# 1099C for Ex-citizens



## alinary007

Let's say that someone successfully renounces their US citizenship after settling in a foreign country and obtaining citizenship there. A few years later, their federal student-loans are forgiven under a 20/25-year income based repayment plan and, as per current law, the amount that's been forgiven is considered taxable by the IRS. As a non-citizen and non-resident, is this person still responsible to the IRS for paying that tax bill? Is it considered US-based "income" that, no matter what one's nationality, a non-citizen is obligated to pay?


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## alinary007

A simpler way of asking this is: Does a US foreigner and non-resident have to pay taxes on forgiven debt that originates in the United States, specifically from the US government?


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## Nononymous

A few thoughts here. You are talking about the very amusing loophole/scam by which a person living outside the US can have their entire student loan excused, if they have the right sort of loan.

The way this works is that for any loans covered by the income-based repayment program, you would have no payments if your income is zero - but not your employment income, your "Adjusted Gross Income" (AGI). For a non-resident claiming the FEIE, the AGI is what's left over after applying the exemption (currently $107k). In other words, an American living somewhere else can earn up to $107,000 and not pay back any student loans that qualify for IBR. (The stimulus benefit works the same way, incidentally. Anyone with an AGI below $75k qualifies for the full benefit; a non-resident using the FEIE can earn up to $182,000 and still receive a cheque.) After the loan term, 20 or 25 years or whatever, the student loan goes away. The amount forgiven is however considered to be taxable income in that year. I don't know offhand if that is loan principal, loan interest, or both.

On to your question. For this to work, you must be filing US tax returns and claiming the FEIE. So presumably you cannot renounce US citizenship until the loan term expires. No idea what would happen if you renounced and filed your exit return when you still have X years of loan term left. Would you only have X years' loan payments to make, or would the whole exemption just fall apart? Possibly no-one has ever tried to find out.

Next, the taxable benefit of the loan amount wiped out. If you renounce, doing so ends all future US tax obligations, but does not wipe out past obligations. So if you waited to renounce until after the loan term ended, you'd probably still be on the hook for the money, but maybe not, depending on timing. As you'd likely be the first to do this, you'd be setting a precedent. Could you renounce just before the end of the loan term, make a few payments and walk away cleanly? Your guess is as good as mine.

Obviously the point of this exercise is to avoid paying back a student loan. No moral judgement here, just treating it as a value-neutral personal finance problem. If you move abroad, there are different ways to achieve this goal:

stop making loan payments; lenders will harass you from afar but they can't do much else, provided your family didn't co-sign anything of course (do some research - there are people living abroad to dodge loans)
use the FEIE-AGI-IBR scheme to not make loan payments, then when the loan runs out, pay a substantial US tax bill (which is still much less than the loan) on the forgiven amount
use the scheme to not make loan payments, then when the loan runs out, renounce and ignore the ensuing US tax bill; if if you live outside the US there's probably not much the IRS can do to collect
If you're determined to pay nothing, it probably comes down to which debt would you prefer not to pay: a smaller one to the IRS or a larger one to a lender? Neither can really touch you if you are living outside the US (regardless of whether you are still a US citizen or not).


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## Bevdeforges

Then there is the simpler approach: the US doesn't really "check" much about those who renounce. There are those who renounced a few years ago but, because they are drawing US SS benefits, have received the $1200 and $600 Covid relief payments. Heck, there are plain old non-citizens drawing US SS benefits from outside the US who have received the payments.

One factor to consider is whether or not you have significant financial assets back in the US that could be "attached" if the IRS decided that your debt to the US tax system is worth their while. But otherwise, debt forgiveness isn't necessarily considered income (or taxable income) in all tax systems.


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## Moulard

Nononymous said:


> A few thoughts here. You are talking about the very amusing loophole/scam by which a person living outside the US can have their entire student loan excused, if they have the right sort of loan.


While we do not know the specifics of the student loan in question, some student loans (generally any federal loans subsidized or not) have a condition of eligibility, that the student must be a US Citizen, Permanent Resident or an otherwise eligible non-citizen. Contractually at least, this means when someone expatriates they are likely no longer eligible and such an event would likely result in a need to refinance the loan in order to payout the balance.

Assuming that the individual in question did not have a loan with such an eligibility requirement, then from an income perspective, assuming that the person in question was now a citizen of Spain, they would have the benefit of not being saddled with the odious savings clause and could therefore take advantage of the Other Income Article of the US-Spain tax treaty - .

Article 23 Paragraph 1. reads...



> Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.


I don't have time to dig out the technical memorandum for the model treaty from the time, but a superficial reading would suggest that if the loan forgiveness was considered income then according to the treaty it would only be taxable by Spain (assuming Spain also treated loan forgiveness as income)


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## NickZ

Moulard said:


> I don't have time to dig out the technical memorandum for the model treaty from the time, but a superficial reading would suggest that if the loan forgiveness was considered income then according to the treaty it would only be taxable by Spain (assuming Spain also treated loan forgiveness as income)


Loan forgiveness could be considered a capital gain.


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## alinary007

Thanks for all these replies. Obviously, these are ultimately questions for a tax lawyer, but I'm learning a lot here already.



Nononymous said:


> A few thoughts here. You are talking about the very amusing loophole/scam by which a person living outside the US can have their entire student loan excused, if they have the right sort of loan.


I wasn't talking about this explicitly, but I happen to be quite familiar with it.



Nononymous said:


> On to your question. For this to work, you must be filing US tax returns and claiming the FEIE. So presumably you cannot renounce US citizenship until the loan term expires. No idea what would happen if you renounced and filed your exit return when you still have X years of loan term left. Would you only have X years' loan payments to make, or would the whole exemption just fall apart? Possibly no-one has ever tried to find out.


True, renunciation would have to be done in the short window between being forgiven for the loan and the next tax year. Or if that's not really feasible, then a few months or a year before the 20/25 year expiration: pay the last few months according to the terms set by the IBRP (if you're even legally obliged to re-certify as a non-citizen / non-beneficiary of the FEIE in that short time), and by the time the tax bill comes you're already SSN-free.



Nononymous said:


> No moral judgement here


No further comment.



Nononymous said:


> use the scheme to not make loan payments, then when the loan runs out, renounce and ignore the ensuing US tax bill; if if you live outside the US there's probably not much the IRS can do to collect





Bevdeforges said:


> then there is the simpler approach: the US doesn't really "check" much about those who renounce.


This would be a much riskier approach for this person, but perhaps feasible, especially since they hypothetically no longer have assets / business in the United States. A question here would be, can the IRS freeze or seize upon FACTA-compliant foreign bank accounts? (This is a pure hypothetical and merely an attempt to understand the reach of the law).



Moulard said:


> While we do not know the specifics of the student loan in question, some student loans (generally any federal loans subsidized or not) have a condition of eligibility, that the student must be a US Citizen, Permanent Resident or an otherwise eligible non-citizen. Contractually at least, this means when someone expatriates they are likely no longer eligible and such an event would likely result in a need to refinance the loan in order to payout the balance.


This is important. Thanks for bringing it up. If so, it would bear upon the time of renunciation vis-a-vis loan forgiveness date vis-a-vis tax year.

Also, the tax treaty between the US and X government is obviously crucial.

Another thing to consider might be taking the insolvency route rather than renunciation. My question here is this: If a non-resident files for insolvency in order to offset the money they owe on a cancelled debt in the United States, is their net worth calculated on their global assets, or only their assets in the United States? This would make a significant difference for a person who no longer has any ties to the country.

¡Muchas Gracias!


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## alinary007

NickZ said:


> Loan forgiveness could be considered a capital gain.


It could be. But, for an individual, I don't believe that it is.


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## Bevdeforges

alinary007 said:


> and by the time the tax bill comes you're already SSN-free.


Just one small point - you will never be "SSN-free" - as you keep your original SSN no matter your citizenship status. But you also keep your right to SSN retirement benefits if you worked for long enough back in the US before you left. You'll be subject to NRA withholding (i.e. taxes) at the 30% rate on your benefit (though actually only on 85% of the benefit) - but depending on your circumstances when you do retire, you really don't want to forget about that.


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## Nononymous

alinary007 said:


> A question here would be, can the IRS freeze or seize upon FACTA-compliant foreign bank accounts?


In a word, no.

Remember too that after renouncing, one can march down to the bank and produce the CLN (or even the receipt for the fee paid) and, in theory at least, the account ceases to be FATCA-reportable from that point forward.

PS on edit:

Since I really doubt that anyone has attempted this - first reports of the loophole date back 5-10 years and we're talking 20-25 year loan terms - this is all pure speculation on everyone's part. Two further thoughts:

One, I recall seeing mentioned a condition of IBR that disqualified someone using the program in an obviously "fraudulent" way. Using FEIE to disappear a student loan while earning $100,000 per year could be deemed non-kosher if it came to the right person's attention.

Two, the idea that one could renounce near the end of the loan term then file the exit return before the forgiven amount is counted as taxable income does rely on sneaking a fast one past the IRS. They could just as easily consider that a "past" tax obligation pre-dating renunciation. Whether they can collect is of course a different matter, but I might not want to continue visiting family in the US if I had a five- or six-figure tax debt hanging over my head, even as an ex-citizen.

In other words, while this might potentially be doable, it's unusual enough that one runs the risk of poking the bear.


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## Nononymous

alinary007 said:


> It could be. But, for an individual, I don't believe that it is.


From what I saw, that loan forgiveness is regular income, not capital gains.


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## alinary007

Nononymous said:


> Remember too that after renouncing, one can march down to the bank and produce the CLN (or even the receipt for the fee paid) and, in theory at least, the account ceases to be FATCA-reportable from that point forward.


Could you explain this? I'm not familiar with it. A CLN as in a credit derivative? What's that have to do with FACTA?


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## Nononymous

alinary007 said:


> Could you explain this? I'm not familiar with it. A CLN as in a credit derivative? What's that have to do with FACTA?


Certificate of Loss of Nationality. It's the piece of paper you pay $2350 for - proof that you've renounced or relinquished US citizenship. Without it a bank won't likely accept your request to not have accounts reported under FATCA.


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## alinary007

Nononymous said:


> One, I recall seeing mentioned a condition of IBR that disqualified someone using the program in an obviously "fraudulent" way. Using FEIE to disappear a student loan while earning $100,000 per year could be deemed non-kosher if it came to the right person's attention.
> 
> Two, the idea that one could renounce near the end of the loan term then file the exit return before the forgiven amount is counted as taxable income does rely on sneaking a fast one past the IRS. They could just as easily consider that a "past" tax obligation pre-dating renunciation. Whether they can collect is of course a different matter, but I might not want to continue visiting family in the US if I had a five- or six-figure tax debt hanging over my head, even as an ex-citizen.
> 
> In other words, while this might potentially be doable, it's unusual enough that one runs the risk of poking the bear.


1. It's definitely a grey area, but it would seem to me that if they ask for a person's AGI to determine their monthly payment, and they provide their AGI as truthfully reported on their taxes, they're not in too much danger of "fraud." Will either Congress or the "right person" at the loan provider ever catch up on their poorly-constructed law? That's a different story. My guess is, yes, probably.

2. Whether they consider it a "pre-" or "post-" renunciation obligation hardly matters in this case, since whether a person is a nonresident citizen or a "nonresident alien" (to use IRS jargon), income originating in the United States is considered taxable. You owe it either way. In fact, now that I think about it a bit more I'm not even sure that renunciation plays to this person's favor...

Thanks for explaining the CLN acronym.


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## Moulard

NickZ said:


> Loan forgiveness could be considered a capital gain.


According to Treasury Regulations Income from discharge of indebtedness is its own separate class of gross income. 

While income can be attributed to more than one class of income, in this case I don't think that would be the case.


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## Nononymous

alinary007 said:


> 2. Whether they consider it a "pre-" or "post-" renunciation obligation hardly matters in this case, since whether a person is a nonresident citizen or a "nonresident alien" (to use IRS jargon), income originating in the United States is considered taxable. You owe it either way. In fact, now that I think about it a bit more I'm not even sure that renunciation plays to this person's favor, _unless _foreign FACTA-compliant bank accounts can somehow be touched by the IRS.


That does make sense actually. 

As I said, I doubt anyone has actually attempted this yet.


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## NickZ

Moulard said:


> According to Treasury Regulations Income from discharge of indebtedness is its own separate class of gross income.
> 
> While income can be attributed to more than one class of income, in this case I don't think that would be the case.


I wasn't thinking about the US but the new home country. The unnamed new country may treat things differently.


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## Nononymous

NickZ said:


> I wasn't thinking about the US but the new home country. The unnamed new country may treat things differently.


Anyone brave/sketchy enough to FEIE their way out of a US student loan is probably brave/sketchy enough to not declare the amount forgiven as income in their country of residence.


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## Moulard

NickZ said:


> I wasn't thinking about the US but the new home country. The unnamed new country may treat things differently.


Indeed. Every country will treat this slighly differently. 

In Australia, for example, commercial debt forgiveness rules are such that a CGT event is deemed to occur if all or part of the interest payments on the debt would have been tax deductible. 
In the case of a student loan, however, loan interest would not generally tax deductible as an education expense and thus no such CGT event would therefore occur.


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## Bevdeforges

Normally, the way they tax foreign residents on US source income is by withholding the NRA tax rate of 30% on all remittances paid out to known foreigners. When it comes to debt forgiveness, since there is no actual transfer of funds, there isn't really any way they can take their 30%. This would seem to favor the path of renouncing first and then doing whatever to have the loan forgiven. Once you're out of the clutches of the IRS there isn't much they can do - though it does depend a bit on how you fill out that 8854 form.


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## alinary007

NickZ said:


> I wasn't thinking about the US but the new home country. The unnamed new country may treat things differently.





Nononymous said:


> Anyone brave/sketchy enough to FEIE their way out of a US student loan is probably brave/sketchy enough to not declare the amount forgiven as income in their country of residence.





Bevdeforges said:


> Normally, the way they tax foreign residents on US source income is by withholding the NRA tax rate of 30% on all remittances paid out to known foreigners. When it comes to debt forgiveness, since there is no actual transfer of funds, there isn't really any way they can take their 30%. This would seem to favor the path of renouncing first and then doing whatever to have the loan forgiven. Once you're out of the clutches of the IRS there isn't much they can do - though it does depend a bit on how you fill out that 8854 form.


Reflecting on it some more, I think the best solution is actually to renounce citizenship (if at all) _after _filing taxes the year that you owe the COD income. Here's why: Assuming that the country that this make-believe person is living in has a standard tax-treaty with the United States, e.g. France or Spain, they're eligible for a tax credit on their French taxes equal to the amount that France would have taxed them on their US-originating COD income if they didn't also file_ a _1099C in the United States, which this person must also do. In other words, with the dual citizenship, one can legally write off the COD income in one's country of residence merely by filing to pay the tax in the United States. Then it simply becomes an issue between you and the IRS, i.e., you've fully complied with tax law in your country of residency, _and_ with the USA -- pending your payment. Obviously, one would have to pay that tax in order to go through with renunciation, but at this point there's hardly any reason to renounce at all (which is not to say suggest that this person shouldn't comply with the US law, but merely to point out that renunciation both requires it and doesn't do anything to absolve you of it, in this situation). This also addresses the condition of citizenship for continued loan eligibility.


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## Nononymous

Bevdeforges said:


> Once you're out of the clutches of the IRS there isn't much they can do - though it does depend a bit on how you fill out that 8854 form.


If they fill out the 8854...

Not sure if you saw this, but the IRA essentially admitted that 40 percent of renunciants don't file 8854 properly, and they don't have the resources to follow up:



https://www.treasury.gov/tigta/auditreports/2020reports/202030071fr.pdf


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## Nononymous

alinary007 said:


> Obviously, one would have to pay that tax in order to go through with renunciation, but at this point there's hardly any reason to renounce at all (which is not to say suggest that this person shouldn't comply with the US law, but merely to point out that renunciation both requires it and doesn't do anything to absolve you of it, in this situation).


Be aware that it is not necessary to be in tax compliance before, during or after renouncing US citizenship. One does not need to prove that all tax bills have been paid in order to successfully lose US citizenship.

I'm not sure I follow the rest of the argument, but I'm pretty sure that this made-up person would be a pioneer.


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## Bevdeforges

Nononymous said:


> If they fill out the 8854...
> 
> Not sure if you saw this, but the IRA essentially admitted that 40 percent of renunciants don't file 8854 properly, and they don't have the resources to follow up:
> 
> 
> 
> https://www.treasury.gov/tigta/auditreports/2020reports/202030071fr.pdf


I was trying to be subtle about it. (They train you to do things like that when you're a CPA/auditor - never advise anyone to simply NOT do a filing they're "supposed" to do. But not bothering is certainly one approach to "how" one files a form.)


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## Nononymous

Bevdeforges said:


> I was trying to be subtle about it. (They train you to do things like that when you're a CPA/auditor - never advise anyone to simply NOT do a filing they're "supposed" to do. But not bothering is certainly one approach to "how" one files a form.)


Oh I know, I said it for the benefit of others. 

A funny thing is that there's no penalty for being "late" with an 8854, and covered expat status cannot be determined without an 8854, so if one were to procrastinate indefinitely...


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## Bevdeforges

Nononymous said:


> Oh I know, I said it for the benefit of others.
> 
> A funny thing is that there's no penalty for being "late" with an 8854, and covered expat status cannot be determined without an 8854, so if one were to procrastinate indefinitely...


The other thing to take into account is what financial assets you have sitting in the US - primarily things like an IRA or similar sort of deferred tax arrangement. Something like that would be "available" for seizure if the IRS were to get aggressive about these matters. Not horribly likely - but something to bear in mind. The fewer "available" accounts you have in the US, the safer you are from that sort of thing.


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## Nononymous

True, though presumably anyone who fled the US to neutralize a student loan won't have built up much of an IRA prior to departure.


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## alinary007

I'm learning a lot here.



Nononymous said:


> Not sure if you saw this, but the IRA essentially admitted that 40 percent of renunciants don't file 8854 properly, and they don't have the resources to follow up:
> 
> 
> 
> https://www.treasury.gov/tigta/auditreports/2020reports/202030071fr.pdf


On the topic of being understaffed, I just did a little research into the FEIE situation to see whether any changes might come from that "right person" at the loan servicer.

One prominent loan servicer -- a "non-profit," of course -- employs a total of 1,800 people. They also report to service 10,000,000 clients. My guess is that, once you subtract the corporates and janitors, there's about one "right person" for every 8k-10k borrowers, and a whole lot of CPU churning out automatic certifications of tax forms.


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## Moulard

Nononymous said:


> Not sure if you saw this, but the IRA essentially admitted that 40 percent of renunciants don't file 8854 properly, and they don't have the resources to follow up:


From the 2018 data book

$250 million tax and information returns (across all categories of returns)
$4.3 billion Operational Support budget (ie just the staff and equipment to support tax administration)
= $17 per tax return.

The IRS barely has resources to keep the lights on.


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## Nononymous

alinary007 said:


> I'm learning a lot here.


Welcome to your one-stop non-compliance shop!


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## rollerskatez

alinary007 said:


> Let's say that someone successfully renounces their US citizenship after settling in a foreign country and obtaining citizenship there. A few years later, their federal student-loans are forgiven under a 20/25-year income based repayment plan and, as per current law, the amount that's been forgiven is considered taxable by the IRS. As a non-citizen and non-resident, is this person still responsible to the IRS for paying that tax bill? Is it considered US-based "income" that, no matter what one's nationality, a non-citizen is obligated to pay?


It looks like from the renunciation webpage:





Renunciation of U.S. Nationality Abroad


Renunciation of U.S. Nationality Abroad




travel.state.gov





"If the Department of Homeland Security determines that the renunciation is motivated by tax avoidance purposes, the individual will be found inadmissible to the United States under Section 212(a)(10)(E) of the Immigration and Nationality Act (8 U.S.C. 1182(a)(10)(E)), as amended. Renunciation of U.S. citizenship may not prevent a foreign country from deporting that individual to the United States in some non-citizen status. "

So, unless someone is OK never returning, has no familial ties, it isn't a viable option. 
It's a rough place to be in, for sure. US student loans are life-crushing.


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## Nononymous

rollerskatez said:


> It looks like from the renunciation webpage:
> 
> 
> 
> 
> 
> Renunciation of U.S. Nationality Abroad
> 
> 
> Renunciation of U.S. Nationality Abroad
> 
> 
> 
> 
> travel.state.gov
> 
> 
> 
> 
> 
> "If the Department of Homeland Security determines that the renunciation is motivated by tax avoidance purposes, the individual will be found inadmissible to the United States under Section 212(a)(10)(E) of the Immigration and Nationality Act (8 U.S.C. 1182(a)(10)(E)), as amended. Renunciation of U.S. citizenship may not prevent a foreign country from deporting that individual to the United States in some non-citizen status. "
> 
> So, unless someone is OK never returning, has no familial ties, it isn't a viable option.
> It's a rough place to be in, for sure. US student loans are life-crushing.


There's not much evidence that the US government has ever attempted to determine that someone renounced for purposes of tax avoidance. This would be silly - they are perfectly aware that 99 percent of the people who now renounce do so because of tax laws and/or FATCA.

It is indeed true that anyone who renounces gives up their _automatic_ right of entry to the US. But as there are few reports of ex-citizens being turned back at the border, it's obviously a risk worth taking for those who do renounce.


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## Moulard

My understanding is that the only time Section 212(a)(10)(E) is even considered is if someone actually states in their exit interview or is silly enough to put it in writing.


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