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
A good question . No one knows the answer.
If you aren’t in the IRS system already, ( i.e. you haven’t been filing), most probably nothing would happen. When you renounce, State sends what info they have to IRS. However IRS have no way to know what to do with it .
If you are in the system, and are compliant, you may or may not be liable to an exit tax. The exit tax is based on capital gains and there is a basic exemption.
If you are in the system and choose to not file the expatriation form 8854 you are then a covered expat. If you have no ties to the US, then the likelyhood that anything dire would happen approaches zero. I disagree with Medea. The Reed amendment has only been applied a handful of times and requires that IRS has assessed you for tax.
If you are a covered expat and leave an inheritance to heirs in the US there is a chance the heirs might be liable for a tax on the inheritance.
Clear as mud?
Ms CLIT
Even though your assets may be over $2,000,000, you are allowed to have made $650,000 on unrealized gains before having to pay an exit tax. You can also gift assets while still a US citizen to avoid covered status.
There are other considerations for covered expats that should be considered carefully.
https://hodgen.com/gifts-bequests-inheritances-and-expatriation/
https://hodgen.com/estate-tax-for-noncovered-expatriates/
If you have no intention of traveling to (or over) the US in future you may be safe.
PS ms CLIT
https://hodgen.com/make-big-gifts-year-expatriating/
The only thing you need to know about the Reed Amendment at this point is to not mention taxes when you renounce.
DoD: “If you are in the system and choose to not file the expatriation form 8854 you are then a covered expat.”
Hodgen says:
https://hodgen.com/who-files-form-8854-and-what-if-youre-late/
In any case, by the time 8854 is due, you’re a NRA. You don’t have any legal obligation to file US tax forms of any kind.
Only file 8854 if think it’s in your interests to do so, would be my advice. (If you expect to visit/fly over the US, or have US assets or income or heirs.)
Um, @Heidi, it was “Ms. LCIT” not “Ms. CLIT”! I trust that was a straight-up typo rather than a Freudian slip.
Also, regarding “you might be stopped and held at the US airport until you pay up” – from what we know, that does not happen today. If things were so bad that the IRS had brought criminal charges against you, then you might be detained on entry, but simply collecting fines or forcing payment of tax debt is not something that border officials have any ability to do.
The other points about consequences are basically correct. The risk is related to where your assets are, whether the US knows about them, where you live and have citizenship, etc. It’s by no means obvious that the IRS could figure out what’s owed, let alone collect any of it.
@nonymous
Oops, I would like to think it was a typo, but twice must involve Freud!
The exit tax isn’t the only issue with being a covered expat. The US also treats ALL of your retirement plan assets as distributed to you and taxed as ordinary income in the year you renounce.
@Edelweiss
Yes, that’s another kick in the pants.
https://hodgen.com/covered-expatriates-and-their-iras-after-expatriation/
Hi,
Thx for your responses. I have a followup question. If one is a covered expat with net worth of over $2 million but has all cash which has been paid taxes on already under annual tax filings over the past and hence not taxable under the capital gains tax “Exit Tax” then how does it matter if one make a gift to reduce the Net Worth below the $2 million level or not???
Thx
Ms. LCIT
all cash? no pension? In that case, it wouldn’t matter AFAIK. One would presumably file 8854 showing zero capital gain and no tax owing. I could be missing something. It isn’t possible for anyone to understand the code completely.
@Ms LCIT
If “all cash” then even as a covered expat you should be unaffected by both the ‘deemed’ capital gain (exemption of well over $600k) or the ‘deemed’ pension distribution part (no exemption, making this about the most evil part of the current exit regime, but you’re really “all cash”, right?) of the exit tax.
You would however still be technically hindered by the section 2801 tax on US person recipients of gifts and bequests from covered expats. I say technically because it seems to me to be trivially bypassable, at least for gifts — simply ‘launder’ them first through anyone who isn’t a covered expat (perhaps an amenable spouse?).
Beyond that there is still the Reed Amendment and perhaps any future nonsense such as the currently shelved (not to mention very creepy) ‘Ex-PATRIOT‘ act to consider. But these are mostly toothless congressional bluster, and of course are entirely non-issues if you have no intention of returning to the US in future.
Ms LCIT
No, it should not matter unless you have US heirs to your estate. In which case the estate will be taxed at the highest US rate, before they inherit(after your resident country take their share.) Currently the US Estate and gift tax form does not ask the question ” was the estate from a covered expat?” The
responsibility is on the inheritors to declare this otherwise penalties are bestowed.
https://hodgen.com/gifts-bequests-inheritances-and-expatriation/
@Ms. LCIT
Phil Hodgen touches on the all cash situation here (as well as the estate and gift implications of being a covered expatriate): https://hodgen.com/death-and-taxes-and-expatriation/
@tdott
Do you have Phil Hodgen’ follow up’ at the end of that post that he promised in 2weeks. “2801 what to do”.
I can’t find it.
Thanks
@Heidi
The 2 week followup (Nov 22 2016) would be this: https://hodgen.com/estate-tax-for-noncovered-expatriates/
Seems to talk some about 2801.
@Heidi
Also worth noting that the IRS still has not finalised or implemented the section 2801 regulations, nor issued the threatened form 708, despite the exit tax law being close to a decade old at this point.
It is almost like they as aware as the rest of us that it is both largely unenforceable and also economically self-destructive, isn’t it?
Senat and House passed separate incredibly complex tax bills with zero input from IRS or other experts on how difficult it will be to implement the changes. At the same time they reduce the IRS budget every year. Little wonder the IRS is beleaguered.
@Watcher
Absolutely. If that is enforced and my kids are still US citizens, there will be a few charities that will benefit instead. My kids have already had the benefit of their education.
@Tdott Thanks.
@ DoD
I find myself feeling not too sad that the IRS is beleaguered. Maybe they’ll even forget where they’ve stored those cargo containers full of FBAR forms (prior to the mandatory e-filing). I even hope the FBAR and FATCA computers seize up someday. Congress, Treasury and IRS have built a Jenga tower of tax regulations and I want to see someone or something pull a key piece out to make it tumble.
@Heidi
You can give money to your kids tax-free when they are still US citizens as long as they are non- or partially compliant while living in Australia. Paying US taxes would be a voluntary act on their part.
@EmBee
Exactly, they don’t need the Russians to bugger America when they have Congress and Treasury doing it.
Nononymous
Yes, if they are under the radar.
My kids are in the US. They had money given to avoid covered status on one of us while we were still US citizens.
@Heidi
Apologies, I had you completely mixed up with someone else.
NB@ Ms LCIT
You mentioned that your estate was all cash, no pension, but does it contain a house? If you are covered (over 2,000,000) then the gain in the price of the house would also be taken into account in the $650,000 allowance before the exit tax kicks in.
This is certainly a consideration for people in places such as London, Vancouver, Sydney etc