only “required” from covered expats, and sent to the pension provider rather than the IRS. It tells them to apply a flat 30% rather than any beneficial treaty withholding rate on pension withdrawals.
@Plaxy: “I surmise, rightly or wrongly, that this means that HMRC goes on giving credit for US tax withheld.”
My understanding also. There are some exceptions to the ‘saving clause’ that taxes former citizens and green card holders for up to ten years after leaving, but where one doesn’t apply then HMRC is I think bound to give credit where US tax has to be paid. (And if they don’t like that then they should not have agreed to a tilted treaty!)
The ‘ten years’ is where the problems may occur with the exit tax and W-8CE waiver of treaty rights. After that period, HMRC won’t fee bound to allow credits, but the US may nevertheless not recognise the treaty. A W-8CE is for life, with no expiry ever.
Form 8854 has multiple functions. In the type of case under discussion, it nails the signer into the irrevocable waiver of treaty rights:
“After that period, HMRC won’t fee bound to allow credits”
Do you have that in writing from HMRC (communication or website)?
I see no reason why HMRC (or ant tax agency other than US)would do something so silly as trying to tax foreign income that has already been taxed by the country with the primary taxing rights.
“Irrevocable” just means that the taxpayer can’t change his/her mind about the waiver.
It has no effect on the allocation of taxing rights as agreed by treaty. Normally, the source country (the country with the power to withhold) has taxing rights unless it concedes to the residence country. If the treaty provides otherwise, one would expect that the source country would abide by the agreement; but if there’s a dispute, it would be settled between the two Competent Authorities.
That’s my understanding.
@Watcher
Under the 10 yr rule did you have to surrender your US passport or are you considered a citizen until the 10 yr is up.
My friend was told to bring his US passport along to the audit in NYC in the 10th year. I thought perhaps they were checking to see if it had been used as I believe he was limited to 30 days/ yr entry into the US under the 10 yr rule.
@placy
That may be your opinion and maybe it would work but I am in my twilight years and don’t fancy a long battle with the Swiss tax authorities perhaps only to be settled when I am destitute or no longer around.
I have already had a battle with them trying to tax 100% my SS without an allowance for the 15% already paid to the US. I have had a stressful working life, I don’t need more stress now just to prove a point.