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 – Yes it’s my understanding of what would happen under the UK treaty.
“I don’t need more stress now just to prove a point.”
???
No one has asked you to prove any point…
@plaxy
You suggested that might be the way it could work . I am not iimplying specificities but point out that others in my position would not want to test it out especially as retirement should be a time to enjoy the fruits of ones labour and not have to fight for what one has worked and saved for. Its not as if one can continue to work to make up what is lost. Fighting city hall is not in my bag of fun activities.
Heidi:
“You suggested that might be the way it could work . ”
The way what could work?
You’re mistaken if you believe I’ve been discussing you or your situation or the choices you’ve made.
I’m talking about Form 8854, waiver of treaty benefits, and example consequences under the UK treaty (which is the only treaty I know well).
I said (typos corrected):
“I see no reason why HMRC (or any 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.”
This is why I said above that for US-source income, the US exit tax is unnecessary. The US has primary taxing rights on US-source income, and the power to withhold tax. The suggestion that one reason for the exit tax is to tax US-source income before the evil renouncer escapes and moves it out of reach, is not based in reality. US-source income is never out of IRS reach, since US law compels the payer to withhold.
@plaxy
‘YOU see no reason’
All countries treasuries have a reason to tax their residents its called revenue gathering, it’s their raison d’etre. They are not benevolent!!
Unless you can invoke a treaty such as pension rights
treaty then you have an uphill battle if the US renages on this.
“Unless you can invoke a treaty such as pension rights treaty then you have an uphill battle if the US renages on this.”
My opinion:
In the hypothetical case of a UK-resident former US citizen with US income, who doesn’t file Form 8854 (i.e. doesn’t waive treaty rights), the individual would indeed be entitled to treaty rights. How the US income would be treated would depend on the treaty provisions for that particular type of income.
In the hypothetical case of a UK-resident former US citizen with US income, who does file Form 8854 (waiving treaty rights and accepting covered status), the individual would not be able to claim treaty rights and would continue to be taxed as a US citizen for ten years under the UK treaty.
In the hypothetical case of a UK-resident former US citizen with US income, who does file 8854 but is not labelled as “covered”, the individual would be entitled to treaty rights.How the US income would be treated would depend on the treaty provisions for that particular type of income.
In all cases, if a dispute arose between the two countries as to who is to tax and who is to allow credit, it would be up to the Competent Authorities to resolve the dispute.
IMO. IANAL. ETC.
@Plaxy “US-source income is never out of IRS reach, since US law compels the payer to withhold.”
Well, not always. US tax law allows the payer to withhold at a treaty rate if below the 30% standard. The UK treaty rate is 0% on pensions. Thanks for the correction on 8854 and waiver of treaty benefits.
As for “Do you have that in writing from HMRC (communication or website)?“, perhaps this:
After ten years (if not earlier), the DTA should exempt a covered expat with a 401k who waived US treaty rights. I have seen a record of a discussion of this between tax professionals and HMRC, but with no outcome apart from ‘monitoring’. No actual affected individual had yet been found, so hypothetical when discussed.
Do you have in writing or elsewhere a statement that HMRC would not seek to tax income that it is entitled to tax under a treaty and where the other treaty party has reneged on a relevant treaty clause that otherwise prevents double-tax?
Of course, as you say the exit tax is unnecessary in this circumstance. This is part of what makes it so objectionable. But it was clearly written without taking into account the assortment of tax treaties that exist around this area, and with which it meshes either poorly or not at all.
Worth noting that this waiver of treaty on future withdrawals applies only to 401ks. For IRAs, no such luck; just immediately fully taxable. In that case, claiming a tax credit from HMRC on future withdrawals could be doubly tricky since the US tax paid would be perhaps decades in the past, rather than same-year as for a 401k with a 30% withholding.
Anyway, I don’t see mileage in discussing this much further. Heidi and I are possibly the only two people here with this issue. And both of us are using other solutions to it.
@Heidi
No passport. I was a green card holder only. Much easier and cheaper dropping that than citizenship.
@Plaxy
As stated multiple times, I have no confidence whatsoever that Competent Authorities would resolve adequately the situation where one treaty party (the US) reneges on a treaty clause. At least, not on any sub-geological timescale.
Watcher:
“Well, not always. US tax law allows the payer to withhold at a treaty rate if below the 30% standard. The UK treaty rate is 0% on pensions. ”
Yes – the US income has not been put out of reach for US taxation; the US has conceded the taxing rights and therefore the withholding rate is zero.
“Do you have in writing or elsewhere a statement that HMRC would not seek to tax income that it is entitled to tax under a treaty and where the other treaty party has reneged on a relevant treaty clause that otherwise prevents double-tax?”
No. I just don’t think HMRC would try it on, because if they did, the taxpayer could invoke the Mutual Agreement Provisions, as set out in the treaty. I am supposing that HMRC would give an answer, rather than trying to enforce double taxation on the taxpayer – who does after all also have the option to invoke the MAP.
“Anyway, I don’t see mileage in discussing this much further. Heidi and I are possibly the only two people here with this issue. And both of us are using other solutions to it.”
No mileage for those who’ve already considered the question and made their choice, I agree, but I speculate that others may be interested in considering the question of Form 8854 and the possible consequences of filing with waiver, filing without waiver, or not filing.
Watcher:
“As stated multiple times, I have no confidence whatsoever that Competent Authorities would resolve adequately the situation where one treaty party (the US) reneges on a treaty clause. At least, not on any sub-geological timescale.”
Do you know of a case in which the US has refused to reduce withholding rates when a treaty provides that the residence country has the taxing rights?
@Plaxy: “Do you know of a case in which the US has refused to reduce withholding rates when a treaty provides that the residence country has the taxing rights?”
What makes you believe that when presented with a W-8CE, a US pension provider could or would refuse to follow US law and regulations that require withholding at 30% rather than a lower (or zero) treaty rate? IRC 877A(d)(1).
We seem to be at cross-purposes. Never mind. Consider the question withdrawn.
A correction.
I said (at http://isaacbrocksociety.ca/renunciation/comment-page-405/#comment-8576015 ):
From looking at the Technical Explanation, it seems I surmised wrongly:
https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-uk.pdf
My wife renounced her US citizenship in 2018.
I am trying to fill Form 8854 “Initial and Annual Expatriation Statement”.
In her case, this will be an “Initial” as well as final expatriation statement.
I am posting my questions below.
Perhaps some people here can help.
Since expatriation occurred in 2018, we must fill parts I, IV and V of Form 8854.
My wife has been fully compliant with the IRS.
She is not rich enough to be a covered expatriate.
Her situation is quite simple: no business in the USA, no business in Canada, no TFSA, no RESP, no investment outside RRSPs and a 401(k), no property in the USA, no rental properties, etc. etc. A salary from her job in Canada and some interest from some bonds in Canada.
Now on to Form 8854:
Part I: General Information
This part is pretty straightforward except for one detail: On line 5, I must check the box “Citizen” and I must provide the “Date notification given to Department of State”. What date is that? Is it the date at which my wife took the oath of renunciation at the US Consulate or is it the date at which the Department of State stamped (and dated) the Certificate of Loss of Nationality?
Part IV: For Persons Who Expatriated During 2018
Line 1: US income tax liability (after foreign tax credits) for the 5 tax years ending before the date of expatriation.
Am I correct in assuming that this is the “total tax” amount on line 63 of the 1040? (If that’s the case, the amount is 0$ for each of the 5 tax years thanks to the Foreign Earned Income Form 2555).
Part V: Balance Sheet and Income Statement
Schedule A: Balance Sheet
At first it looks intimidating but maybe it is not. I think that the only non-zero lines will be lines 1, 6, 7, 16, 20 and 25. Lines 20 and 25 are simply a sum and a difference, respectively. This leaves me with lines 1, 6, 7 and 16. Here they are:
Line 1. Cash, including bank deposits.
Here I will include the total value (as of date of renunciation) of two bank accounts and a bunch of fixed-rate bonds and step-up bonds at Épargne Placement Quebec. I can’t think of anything else. The two bank accounts are held jointly. Do I go 50%? Do I ignore column (b) (US adjusted basis)?
Line 6. Pensions from services performed in the United States.
She has a 401(k). Do I enter the total 401(k) value? Do I ignore column (b)?
Line 7. Pensions from services performed outside the United States.
She has two RRSP accounts, one spousal RRSP (with me as the contributor), and one Defined Contribution Pension Plan. Do I enter the total value (as of expatriation date) of these 4 accounts? Do I ignore column (b)?
Line 16. Real property located outside the United States.
Her car and the house? Book value for her car? Half of house value (since it is jointly owned with me)? What about column (b)? Do I put (half of) the price we paid for the house?
Part V: Balance Sheet and Income Statement
Schedule B: Income Statement
Lines 1 to 8: I have zeros everywhere!
Line 9. Gross income from all other sources.
She has only 2 types of income: salary from her job here in Canada and interest on those fixed-rate bonds and step-up bonds. Do I simply write down on line 9 the total as of the date of renunciation?
++++++++++++
It seems quite simple.
Am I missing something?
@Formerpatriot
Date of notification is the date of taking the oath at the embassy. Total tax is five lots of $0.
For cash, put in half of your joint accounts, and put the same value in (b) as in (a) (unlike stocks, real estate and so on, cash does not ‘appreciate’). For the 401k, put the end-of-year balance in (a), and if it is a pure pre-tax 401k just put something like ‘N/A’ in (b). Same as the 401k for the RRSPs.
Real property is probably just the house. Column (b) would be fiddly if you were covered, but since you are not just put in half of what you paid. Take a guess at the car value and add it into Other Assets, along with a mostly made-up figure for the value of possessions like furniture, underwear, and so on(!).
For income, as you suggest. The whole thing is indeed actually quite straightforward if your affairs are simple. And unless you are a covered expatriate, for the most part it doesn’t matter at all what you write in here since it generates no actual tax liability, but is just another pointless workload for the IRS.
As far as I can tell the cost basis of assets goes in column C. Bonds and strip bonds are marketable securities. For cash, the cost is the same as the value. If assets are owned jointly, you can divide by 2 .
Don’t forget to convert to US dollars. If the Can dollar was higher when you bought something, use the exchange rate of that date- it will raise your cost base.
401k. has a cost base -probably difficult to ascertain the correct number.
The RrSps are actually ‘other assets, include a separate page and enter the total value and cost of other assets on line 19
If you can determine a cost for the RRSps, sometimes on your brokerage statement, put iit in.
Same for the defined contribution PP.
Put down half the cost and value of the house. Use numbers that are favourable to you if you can defend them. E.g. assessed value rather than market value. Make up some reasonable numbers for the car.
Finally, if she is well under 2 million, she can’t be a covered expat so column c-g could be left blank. I would put something in.
Don’t mention any accounts that you haven’t previously reported.
Don’t expect to hear a word one way or the other. I went through this exact process precisely 1 year ago. Good luck.
Watcher and portland:
Thank you for your comments.
For reporting RRSPs in Part V Schedule A, I have read various opinions: some say Line 7 (Pensions from services performed outside the United States), some say Line 9 (Assets held by trusts you own under section 671 through 679) and some say Line 19 (Other assets). As long as it is being reported, I doubt that it would matter which of those 3 lines I used. I have not heard of any case where someone, specially a non-covered expatriate, was reprimanded by the IRS for putting their RRSPs on the wrong line.
For Quebec government bonds, I do not see how I could consider them securities that would go on either one of Lines 2, 3, 4 or 5. They are not issued by US companies nor by foreign companies. They are issued by a foreign government. I think I’ll put them on Line 19 (Other assets).
The “Net worth” (Line 25) will be well under 1 million USD. I doubt they would make a fuss. But I definitely want to be consistent with all previous reporting (Form 8938 and FBAR).
We put 2 RIFs under other assets. Net worth was well under. Haven’t heard a dicky bird. We did fill in column column B and C ( my mistake -you had the columns labelled correctly)
Schedule B, Income statement, on pg. 6 was a sea of zeroes.
BTW, we didn’t file 1040 or 1040NR for the partial year as her income for each period was well below any conceivable threshold. I guess that might have changed with the new tax rules.
@Formerpatriot
My form 8854 was done by a tax lawyer and I was made to fill out all columns, A, B, C
How it works is you are supposed to be doing your pretend sale the day before you renounce so the values for net worth are for that date. I made note of all values of all my accounts on the day before I renoounced. For the house, I looked at what similar properties sold for during that period. You can use the exchange rate of that day too.
Then in column A goes the value on the day before you renounced, column B you can adjust it on cost, for example cash is the same column a and b but for a stock account let’s say you have stock of $20,000 in column A but you paid $5,000, then column B has $5000 and column C would be $15,000. It is column A that provides the grand total at the end. Column C will just show the gain. and as others said, pretty much if you are under you can write good faith totals and you won’t hear a thing. and not sure they care,
For other assets which was line 19, I put value of my contents insurance which was probably over estimated because things do depreciate. and then attached a statement stating that the value on line 19 was for my personal property.
Prior posts are appreciated. I visited IBS in May and June last year, my renunciation was effective 21 June and I’ve just finished my 8854. Waiting for TurboTax to post form 8582 which is actually irrelevant but I have a rental apartment and it has carryforwards that will mean nothing after 2018. But my 1040NR is done, lots of zeroes there. Also 3520, 3520-A & 709: the very reason I was forced to renounce because my (non-US citizen) child has a disability trust which would have been double taxed. (Somebody else wrote that IRS Ogden is very quick to send out $10,000 penalty letters and that is true: I got a threat which they withdrew when I sent a copy of my CLN. 3520-A was on time, but showed no U.S. “owner”. While they can’t attribute citizenship to my child they could — but didn’t under the circumstances — say that I as trustee and US citizen mother am a “derivative owner” despite the special needs restrictions. I am counting on them not pursuing the “settlor”, my (expat, still-US citizen) father: that’s the 709. Generation skipping tax and all that.)
I have no US assets except a modest Roth IRA (tax exempt both in USA & UK) and I’m going to contrive to continue to contribute $6,000 a year by declaring a week’s work whenever I visit the USA. Wonder if I can also declare it for Schedule SE, pay $800 SET and get a few more years of SS coverage (subject to WEP but what they hey). Not supposed to be possible but people say it works. (Back in the day, I am reliably told, neither the SSA nor the CPP asked for immigration status before giving out an account number, which left open lots of possibilities. My BFF gets CPP, SS and UK State Pension. Pennies each of them, but together they pay the rent.
P.S. Single mum, born in UK, never lived anywhere else. Less than $2mn assets and a pittance for salary but even if that weren’t the case, guess no chance of being a covered expat, And even if I were, my child and heir isn’t a US Person.
If I’ve got anything wrong, do tell.
If you plan to declare that much self-employment income sourced in the US (i.e. you doing labour in the US), it seems to me you’ll need an employment visa.
As far as I can tell, back in the day, the SSA didn’t ask for immigration status of applicants who had US addresses, but they demanded to see current US passports of applicants who had non-US addresses. The SSA had already held onto an expired US passport for months before returning it by unregistered air mail from the US to Japan, and I couldn’t dare to take that risk with my then-current US passport that had Japanese immigration stamps in it (under the old Japanese system).
If you apply for an ITIN, the IRS is worse. They hold onto passports (usually non-US but sometimes US) for months before returning them by unregistered sea mail from Germany to Japan.
@GoneSoon
You can combine your SS from two countries if your resident country has a totalisation agreement with the US
https://www.ssa.gov/international/agreements_overview.html
Thanks. But what I said about SSN & CPP# was true, although of course you needed a local postal address. Everything done by post. BFF had an accommodation address in Montreal back in the day; gets a few hundred C$ a month now. Earnings were for “jetons de présence”. The fee paid to a company board meeting for attendance: you know, for politicians and their friends it’s $100,000s a year; this one was a tiny fraction of that. Never had a work visa for Canada but that was then, this is now. “Frontaliers” were dealt with very informally once upon a time.
Actually with SET one could own a “business” in the USA without ever going there. You are allowed to visit for board (etc.) meetings on a business visa or ESTA, not to see clients (you can see clients for a foreign business, within limits; supervise repairs, etc. etc.) Indeed, I’ve known board meetings to take place in the airport lounge, behind immigration control, of airports. (In fact I know of a “business” meeting of a US secretary of a government department who did that, but that’s another story. He also had an armed guard with somebody from Scotland Yard to hold the pistol until between flights.
As for totalisation: you can’t do that for years in which you have earnings in both countries, and I will have more than 30 years of NIC credits; about 48 quarters of SS so far. I don’t think a NRA can benefit from Medicare Part A regardless, but I could be wrong on that.
@GoneSoon
You are stiil eligible for Medicare post renunciation.
If you pay the monthly premium you can get part A and B . I did this for some years after renunciation but decided to drop part B (and the premium) a couple of years ago as I rarely travel there. I am still eligible for part A, and have a part A card for whatever that’s worth.
https://www.castroandco.com/blog/2015/july/the-top-5-myths-about-relinquishing-your-u-s-cit/