As John Richardson calls it, the US’ confiscatory tax on a covered expatriate’s pension in their home country is indeed “a particularly difficult and unfair aspect of renouncing US citizenship.” This policy is very egregious as it concerns tax on income that hasn’t even been received yet by the person and which has no connection to the US in the first place. It’s a serious potential problem to beware of in planning your renouncing/relinquishing. (Posted with permission.)
To see examples of the deemed income inclusions and the U.S. tax owing click on the links to Appendices, B, C and D below.
Outline And Structure
This post is for the purpose of alerting Americans abroad and their advisors to a particularly difficult and unjust aspect of renouncing U.S. citizenship. The punitive treatment of the non-U.S. pension is a reason for many Americans abroad to consider renunciation earlier (when they are not “covered expatriates”) rather than later (when they may be subject to the confiscatory rules applied to “covered expatriates”).
Part I – Introduction – The General Message
Part II: Relinquishment and the confiscatory case of the “ineligible” (non-U.S.) pension … A Deeper Dive
Part III: Relinquishment and the retention of the “eligible” (U.S.) pension … A Deeper Dive
Part IV – Conclusion
Appendix A – How Internal Revenue Code Sections 877A and 877 Lead To The Confiscation Of The Non-U.S. Pension
Appendix B – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation
Appendix C – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation with a $100,000 tax credit carry forward
Appendix D – Dual Status tax return with (1) a full actual distribution of the pension in Canada on the day before expatriation (generating a foreign tax credit in the current year)
Part I – Introduction – The General Message
The warning! Some Americans abroad who renounce U.S. citizenship can expect to have punitive taxation imposed on the value of their non-US pensions. This is a tax imposed by a “deemed distribution” (not actual) of the the pension. Because there was no “actual distribution” those affected will need to find another source of funds to pay the tax. Significantly, the tax does NOT apply to U.S. pensions. Those renouncing who have U.S. based pensions may NEVER be taxed on the value of those pensions.
Once an individual’s net worth reaches 2 million USD, that individual is generally subject to this tax. This means that renunciation may become very costly. Americans abroad with non-US pensions and their advisors should be aware of (and plan around) this problem.
In this post I am joined by CPA Olivier Wagner who has generously provided excerpts from mock U.S. tax returns which demonstrate how confiscatory the U.S. Exit Tax rules are when applied to non-U.S. pensions (and therefore to Americans abroad). You will find his returns in Appendixes B, C and D at the end of this post.
The mock tax returns show that a U.S. citizen living outside the United States who:
– is a “covered expatriate”
– has a non-U.S. pension with a present value that includes a taxable amount of $1,000,000 USD
will be subject to an immediate tax of $344,963 triggered by renunciation of U.S. citizenship.
Because this tax is NOT imposed on those with U.S. based pensions, this tax applies disproportionately to Americans abroad, who earned their pensions while living outside the United Sates.
Thank you, Mr. John Richardson and all others who are trying to fight this.
RENOUNCE x 100.
Read it until my eyes started to glaze over.
And of course, all subject to change on a whim by the US government, so don’t forget your crystal ball when planning.
My young lady friend was 9 when I first realised the sheer scale of this issue in 2010 when you-know-what was announced. I was told to not worry about because this would be sorted out long before she’s a taxpayer. Well, she’s 21 now and the issue, if anything, has got worse with no acknowledgement from the USA that the core issue is the US taxation of other nations residents and citizens and that no amount of carveouts is going to fix the problem.
And worse, in my opinion, virtually zero pushback from other nations who continue to prefer to fight those who complain rather than stand up to the USA.
I agree, if at all possible, renounce.
Nobody should have to live with this abomination over their heads.
Why would a person who renounced bother to file an exit tax return that created this sort of liability for them? They would simply renounce and get on with their lives. The exit tax is easily avoided by anyone without US assets.
I feel that for quite a few people, yours is a good option. But it’s not an option for all. So, it’s important people know about this egregious tax and plan accordingly. And, of course, make their own decisions on what they will personally do about their own renunciation and tax matters. As Calgary411 has often said, people should read, read, read, ask questions, and make the decision/s they are most comfortable with in their situation.
I took a good look at Form 8854 years ago when all this hit the fan. I vowed right then and there that I would never file one of those abominable forms and my opinion has not changed one iota. None of what they ask for is any of their business and the only way they could know is if people are dumb enough to tell them.
An “exit” tax on assets that were accumulated outside of and were never in the US in the first place? Give me a break. What a disgusting, pathetic joke.
You sum it up, maz57.
The strange thing is, why can’t those who are writing this crap see that? What part of their moral clock broke here, does it just need a rewind?
As to ignoring these demands, it has become clear to me that many people simply can’t, they are not wired like that. Like the people in the infamous video of some Dutch folk getting screwed for thousands of dollars, they just follow the rules. Some don’t want to be covered expats, they want to be completely free and clear.
And I for one can see their worry that the US might just one day find a way to enforce this, it’s not as if we have seen governments all over the globe stand up to US taxation piracy so far, is it?