This post appeared on the RenounceUScitizenship blog.
5 strategies for weight reduction and a better life 4 #americansabroad http://t.co/gwxjjB6Zmm – Lose your #coveredexpat status
— U.S. Citizen Abroad (@USCitizenAbroad) July 14, 2013
My recent post discussed the importance of renouncing U.S. citizenship before becoming a covered expat. For those who need a reminder (and this is not a substitute for careful legal advice) a “covered expatriate” is one who meets any of the following tests:
1. The Income Test – Has the composition of income hat has resulted in a U.S. tax bill of approximately 140,000 for each of the last three years (this is a paraphrase, look it up yourself);
2. The Asset Test – Has a net worth of two million dollars or more
3. The Compliance Test – Is unable to certify compliance with U.S. tax laws for each of the five years prior to expatriation. Note that this is intended to include having filed all relevant information returns. (I would argue that since FBAR is a Title 31 requirement it is irrelevant to Title 26 compliance). Interestingly, if you do not meet either the asset test or the income test, you have a huge incentive to ensure that you have five years of tax compliance.
When it comes to U.S. tax compliance:
The only thing worse than the fear of non-compliance is the certainty of compliance. Why?
Tax compliant U.S. citizens abroad have locked themselves into the “prison of U.S. citizenship-based taxation”. The complexity, cost, anxiety, fear and anger is like being in a permanent state of OVDP. The amount of time stress and fear of penalties is simply unbelievable. One tax compliant U.S. citizen abroad reports that:
“This year I started dealing with my IRS Return in January 1st and tomorrow July 14 I will send my return with Puralator to make sure that it will arrive.”
The vast majority of U.S. citizens abroad want to be in compliance with the law. The reality is that for U.S. citizens abroad, U.S. tax “compliance is somewhere between very difficult and impossible“.
Only the most wealthy U.S. citizens abroad can afford to keep U.S. citizenship
Unless they are exceptionally wealthy and can afford the costs of U.S. tax compliance, double taxation and constant anxiety (no middle class American abroad can) they have have only two options:
1. They must go and live in the U.S. – this is not really an option for long term citizens abroad
2. They must Relinquish their U.S. citizenship – this can be costly for “tax compliant” people who are also “covered expats”.
The current laws of the United States are forcing tax compliant Americans abroad to choose between their U.S. citizenship and their lives. These ideas are well covered here.
The two kinds of tax compliant Americans who must consider relinquishing U.S. citizenship
1. Those who are NOT covered expatriates – They will avoid the 877A Exit Tax
2. Those who are covered expatriates – They will be subjected to the 877A Exit Tax
Incredibly: there are no worse living conditions than being a tax compliant U.S. citizen abroad who is a “covered expat”. A “covered expat” is subject to the Section 877A Exit Tax.
A “covered expatriate” is something that you do NOT want to be!
Like the undesirables in Nazi Germany and the undesirables in the Soviet Union, “covered expats” are required to pay the U.S. government for their freedom. (You can tell a country by the company that it keeps.)
The Asset Test – $2,000,000 dollars and a Toronto home owner
The truth is that $2,000,000 doesn’t mean much. The truth is that any responsible saver will reach it through investments and general inflation. The truth is that most Toronto home owners, who also have an RRSP and few other assets are there! These so called “billionaires” are your neighbors. These so called “billionaires” drive Toyotas. These so called “billionaires” shop at Costco and Walmart. They are demonized only because they have chosen to be responsible with their money. But, I digress …
The Asset Test is interesting because …
It is triggered by a net worth of $2,000,000 U.S. dollars on the day you relinquish. Some points worthy of note are:
1. The calculation is computed in U.S. dollars. Use the exchange rate on the date of your relinquishment.
2. If you have $1,900,000 you are free but if you have $2,000,000 you are subject to the tax. This demonstrates that the purpose of the tax is simply to punish the PEOPLE who have accumulated $2,000,000 of assets. After paying the Exit Tax, the person with $2,000,000 MAY end up with SIGNIFICANTLY less than the person who had only $1,900,000. Clearly, if this were a tax on ASSETS then one would expect the amount in excess of $2,000,000 to be subject to the tax.
3. I will do a separate post on the how the Exit Tax actually works. For those who can’t wait, here is a clear exposition by Robert Wood. This post is about what triggers the “Exit Tax” and how to avoid the $2,000,000 trigger. Furthermore, this post is to describe the reality of “tax compliant U.S. citizens abroad”. The following points should be clear to those of you who are “tax compliant Americans Abroad”:
– as I wrote in my last post, you must relinquish your U.S. citizenship. It’s very sad, but there is simply no way to live as a tax compliant U.S. citizen abroad
– you must take every reasonable step to avoid being a “covered expatriate” when you relinquish. As Phil Hodgen commented: “failing the 3 tests is a good thing.”
4. Although I am not using this post to discuss how the Exit Tax works, I do want include two important considerations:
A. You can have approximately $660,000 of capital gains which are excluded from the tax (and indexed for inflation) before the tax kicks in. U.S. citizens abroad who CANNOT certify 5 years of tax compliance take note.
B. Those of you who were born dual citizens (and meet some additional requirements avoid the Exit Tax all together. Is this discrimination based on citizenship?)
Therefore, the Exit Tax is aimed at:
The Tax Compliant U.S. Citizen abroad who meets one of the above three tests and was unlucky enough to not have a second citizenship from birth. Furthermore, by taxing the person (as opposed to the property) the U.S. is levying a tax on “foreign assets”.
Failing the “Asset Test”: Consider turning your over $2,000,000 big assets into less than $2,000,000 little assets – When less is really more
You are a U.S. citizen. Therefore you are exceptional. You were born in a special place and therefore special principles apply to you. You hold the only citizenship on the planet where you will actually make money – by losing money.
Think of it as a weight reduction program!
Here are some thoughts on how to achieve weight reduction:
Strategy 1 – Realize your gains – Your net worth may include unrealized capital gains – Realize those gains and pay the taxes
Example 1 – No Debt
For example, let’s say that as a responsible person you invested in a small property. To keep it simple, let’s assume no debt. You bought it for $500,000. Today it is worth $1,000,000. It would be treated as worth $1,000,000 for the purposes of the net worth test. You have an unrealized gain of $500,000. ($1,000,000 – $500,000). How can you reduce value of the property? The answer is sell the property. You will have to pay tax on $500,000 of capital gains. The amount of the tax will not be less than $125,000 and could well be more. Amazing you have just reduced your net worth.
Example 2 – Debt
Same example. Let’s say that as a responsible person you invested in a small property for $500,000. Let’s say that you financed the property with 100,000 down and a mortgage of $400,000. Let’s say that today the property is worth $1,000,000. Let’s assume that the mortgage is still $400,000.
A. The net worth of the property for Exit Tax purposes would be $600,000. ($1,000,000 – $400,000). This is the amount that you would include as part of your net worth.
B. Let’s say you sell for $1,000,000. What happens? Basically the same thing. The capital gain is still $500,000 ($1,000,000 – $500,000). Of course you will use the proceeds of the sale to pay off the $400,000 debt. So, you are left with $600,000. You will still have to pay the capital gains tax which will reduce your net worth (still probably at least $125,000).
But, what’s different this time is that you may recognize a gain or loss on the payout of the mortgage. Part of the problem of being a U.S. citizen abroad is that you are subject to the phantoms gains and losses of currency fluctuations. This is complicated but, if your goal is to reduce your net worth (which it is) this is something that should be considered. I analyzed this problem in an earlier post.
Strategy 2 – Consider selling your principal residence
This is an interesting topic. For those who don’t know, the U.S. does tax the gains on your principal residence. But, you do have the $250,000 tax free capital gain (making it different from strategy 1). If you have a spouse, half of that gain may belong to them.
Selling your principal residence prior to expatriation may make sense for two reasons:
1. If you sell the principal residence prior to expatriation, the sale will NOT be subject to the 877A rules. This ensures that you get the benefit of the $250,000 exclusion. It is NOT clear whether the $250,000 exclusion is available if the sale of the house becomes part of the 877A calculation. This issue is identified by both Robert Wood and Phil Hodgen.
2. Expatriation may involve life changes. You want to move anyway. Therefore, this might be a way to kill two birds with one stone.
To see what the savings are, simply multiply the capital gains tax rate by $250,000. It is significant.
Strategy 3 – Gifts
U.S. citizens can pay the gift tax now or the estate tax later. Make gifts to the extent that you can. I am not an expert on the tax consequences of gifts (although I have been told I am a generous person), but you are allowed to make gifts. As a citizen of “Form Nation”, your gifts will require a form. That said, here are three things you can consider:
A. Gifts of $13,000 per year to a large number of people. Hey, if you only have a couple hundred thousand to get rid of, why not?
B. The revenge of the alien spouse – $143,000 erosion per year
(i) Why not give your non-U.S. spouse as much as you can each year (my understanding is that this is about $143,000).
What if you don’t have a spouse? Why not just go out and get one? Run an ad:
“U.S. person requires spouse of convenience to give $143,000 per year to.”
(Even a U.S. person could find a spouse with this promise.)
(ii) The Gold Digger/Hostile Spouse – When it comes to the depletion/erosion of financial assets, there is nothing better than a hostile spouse. When the hostilities begin you can either give your money to a lawyer or give your money to a spouse. Perhaps a hostile spouse would be a way of getting around the $143,000 limitation on spousal gifts.
Now, I would tread lightly on this one. Phil Hodgen had an interesting post on this topic, that you really should read (and maybe consult Phil). That said, from a common sense perspective, the marriage of convenience (or any other marriage) is a great way to erode assets.
And finally, although you might have to advertise for the spouse who will accept the $143,000 a year, you won’t have to advertise for the “Gold Digger/Hostile Spouse”. They just happen.
(iii) Combine the Alien Spouse with the Gold Digger/Hostile Spouse (strategies i and ii) – This could be very effective. While you are being taken to the cleaners, and paying for lawyers, you can make the $143,000 payout in addition.
(Now, I do realize that U.S. persons are no longer attractive as marriage partners. If you need help, I can help you find a very attractive “Alien Gold Digger/Hostile Spouse” to erode your assets. Contact me.)
C. Financing an education for your child – Now I really feel that I am on a roll. I never realized how many opportunities for asset depletion there are. I am not sure on this one. But, is a U.S. person allowed to finance an education for his child? Does it matter whether the child is a U.S. citizen of not? This is an interesting question. But, if this is possible (and I suspect it is) perhaps you can prepay a degree for your child. Find something that takes many years. Better yet, send your child to law school. Encourage the child to study tax and family law. But, hey, if educational expenses allow you to bypass the gift tax exemptions, then this would be another well known way to erode your assets. Note that the payment must be made directly to the educational institution and must be for tuition.
Warning! Make sure that the child renounces U.S. citizenship. A child born abroad to a U.S. citizen may not be a U.S. citizen). You want to be able to get some of this money back in your older age.
D. Medical Expenses – Really who needs OHIP anyway? If your family members need expensive medical care it might be smart to pay for it directly. Of course, there are rules, forms, etc. Of course the health of many U.S. citizens abroad has been damaged over the last few years. Why not let the U.S. government subsidize part of the cost.
Strategy 4 – Stop Working and live off your capital until you are below the 2,000,000 mark. Take your trip around the world. No point in waiting until you are too old. Enjoy your money. Just spend your way below the two million mark. (This dovetails nicely with the hostile spouse option described above.)
I have talked to a number of U.S. citizens abroad who are seriously considering just stopping working. There is no point in it.
Strategies 1 – 4 are for those of you who are tax compliant.
Strategy 5 – What if you are not tax compliant and want to become tax compliant?
Okay that’s fine. But, you need to understand that the moment you become tax compliant (unless you are exceptionally wealthy) you will need to relinquish. You will be unable to deal with the forms and life restrictions.
Here is a wonderful way to clean it all up at once and move forward. Again all of these options should be done only under the supervision of a lawyer.
Here is an interesting strategy. There is a certain group of people who might consider this one. Again, only under professional supervision …
If you have never filed taxes or if you have recently learned that you have not been filing correctly (you have mutual funds, etc.) you could:
1. Enter OVDP
2. Pay the penalties
3. Get a clean bill of health on your taxes
4. Pay your lawyers fees
5. Watch your net worth erode to below the two million. (If the IRS doesn’t take it your lawyer will.)
Renounce!
This is a wonderful way of turning IRS OVDP penalty abuse to your advantage!
No doubt some of you will find the final suggestion amusing. Run the numbers. I can imagine scenarios where it could make sense.
In 1997 James Dale Davidson, writing about U.S. tax laws and their application to U.S. citizens abroad implied that:
U.S. tax laws as applied to Americans abroad are so punitive that many would be further ahead by simply paying the Exit Tax (at this time it was the Clinton Exit tax) and moving on.
In other words, maybe you purchase your freedom (wasn’t there a period in U.S. history when certain people purchased their freedom) and move on. After all, the simple truth is that the U.S. government does have a property right in its citizens.
Conclusion, this is all very very sad …
Speaking of Phil Hodgen, in a recent blog post, where he was discussing exiting the U.S.A. and the Exit Tax he closed by saying:
We have squillions of brain cells in our office dedicated to Section 877A and expatriation. My only advice to you (and others) who are going through the expatriation process is this: remember your Primary Purpose to exit the United States cleanly, so you can move about the planet freely for the rest of your life. Don’t f— that up by playing games with your taxes.
“Your money or your life?” That is the question you are being asked. Choose life.
You are a U.S. citizen. Therefore you must choose between your money or your life. It’s too bad U.S. citizens can’t have both!
Put, that way, yes Mr. Hodgen is correct:
You lost the birth lottery – Take life!!
Disclaimer!! This post is and is not intended to be legal advice or any other kind of advice. You must seek advice appropriate to your circumstances.
I don’t follow the 660,000 part. Can’t pick out the theory behind it. Seems like it might be important.
@MarkTwain: The excluded gain of $660,000 on real estate could be important. Please see this quote from the article “IRS Provides Some Guidance on the New Expatriation Exit Tax”:
“What is perhaps the strangest result of this provision, at least from a policy standpoint, is that it can permanently exempt from U.S. federal income tax some gain on USRPIs (ed. US real property interests) that otherwise would be subject to tax in the hands of anyone other than a covered expatriate.
Example:
A covered expatriate’s only asset is U.S. real property worth $1 million, with a $400,000 basis. The
expatriation date occurred in December 2008, when theSection 877A(a)(3) exclusion was $600,000. The covered expatriate thus pays no gain when he leaves the U.S., since the entire $600,000 realized gain is excludable. Notice 2009-85 directs that on departing the U.S., the expatriate is to adjust his tax basis in each item of property subject to the deemed sale to its FMV on the expatriation date. The covered expatriate thus obtains a basis step – up on the USRPI to $1 million. If he immediately sells the property for $1 million, there is no U.S. gain realized on the sale, and thus no U.S. tax liability is triggered (i.e., no FIRPTA liability arises).
In contrast, other nonresident aliens and U.S. taxpayers alike are always subject to tax on any gain realized with respect to a sale or other taxable disposition of USRPI, and therefore such persons would be subject to tax on that same $600,000 gain. Accordingly, covered expatriates who own appreciated U.S. real property at the time of expatriating generally receive tax-favored treatment under this provision as compared to all other classes of persons.”
http://www.hklaw.com/files/Publication/454a4da6-d692-41b8-b9dd-367f9f8846c3/Presentation/PublicationAttachment/edb41a72-92bb-419c-bf9a-3de0351be763/Packman-March2010.pdf
@Renounce:
This is all well and good, but what if you’re a low net worth individual (like your humble servant)? You don’t have the five years of filed tax returns but so what, provided you have no US assets or US-source income? Are low-income USPs with no residual connection to the US really in danger from the exit tax?
@Lyoba Maybe not in the short term but medium to long-term yes. If I recall this exit tax was introduced in 2008 and in general all the new laws concerning expats over the last 20 years has been only in one direction – that of making the situation more diffficult. If the number of reunciations increase, to stop this trend, the 2Mil threashold could be lowered. Secondly don’t forget that inflation could pick up making it easier for middle class incomes to reach this threashold faster than you think.
Recently I asked a former CPA to review the 8854 instructions which we then discussed. He said that he had no hands-on experience with form 8854 but had performed audit and tax work for a CPA firm some years ago. Here are my notes:
“Plan for a net asset level
Some similarities to estate planning
With estate planning, common planning is to transfer assets to wife/ husband, give away assets to family and set up a trust to hold some of the assets to ensure that you are below threshold where estate taxes start
Setting up a foreign (non-US) trust might introduce complications and he probably wouldn’t recommend
Largest assets for most people are:
a. Home
b. Financial investments
c. 401k and pension assets
d. Small business (largest asset for some people, e.g., farmers)
Similar to estate inventory values, any amount put on 8854 must be supported but it doesn’t mean you have to obtain formal appraisals on real estate, small business, etc. according to the instructions
Values that are from third parties are better than arbitrarily assigned values. «Values need to be supported, find the value of your car or tractor on ebay and print it out. Most assets can be valued with available comparables».
For ease, consider using property tax basis for real estate unless it could be challenged as too low or you have something that is better/ more accurate
Home and small business values have some «wiggle room» for value but financial assets generally do not
It should be expected that IRS will cross reference any information on 1040 with 8854, e.g.,
a.You list dividends/ interest on your 1040 but don’t show stocks/ bonds on your 8854
b.You check the box for an owned house on 2555 but don’t list a home on 8854
c. You list rental income from a vacation home on your 1040 but don’t list a vacation home on 8854
Income to asset comparison:
This was something I had not considered. He said it is conceivable that IRS could perform a reasonableness test of your assets on 8854 to your reported income over a period of years (and your latest small business balance sheet, if any). For example, let’s say you’re 50 and show assets of $1.3 million on 8854 and have had (family) income of $250,000 for the past ten years. It would probably be reasonable to assume that you are worth at least $1.0 million and perhaps $1.5 million, based on their reasonableness test, but they couldn’t likely prove that you were worth more than $2.0 million threshold unless they have other information, e.g., cross reference above yielded a mismatch, possible inheritance/ estate information. In his opinion, the IRS has a fair amount of financial and non-financial information about you but not everything. It knows your past income but only knows some of your personal expenses. It may have a balance sheet if you have a small business but it does not have a complete picture of your assets until you prepare a form 8854, which is a full personal financial statement.
He thought it worthwhile to have a CPA firm complete 8854 for another set of eyes and makes it more credible to IRS but is not required”
He told some war stories about dealing with farmers, one which sounded familiar. They generally feel they pay (federal) taxes and receive nothing back while working their tails off in the heat and cold on their farms far from civilization. The only federal government contact they have is with the post office which they’re charged for of course. Substitute embassy for post office and you have an expat’s view. 🙂
I enjoyed the many suggestions. Fortunately I was under the threshold when I relinquished and so I didn’t have to implement any of the more drastic suggestions. The gold-digger hostile spouse I think is the most creative suggestion thus far. And the thing that makes it so perfect is that it is perfectly legal and there isn’t a damn thing the IRS can do about it.
I think in the Canadian context there are a lot of easy ways to get under the threshold. Here are the most important:
(1) De-register RRSP savings (i.e., early withdrawal): CRA withholds 30% and it has a direct affect on your marginal tax rate, with no beneficial treatment (such as would normally come from capital gains or dividends). Paying the tax, as you suggest in your post, is a great way to destroy wealth.
(2) Pay out retained earnings in your company in the form of a bonus (not as a capital or eligible dividend) in order to pay the maximum taxes in Canada instead of later owing taxes to the United States.
(3) Buy Canadian maple coins (gold or silver) and declare only the face value of these legal tender coins Form 8854. At present, the prices for these coins are at a three year low, if you can obtain them (supplies are very low in this manipulated precious metal environment).
@Petros
Love your comment on deregistering the RRSP. Certainly the payment of taxes will lower your net worth and that is great. There is a more important reason for deregistering the RRSP. It then ceases to be a pension at the time of expatriation. Before anybody does that though, it would be important to check the tax treatment for U.S. purposes.
Anybody reading this should only pay out “retained earnings” after taking a very close look at the company and only as employment income or a bonus. You do NOT want to get into the consequences of this being treated as a dividend.
But, thanks – great additions to the goal of wealth destruction.
Glad you like the Hostile Spouse strategy. So easy to achieve …
@Innocente
What is important here is that the information on the FBARs and 8938 and 1040s match the 8854. The Exit Tax is about confiscation of assets. The purpose of the FBAR and 8938 is to force you to identify those assets for confiscation.
Those expatriating really should work with a somebody whose sole job is to look for consistency in your paper work. This need not be a paid person. But, it’s important.
@Mark Twain
Basically if you are a covered expatriate – at the risk of oversimplification – the first approx $660,000 is excluded. Thing is that this exclusion amount is allocated over different assets classes. So, it’s obviously helpful. But, not as helpful as you might think.
@Lyoba
Here is a post that I wrote on your question about a year ago.
http://isaacbrocksociety.ca/2012/06/07/phil-hodgen-why-people-expatriate-a-comment-on-his-post-what-about-those-who-cannot-certify-5-years-of-tax-compliance/
I have always felt that a low net worth person could just take the position that:
1. Can’t certify 5 years, so you are a covered expat;
2. Run the numbers, presumably showing little capital gains, use the $660,000 exclusion and be out (but this is a thought not advice of any kind – talk about your facts with your advisor).
3. Reality is that you have admitted to the IRS that you are not compliant. What would be the fallout of that? Who knows? Would they audit? I don’t know.
This post is really written with “tax compliant” “over two million” U.S. citizens abroad in mind. They are the ones who really have to renounce. Not sure that you really do.
Also, there is some evidence (think Reed-Schumer) that the U.S. is simply on a Witch Hunt to burn Covered Expats. (How could they have hurt the Homeland by saving their money?) Therefore, in a general sense, its probably prudent to NOT be a covered expat.
Finally, (if this is an issue) those in the Homeland who receive gifts from renouncing “covered expats” have to pay a punitive tax on the gift. So, I would add to the “gift strategy above” that if you are making gifts to reduce your net worth, you should gift to the people in the homeland (those you like).
The exit tax isn’t the only impact of being a covered expatriate. We shouldn’t forget that failing to certify that you are tax compliant (or being over the net asset limit or the tax liability limit) can cost a significant chunk of your pension assets since these are deemed distributed the day before you expatriate and taxed as income by the US.
@Edelweiss
Very important point. All the more reason why one should work on doing some “wealth destruction”. This makes Petros comment at 7:22 (at least for those in Canada with RRSPs) very important. It is certainly worth investigating whether its’ worth it simply get rid pension plans.
Also, the impact of “taxed as income by the U.S” is lethal.
Lyoba Of course you are correct. Unlike many people here who believe that somehow the irs is going to come over the border to steal their life savings.
Those with no US connections are perfectly safe. Just ask- What are they going to do to you?
Happened to see this while reading through the Canadian “FW-1 Temporary Foreign Worker Manual”:
“13.7. United States government personnel
U.S. Internal Revenue Service (IRS) employees
Work permit required, but LMO exempt pursuant to R204, T1
1. IRS employees will periodically enter Canada to audit, collect and do criminal investigations. IRS representatives require a work permit, but are LMO exempt as they will be engaging in employment pursuant to an agreement entered into with a foreign country by or on behalf of the Government of Canada. They may be issued a one-year work permit.”
pp. 106-107
http://www.cic.gc.ca/english/resources/manuals/fw/fw01-eng.pdf
Does Canada have a FOIA-equivalent to determine how many IRS employees are based in Canada?
@USCitizen, @Duke,
Thanks for the comments. If I were a mere employee, I’d file my five years returns tomorrow. BUT I’m a sole business persons scraping a living from writing services. As a small-business owner, my accounts are complex and I would (I think) be liable for social security tax from the US (despite already paying this in Switzerland). And I’m utterly opposed to the principle of double taxation. Hence the paralysis…
I would have to renounce one day if my (local Swiss) bank wanted to transmit my account info the IRS. That is something, of course, which may or may never happen.
@Lyoba:
Switzerland and the US have a Social Security Totalization Agreement: „If you are self-employed and reside in the United States or Switzerland, you generally will be covered and taxed only by the country where you reside.“
http://www.ssa.gov/international/Agreement_Pamphlets/switzrld.html
Gifting comments: You can gift $143k to non-US spouse in 2013 without filing anything to IRS. I believe that there is also a $5 million lifetime gift exemption, but IRS forms are probably required if some threshold reached. Such gifting makes sense ONLY if your country does not impose transfer tax or other taxes on the gift.
Even if you decide not to renounce and wish to remain compliant, if you have a non-US spouse there is no need to pay capital gains tax on house sale to IRS. Gift your portion of house less tiny % to spouse (again, only if no transfer tax in your country).
Gold digger spouses were mentioned but my wife expressed concern over lack of consideration for gifting to trophy wives.
8854: I agree with Innocente that 8854 should be carefully filled out. I posted elsewhere comment from a tax professional that IRS is looking more closely into accuracy of 8854s. I recently asked one tax expert as to the number of years after filing 8854 IRS can come back and contest. The answer was six years.
@Southerner says:
“If the number of renunciations increase, to stop this trend, the 2Mil threshold could be lowered.”
I worry about this too, and given accelerating vindictiveness of IRS, worry for example that some renouncing in 2013 will find nasty changes in the 8854 for 2013 that comes out next year. I think I can predict response if this happens.
Brilliant, what a Canadian tax accountant friend of mine describes as “the tax tail wagging the dog”, but what other choice do you have when you need to shake off that cold and wet citizenship? Maybe you should examine suicide as a means of extricating oneself from the the clutches of the US in your helpful series (seriously).
@Bubblebustin
Well, I don’t really think a post about that particular means of extrication is a good idea. But, you might find this video of ACA’s Anne Hornung Soukup interesting.
http://www.youtube.com/watch?v=__qgj0-0Zjk&feature=youtu.be
The topic begins at the 11:00 minute mark of the video. In addition to touching on the topic in your above comment, she also suggests a market for dating agencies that avoid U.S. citizens.
I have a huge appreciation and respect for Anne Soukup for her tireless effort in telling it like it is. She does sound a bit beleaguered in that interview however. I hope that the prospect of RBT has put more wind in her sails since then.
Who’d know that the “death to America” would come from a self-inflicted wound?
some assets can be purchased without paperwork and could remain undetectable, such as artwork, jewelry, precious metals, or maybe even a large boat or expensive car. Many of those things are quite risky or depreciate quickly, of course, but this is the price one pays for the benefit of having a battleship ready to pick you up in case of any disaster in your country of residence.
ok, I clicked on Phil Hodgens entry, and I think I see that, IF one is determined to be a “covered” expat, THEN one’s gains are taxed by USA at standard USA rates upon exit (15% or 30% for short-long resp). $660,000 is excludable. I assume that the exit tax is then not creditable in one’s country of Residence unless some miracle exists locally.
The previous post meant that even normal working schmucks (not in danger of being covered) would pay 40% tax upon their tax-free pension of their resident country. This joy is made possible because the retirement account needs to be declared upon 8938 and FBARs, creating a flashing red light with the label “please tax me some more”
@Innocente
Thanks for this information: could be a game-changer for me.
I have been to see a lawyer in Geneva but he was not really on the ball. So I’m relying on this highly informative forum for help with decision-making.
@Bubblebustin,
Of course I seriously considered including in my list possibility of a “more permanent” exit strategy, but obviously only the scenario in which naturally and peacefully expiring US person is surrounded by family and friends.
I quickly dismissed this idea once I realized that IRS with helpmate FinCEN will still come after estate and at least first and second generation beneficiaries and dependents for collection of unpaid FBAR, capital gains, 8854, etc. taxes, penalties, and interest.
I believe that somewhere on one of the recent IRS (or was it IBS?) websites there is the helpful explanatory statement confirming that this strategy will not work: “We are IRS: Death is no excuse.”
@IRSCompliantForever
I know it’s rather macabre, but it might be beneficial to examine the pros and cons of such an exit strategy if only to determine that doing so wouldn’t be of much benefit, other than to relieve the USP of his/her daily ongoing struggles as an individual under siege. It actually might be therapeutic to bring these thoughts out into the open, because surely there are many reasons for USP’s abroad to be severely depressed. Fortunately I’m not one, but I know that I’m substituting depression with anger. I can’t imagine how a similar situation would effect those actually living in the US where they can’t escape the IRS’s reach if they had to. That would be depressing.