Not applicable to adult emigrants. No other proposals to simplify income taxes for individuals who don’t live in the United States. No help with the insane reporting requirements on foreign retirement & medical & disability savings plans. Some people may hope it’s a start from an administration which up until now has been totally deaf to the “special concerns and issues of Americans abroad” which the president claimed he would address when he was campaigning for our votes. Others will take it as what it appears to be at face value: a chance to get out while the getting is semi-good. At page 282 of the “Green Book” (all links added by me):
Individuals who became citizens of both the United States and another country at birth may have had minimal contact with the United States and may not learn until later in life that they are U.S. citizens. In addition, these individuals may be citizens of countries where dual citizenship is illegal. Many of these individuals would like to relinquish their U.S. citizenship in accordance with established State Department procedures, but doing so would require them to pay significant U.S. tax.
Under the proposal, an individual will not be subject to tax as a U.S. citizen and will not be a covered expatriate subject to the mark-to-market exit tax under section 877A if the individual:
1. became at birth a citizen of the United States and a citizen of another country,
2. at all times, up to and including the individual’s expatriation date, has been a citizen of a country other than the United States,
3. has not been a resident of the United States (as defined in section 7701(b)) since attaining age 18½,
4. has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,
5. relinquishes his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen, and
6. certifies under penalty of perjury his or her compliance with all U.S. Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.The proposal would be effective January 1, 2016.
This didn’t appear to be covered in the table of revenue estimates. Correction: As Tim points out, the revenue estimate is in the summary tables file on the White House/OMB website, rather than the Treasury website. They estimate it would cost $400 million over ten years, with more than half of that coming in the first three years as people scramble to take advantage of the offer.
Details of revenue estimates
| Deficit increases (+) or decreases (-) in millions of dollars | Totals | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Heading | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2016 – 2020 |
2016 – 2025 |
| Provide relief for certain accidental dual citizens | ……… | 60 | 103 | 55 | 23 | 24 | 25 | 26 | 28 | 29 | 30 | 265 | 403 |
I am quite interested to know the underlying number of relinquishers OMB used make these estimates (and for that matter, whether they have offset those estimates by the $2,350 fee that many accidentals are going to have to pay because they only qualify for renunciation and no other method of giving up citizenship). I assume that the estimates for ongoing deficit increases past 2018 are attributable to one-time losses of revenue from additional relinquishers,rather than ongoing loss of revenue from the initial group of relinquishers.
For example, they may be using the utterly false (and late again for this quarter) Federal Register relinquishment numbers and assuming that all of them would qualify for Obama’s plan. (That would also mean they’re assuming that no non-accidental Americans have ever given up citizenship because of the FATCA mess that Obama signed into law — clearly an incorrect assumption.) In that case they would be saying that in 2020 they’re expecting an average annual revenue loss of $8,000 per person, rising to $10,000 per person by 2025.
If OMB understands that only a small proportion of recent relinquishers qualify for Obama’s plan, then they’re trying to claim that the revenue loss per person would be much higher — which I don’t think is supportable. On the other hand, they may also understand that the actual number of relinquishers is higher and that only a small proportion of them will qualify for Obama’s plan. Though given the dubious earlier models of the effect of cancelling the FEIE, I get the sense that the government does not have this much of an in-depth understanding of emigrant tax issues.
Treatment of businesses owned by American emigrants
Another small mercy: the proposed 19% minimum tax on foreign earnings only applies to CFCs owned by “entities taxed as domestic C corporations” — finally, an implicit acknowledgement that some owners of CFCs are human emigrants rather than multinational corporations. Unfortunately the 14% tax on “previously untaxed” foreign earnings does not appear to include that same acknowledgement.
Will not affect ADCS lawsuit
Update, 6 February: Stephen Kish has already spoken with Mr. Arvay about the Obama budget proposal, and states:
Some you have expressed concern that should the Obama budget proposal, if ever enacted, provide some relief to duals-at-birth, like our two Plaintiffs Ginny and Gwen, this could mean trouble for our lawsuit — because both Plaintiffs are duals-at-birth. Apparently, Canada’s Mr. Roy Berg himself, a U.S tax compliance professional, is mentioned in an article (which I have not seen) which states that should the tax code on duals-at-birth change for the better, this might “spell the death-knell” to our Canadian lawsuit.
Please do not worry. The Arvay team has been quite aware of the issue of specific characteristics of plaintiffs from the very beginning.
Today Mr. Arvay also has confirmed with me, yet again, that our legal strategy is not limited to the specific characteristics of the two plaintiffs, that additional plaintiffs can be added to the lawsuit should this ever be necessary, and that our aim has always been to include affidavits from people who span a range of differing characteristics.
I’m afraid that this is just another example of the US when discovering they have a problem choose to tinker with it, instead of actually dealing with it in a constructive fashion. Call in the so-called experts to have a look at it, only these experts are more adept at making political hay out of the problem than actually solving it. Like raising the renunciation fees instead of simplifying the procedure, to name just one example.
Geez, I’m getting cynical!
@Fred,
I would say that this proposal does NOT fit the case in your country, because she has already renounced. see Point # 5.
Fred. You asked ‘what happens to those who renounce without filing any (tax) forms?’ Answer: nobody knows. It’s all speculation. Dire warnings about being detained at the border. Dire warnings about flying over the U.S. . Give me a break.
Being a covered expatriate would be a problem if you plan to leave an inheritance to a U.S. taxpayer. Otherwise there isn’t much they can do. Perhaps a nasty computer generated letter or two.
PL. until March 31 2016.. Normally for tax returns there is an automatic 2 month extension for non residents. Don’ t think it applies to 8854.good luck.
@DukeOfDevon,
Can you please explain the logistics of this comment a little more, “Being a covered expatriate would be a problem if you plan to leave an inheritance to a U.S. taxpayer. “
@Duke of Devon. These are not dire warnings , they are considerations .
@WhiteKat
A US person who inherits from a covered expat will have to pay tax on the estate at the highest %
See Hodgen
http://hodgen.com/expatriation-inheritance-and-another-inheritance/
@Duke of Devon, my understanding is that the extension (applied for timely) for the return also applies to the 8854 – as a copy is to be filed with the last return. I used Form 4868 – which allowed for filing up to October 15.
I relied on:
http://hodgen.com/when-to-file-form-8854/
and the Form 8854 instructions – as much as I could make any sense out of them.
“…… Oct 28, 2014 – If you expatriated after June 16, 2008, attach Form 8854 to your income tax return (Form 1040 or Form 1040NR) for the year that includes your expatriation date, and file your return by the due date of your tax return (including extensions)……”
@Heidi, thanks. I was just wondering how that situation is more dire than any of the rest of this mess.
@WhiteKat
It is for US children who remain so. Mess says it all!
@Heidi, Can’t they just NOT file on behalf of their parents estate (just like many of us are NOT filing annual US tax returns and FBARs)? What I don’t get is, how is this situation different than any of the other FATCA fingers many are giving the USA?
@ Duke of Devon and PL
My husband did the same as badger. He didn’t know when his CLN would arrive so he got the October extension. Well I say “got” but you never know with they-who-never-acknowledge-anything. His CLN arrived in late June so he was able to send everything off on June 30th. (He just wanted to get it over with.) He hasn’t had any negative feedback … yet.
When a large amount enters their bank account, won’t there be questions asked? Banks are now an extension of the IRS.
@Heidi, I hear you. I have this fear too, although my situation is somewhat different.
@whomever
I apologize for being late in noticing this, but I find it rather curious that section 4 of the proposal only mentions getting a passport for departing from the US, but not for entering it. If you read the law linked by Eric, the law says US citizens must have a US passport to depart from OR ENTER the US. I have to wonder if the wording in this proposal is a careless oversight, an editing error, or something deliberate — but deliberately leaving out the OR ENTER part makes far less sense to me than the other two possible explanations. Though this assumes rationality and reasonableness on people in the Obama administration who drafted this, which assumption is perhaps more heroic than it should be …
This is important, because AFAIK the only people who’ve been bullied about getting a US passport, at the border, have had that happen WHEN ENTERING the US not when leaving it. At least, that’s my recollection of all the tales I’ve read here, and on Sandbox, and have heard of in private conversations. Bizarre.
The more I read and ponder what the IRS, Treasury and the Congress have done in this area, the more amazed I am that the US can still function coherently as a country … gives the phrase “the gang that couldn’t shoot straight” a whole new dimension. With all our warts and problems in Canada, I am soooo glad I’m no longer an American and don’t live there. And I have great trouble imaging how anyone who qualifies under this proposal, if it ever passes into law, wouldn’t leap at taking it immediately.
The relevant part of 22 CFR §53.1 is only one sentense:
We can only guess, but after looking at 22 CFR 53.2, it sure seems to me like they intended to say “entering or departing” in this proposal.
@Schubert, the ‘departing only’ part confuses me as well. I tend to think it was an oversight.
And one could also wonder why, if it is illegal to enter USA on a non-US passport if one is born in the USA(and has no CLN), then why make this a restriction part of the criteria for meeting the proposal requirements to renounce?
Its like saying that only those so-called ‘accidentals’ who crossed the border illegally on a non-US passport or never visited USA at all can renounce. Those that followed the passport laws, get screwed.
It seems like the are trying to accommodate the ones who MIGHT not have known they were US citizens, even though many that did will still meet the proposed criteria as long as they did not follow the passport laws.
Weirdly illogical – but what else is new eh?
I don’t think my last comment made any sense at all – kind of like this proposal.
@WhatAmI, If you are correct, then everyone who ever had a US passport just has to say they got it because they were required to according to US law (no coercion by border guards necessary).
WhiteKat,
Your post made perfect sense. You are describing my situation. Under this proposal, if passed, I will be screwed. I found out later in life (18) that I was an accidental American by a USA border guard who scolded me for not knowing I was American and not having an American passport. I was entering the States to visit our relatives. My parent had their American passport and I had my Canadian passport as I was born and raised in Canada. That day I found out I was technically American at birth in Canada. I was instructed to go and apply for a passport. I did this because I wanted to follow the law and not get into trouble the next time I crossed the border. By getting a passport, in no way did I agree to, endorse, or ask to be a citizen. I am an accidental. But because I followed the law I am not eligible for this potential program. While I am sure there are many others who knew they were accidental Americans, hide in the shadows, and will be eligible for this program. I don’t blame those people. I blame the USA government for drafting legislation that punishes people who follow the rules as dictated to them as I was by a USA customs officer. MAKES NO SENSE. I should be eligible for this program because I am an accidental who didn’t know I was forced American citizenship until I was an adult (18). Obtaining a passport to enter the USA doesn’t mean I wanted my citizenship. I know I am ranting but your post describes my situation to perfectly!!
@ WhiteKat @Schubert1975
When I read this initally I thought maybe the intent was to recognize that you might need a passport to move elsewhere in the world. However as others in this thread have mentioned, it could also be an error, missing the “entering” part (the law refers to both as WhatAmI has pointed out), and recognizing that people were forced to get US passports “for the sole purpose” (key words, I think) of entering and departing the US, having another passport for travelling in the rest of the world. WhiteKat brings up some good points favouring this interpretation.
Well, the proposal is either “exiting” or “exiting and entering”.
The proposal describes a subtle change to tax law, not citizenship law. The people who fit the proposal are still considered by the US as US citizens. It seems to single out specifically those US citizens who hardly knew they were USCs, who never acted as USCs throughout their lives, and don’t care to retain their USC, and in fact are going to relinquish their USC within 2 years after the law comes into effect (or after they discover they are USCs).
Why the 2 year limit?
The proposal is tax relief for US persons who have lived outside of the US for their entire adult lives. In a way, you could say that the proposal gives a nod to RBT taxation by letting these people be taxed as non-resident aliens, but only if they first relinquish their USC. You could twist that around and say that the IRS is in a way back-dating the relinquishment by taxing them as NRAs! The proposal does NOT suggest that such people can go on indefinitely filing NRA tax returns; they must relinquish (renunciation is but one form). At first I thought the 2-year limit was strange, but I get it now, but…
There are glaring omissions in the proposal, if the intent is as I’m guessing. They’re letting Accidental Americans off the hook for 5 years of taxation on world-wide income if such people haven’t lived in the US (my interpretation of the intent), but their only other mentioned criteria is tied to holding a passport. What about voting, and seeking aide from US comsolates around the world? These things are the benefits of US citizenship that they use as justification for ongoing citizenship-based taxation, yet the only thing this proposal mentions is the passport. Shhhh, don’t tell them they missed some restrictions.
It’s too bad the 6 point proposal wasn’t decribing a condition of _relinquishment_ for born-dual citizens. That would be grand! Well, US$2.350 grand, to be exact, as most people benefiting from this proposal will have to pay US$2350, which will generate more money than the tax cut will lose (which is clearly not going to be $403 million).
The proposal mentions “or the date on which the individual learns that he or she is a U.S. citizen”. I suggest that anybody who has or has had a consulate appointment to claim a past relinquishment but is denied, only found out that they are a USC on the date they receive their denial letter. The DoS denial is documented proof of that.
@Phil and Heartsick, it did? Now I am really confused.
@Heartsick, your initial interpretation could be right though. Maybe they are trying to exclude only the people who actively BENEFITED by using a US passport to travel to NON-US COUNTRIES (not those who used it to travel to the US because it is US law to do so). Like for example, you were afraid you might run into trouble and need rescuing and figured that your US passport was a better passport to travel on than your Canadian one(yeah right) in which case you deserve to pay taxes!
@WhiteKat,
Yes, your example is exactly their justification for CBT, and why it makes sense that this proposal tries to exclude people who benefited from US citizenship.
Your example hits upon the reason why the IRS has a different definition of the date when one gives up USC. There was a long-standing loophole where expats stopped filing taxes, but didn’t notifiy the DoS of their relinquishment. They kept USC as a saftey net in that they could renew their passport at any time if they needed US protection (from an embassy, for example). These abusers would eventually show up at a consulate to claim a back-dated relinquishment and not have to pay taxes for those years!
One thing for sure is that we need some clarification from the American government on condition #4. If it does exclude people who were told to get passports after learning later in life (me 18 years old) that we were American, that is absolutely stupid.