# Expat Tax Return



## xUSCAL (Dec 21, 2018)

My husband and me worked and lived in US for over 30 years. Long story short, we retired back in birth country which disallows dual citizenship so we're forced to renounce US citizenship recently in October. My understanding is that we need to file dual returns for 2018 - a 1040 from Jan to Oct 2018, and a 1040NR for last 2 months. However, I also read on this forum that you could just file 1040 for the whole year. How do I determine which is more beneficial? And will it increase IRS audit risk?
We didn't open a bank account here as we did not want to deal with FATCA, so we took the easy way out and transferred money into my (non-US citizen) daughter's account whenever we need - transfers added up to over US$100K. Do I need to report these transactions to IRS or anywhere else?
Currently we receive social security direct deposit to our US bank accounts. Do we need to file 1040NR to report it after expatriation (as in 2019 tax year and thereafter). Do we have to inform Social Security office about our expatriation?
If anyone can share their knowledge or experience on these topics, would appreciate it very much. Thanks.


----------



## Bevdeforges (Nov 16, 2007)

To be perfectly honest about it, you probably don't "need" to file the final US tax return at all. Unless you've got loads of money, the audit risk is minimal to non-existent once you've renounced.

However, on the Social Security side of things, your renunciation is one of those things they specifically require you to report - either spontaneously or when you get your "are you still alive" query (every two years). When you notify them of your renunciation, they will start withholding the 30% NR tax (on 85% of your benefit) automatically so you won't need to file any 1040NRs. 

The transfers should have been reported by the banks involved in the transfers, but no, they don't have tax consequences for you.


----------



## JustLurking (Mar 25, 2015)

ExpOct30 said:


> My understanding is that we need to file dual returns for 2018 - a 1040 from Jan to Oct 2018, and a 1040NR for last 2 months. However, I also read on this forum that you could just file 1040 for the whole year. How do I determine which is more beneficial? And will it increase IRS audit risk?


If this is an option for you, the simplest way to find out which route is the most beneficial is to do the forms both ways and use the one that generates the lowest US tax liability.

If electing full year, all your local earnings and investment gains from Oct to Dec will be US taxable even though you were no longer US citizens. If little or nothing here then electing full year may make no difference. On the other hand, if you (say) sold a home with a large capital gain between Oct and Dec that might be US taxable even though not locally taxable. In that case then, choosing the split year would clearly be better.

So which to use may not matter, but if it does then it will depend heavily on your own circumstances, and in particular what financial activities you undertook in Oct to Dec. I can't see any increased risk of audit either way on this.



ExpOct30 said:


> We didn't open a bank account here as we did not want to deal with FATCA, so we took the easy way out and transferred money into my (non-US citizen) daughter's account whenever we need - transfers added up to over US$100K. Do I need to report these transactions to IRS or anywhere else?


I suppose the possible problem here is that the IRS could construe this as a gift or a loan to your daughter. At minimum it sounds like structuring to avoid FATCA reporting.

As to what to do here ... if you transferred the cash before renouncing or elect full year and _really_ want to be squeaky-clean I guess you could report this on form 709 as a "taxable" gift. Filing this form won't actually generate any additional tax liability for you though, just burn a bit of your $11MM lifetime exclusion on gifts and bequests. But since you have renounced and won't be using any of the rest of it anyway, that won't matter at all to you -- just more pointless and zero-value paperwork for the IRS to process, and that's not your problem.

If you transferred the money after renouncing and chose split year, then the IRS has no business knowing about or poking into this transfer of funds at all.



ExpOct30 said:


> Currently we receive social security direct deposit to our US bank accounts. Do we need to file 1040NR to report it after expatriation (as in 2019 tax year and thereafter). Do we have to inform Social Security office about our expatriation?


What Bev said above, but with the added proviso that if you live in a country that has a tax treaty with the US, your US tax will probably be less than the standard 30% for non-resident aliens.

You can find the US withholding rates for treaty countries in this table from the IRS: https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1.pdf


----------



## Bevdeforges (Nov 16, 2007)

Just an additional note. Some tax treaties call for the country of residence to have sole taxing power over US social security payments. Which means you pay income tax only to the country of residence, not to the US. If you're in one of those countries nothing changes with renunciation (though you still should notify the US SSA at least on your "are you still alive" confirmation).


----------



## xUSCAL (Dec 21, 2018)

Bevdeforges said:


> To be perfectly honest about it, you probably don't "need" to file the final US tax return at all. Unless you've got loads of money, the audit risk is minimal to non-existent once you've renounced.
> 
> However, on the Social Security side of things, your renunciation is one of those things they specifically require you to report - either spontaneously or when you get your "are you still alive" query (every two years). When you notify them of your renunciation, they will start withholding the 30% NR tax (on 85% of your benefit) automatically so you won't need to file any 1040NRs.
> 
> The transfers should have been reported by the banks involved in the transfers, but no, they don't have tax consequences for you.


Thank you Bev, for the quick response. Actually I did a hefty withdrawal from our retirement plans (rollover IRAs) this year to make a downpayment on our new resident home here, which makes our income unusually high (about 24% bracket). For the past several years, we've been within the 10% tax bracket due to only social security payments. That's why I worry it may raise a red flag and increase audit risks, especially I read on some forum that last year IRS stepped up audits on international returns.

My husband still has about $400K left in his retirement plan, and he wants to cash out all next year. Is this a good idea - I guess my question is, will we have to pay tax at the 35% tax rate (for $400K-600K) or just the 30% tax for NRA? 

Also was wondering if we could somehow choose to file 1040NR and be taxed at the lower rate if we withdraw a little bit each year. We chose to retire early and thus our social security is really minimal. With the extra 30% withholding, it will make a huge dent to our income.


----------



## xUSCAL (Dec 21, 2018)

JustLurking said:


> If this is an option for you, the simplest way to find out which route is the most beneficial is to do the forms both ways and use the one that generates the lowest US tax liability.
> 
> If electing full year, all your local earnings and investment gains from Oct to Dec will be US taxable even though you were no longer US citizens. If little or nothing here then electing full year may make no difference. On the other hand, if you (say) sold a home with a large capital gain between Oct and Dec that might be US taxable even though not locally taxable. In that case then, choosing the split year would clearly be better.
> 
> ...




Talking of gift tax return, I have another quick question. I still own a condo in CA which was my primary residence until I left US in 2017 to retire here. My other daughter (who is still a US citizen) is now living in it. She is a preschool teacher and does not make much money living in a high cost of living area, so we want to give it to her to ensure a roof over her head at least. Question is : would either donor or donee have to pay gift tax? We paid about $255K back in 2014, it's probably worth about $450K now. I'm particularly worried about gift tax under Section 2801 (I believe it relates to expats, whereby donee might have to pay tax as high as 40%). Correct me if I am wrong. Or is there another way around it, like "selling" it to her (then she'll have to pay higher property taxes), Or putting it in a trust? (maybe too complicated?). Or maybe this rule does not apply to our situation hopefully, because we are not high net worth?

Another question: There is a non refundable tax credit of $500 for adult dependents under the newly passed tax package. My non-US citizen daughter has low to moderate autism and she lives in the same household with us. Can we claim her as our dependent for this new credit?


----------



## Bevdeforges (Nov 16, 2007)

ExpOct30 said:


> Thank you Bev, for the quick response. Actually I did a hefty withdrawal from our retirement plans (rollover IRAs) this year to make a downpayment on our new resident home here, which makes our income unusually high (about 24% bracket). For the past several years, we've been within the 10% tax bracket due to only social security payments. That's why I worry it may raise a red flag and increase audit risks, especially I read on some forum that last year IRS stepped up audits on international returns.


Depends what they mean by "stepping up" international audits. There have never been all that many of those except in rare circumstances, usually involving 7 figure incomes at a minimum.



> My husband still has about $400K left in his retirement plan, and he wants to cash out all next year. Is this a good idea - I guess my question is, will we have to pay tax at the 35% tax rate (for $400K-600K) or just the 30% tax for NRA?


Given that you've already renounced, next year (2019) you're only subject to NR taxes, so the 30% rate ought to do it.



> Also was wondering if we could somehow choose to file 1040NR and be taxed at the lower rate if we withdraw a little bit each year. We chose to retire early and thus our social security is really minimal. With the extra 30% withholding, it will make a huge dent to our income.


There is no choice - once you have renounced, you are taxed as a non-resident at NR rates. And that's on both your US SS and any IRA withdrawals (depending on how "pension benefits" are treated according to the tax treaty in your country of residence). If you're in Germany or the UK, for example, it's only your country of residence that taxes US pensions. If you're in France or another country where the US claims sole rights to tax your US pensions, you'll be taxed at the NR rates - and in fact will probably have the tax withheld before they remit the funds to you. (No need to file anything.)


----------



## Bevdeforges (Nov 16, 2007)

ExpOct30 said:


> Talking of gift tax return, I have another quick question. I still own a condo in CA which was my primary residence until I left US in 2017 to retire here. My other daughter (who is still a US citizen) is now living in it. She is a preschool teacher and does not make much money living in a high cost of living area, so we want to give it to her to ensure a roof over her head at least. Question is : would either donor or donee have to pay gift tax? We paid about $255K back in 2014, it's probably worth about $450K now. I'm particularly worried about gift tax under Section 2801 (I believe it relates to expats, whereby donee might have to pay tax as high as 40%). Correct me if I am wrong. Or is there another way around it, like "selling" it to her (then she'll have to pay higher property taxes), Or putting it in a trust? (maybe too complicated?). Or maybe this rule does not apply to our situation hopefully, because we are not high net worth?


There are some special tax rules for US citizens who inherit from non-citizens that will apply here if you've already renounced. Plus, not sure how the rules on sale of a primary residence will apply to a NR taxpayer - potentially not at all, but you need to check that before any talk of selling. 

Be very careful with the notion of a "trust" - depending on where you are now resident/citizen there are countries that don't recognize the US trust entity and you could be looking at confusion in your local tax situation.



> Another question: There is a non refundable tax credit of $500 for adult dependents under the newly passed tax package. My non-US citizen daughter has low to moderate autism and she lives in the same household with us. Can we claim her as our dependent for this new credit?


Again, if you're no longer a US citizen, the notion of dependents and virtually anything related to the new tax law really doesn't apply to you. Dependents need to be US citizens to be claimed on a US tax form (and have a US SS number or ITIN).


----------



## xUSCAL (Dec 21, 2018)

Bevdeforges said:


> There are some special tax rules for US citizens who inherit from non-citizens that will apply here if you've already renounced. Plus, not sure how the rules on sale of a primary residence will apply to a NR taxpayer - potentially not at all, but you need to check that before any talk of selling.
> 
> Be very careful with the notion of a "trust" - depending on where you are now resident/citizen there are countries that don't recognize the US trust entity and you could be looking at confusion in your local tax situation.
> 
> ...



I did some further reading on IRC Section 2801 which apparently "......contains the rules that impose a tax on recipients of gifts or inheritances from covered expatriates.....". But it is silent on what happens if you are NOT a covered expatriate (which I'm pretty sure I don't belong). Does this mean that there is no tax liability involved in our case? And my daughter, being a US citizen, will NOT have to file gift tax Form 708 or be subject to any gift tax as a donee? Does anyone have any thoughts or opinions on this issue? Thanks.


----------



## Bevdeforges (Nov 16, 2007)

I actually wasn't referring to the section you found. Rather, this one: https://www.irs.gov/businesses/gifts-from-foreign-person

Once you renounce, you become a foreign person, whether or not you were/are a "covered expatriate." This also includes the information about a "foreign trust."


----------



## xUSCAL (Dec 21, 2018)

Hi Bev,

I read the link you provided. This is an extract from IRS website "........Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax. However, there are significant penalties for failure to file Form 3520 when it is required....". It appears there is no tax liability, only paper work involved. 

So just to make sure I understood this perfectly....if I give the condo to my daughter next year when I am a "foreign person", there is no gift tax for her to pay, just file Form 3520 (for the tax year 2019) to fulfill her obligation as US citizen.

Appreciate your patience and guidance, Bev.


----------



## Bevdeforges (Nov 16, 2007)

Lots can change in a year, but at the moment, I guess what you saw on the IRS page is the case. I have no experience in filing 3520s or any of those elaborate forms so can't say anything definitively. She may want to consult a tax adviser (accountant, EA or attorney) a little closer to the time you plan on making the gift. Since she is living in the US, her exposure will be a bit different than yours - either now or when you have renounced.


----------



## JustLurking (Mar 25, 2015)

ExpOct30 said:


> I still own a condo in CA which was my primary residence until I left US in 2017 to retire here. My other daughter (who is still a US citizen) is now living in it. She is a preschool teacher and does not make much money living in a high cost of living area, so we want to give it to her to ensure a roof over her head at least. Question is : would either donor or donee have to pay gift tax? We paid about $255K back in 2014, it's probably worth about $450K now. I'm particularly worried about gift tax under Section 2801 (I believe it relates to expats, whereby donee might have to pay tax as high as 40%).


This is an area where some pre-expatriation tax planning might have been useful. However, it's now too late for that.

Section 2801 only applies to 'covered' expatriates. Provided you duck under the $2MM total assets limit, don't pay more than $160k or so annually in US tax, and complied with US tax laws up to renouncing, you are not 'covered' so you can ignore that. (In any case, there is no actual route to section 2801 compliance at the moment -- after more than a decade the ever-efficient IRS has got no further than proposing some regulations, and form 708 simply does not yet exist!)

Your daughter will need to complete form 3520 on receiving this or anything valued more than $100k from you in a year. This form (of course) comes with its own horrific and overblown penalties for non-filing, but does not generate any added tax liability provided it is completed correctly.

The possible problem I foresee is FIRPTA, something that would not have affected you had you sold the property before renouncing. Under FIRPTA, property sale proceeds are withheld for US tax at 15%, and non-US residents are assessed US tax on the _capital gains_ at US _income tax_ rates, so generally much less favourable than for US citizens and residents.

There may be ways to 'structure' passing your condo to your daughter and which avoid some or all of the above traps, but you will probably need professional help here from the sound of things.


----------



## JustLurking (Mar 25, 2015)

Further to the above, here is a BNA article describing the possible interactions of section 897 FIRPTA, the section 877A expatriation tax, and the section 121 primary residence exclusion:

Nonresident Aliens, 'Covered Expatriates,' and the §121 Principal Residence Exclusion

As ever, about as clear as mud.


----------



## xUSCAL (Dec 21, 2018)

JustLurking said:


> If this is an option for you, the simplest way to find out which route is the most beneficial is to do the forms both ways and use the one that generates the lowest US tax liability.
> 
> If electing full year, all your local earnings and investment gains from Oct to Dec will be US taxable even though you were no longer US citizens. If little or nothing here then electing full year may make no difference. On the other hand, if you (say) sold a home with a large capital gain between Oct and Dec that might be US taxable even though not locally taxable. In that case then, choosing the split year would clearly be better.
> 
> ...



Since my only income are social security, pension, IRA withdrawals and interest, guess it's better to file 1040 for entire year. Will this allow us to take the full year $24,000 standard deduction or do we need to pro-rate it for 10 months?

I also realize that I need to file Form 8854 to make a clean exit from the US tax system, even though we may not be "covered expats". The form looks intimidating though as a "non-covered expat"I only need to fill in Parts I, IV, and V. From my research, I found several tax preparers who claims to have expertise on "expatriation taxes" --- "taxesforexpats.com", "expattaxprofessionals.com", "1040abroad.com", and "greenbacktaxservices.com". I've read some of their reviews but not sure if I can trust these 100% as people can be paid to do reviews. Does anyone have experience with these companies, or can recommend any that they have positive experience with to do expatriation taxes, and what are their fees like? I did enquire to one tax attorney law firm and they responded their fees are in the "tens of thousands". That sounds like for someone with 7-figure income which we do not have. Any advice would be appreciated. Thanks.


----------



## JustLurking (Mar 25, 2015)

ExpOct30 said:


> Since my only income are social security, pension, IRA withdrawals and interest, guess it's better to file 1040 for entire year. Will this allow us to take the full year $24,000 standard deduction or do we need to pro-rate it for 10 months?


I've never looked into this before -- and now I have, I cannot find any clarity on it from the IRS -- but it would seem patently unfair to make you pro-rate the standard deduction while at the same time encompassing your entire income for the year. Unfairness is a basic constituent of US tax law for NRAs, but not usually to that degree.



ExpOct30 said:


> I also realize that I need to file Form 8854 to make a clean exit from the US tax system, even though we may not be "covered expats". The form looks intimidating though as a "non-covered expat"I only need to fill in Parts I, IV, and V. From my research, I found several tax preparers who claims to have expertise on "expatriation taxes" --- "taxesforexpats.com", "expattaxprofessionals.com", "1040abroad.com", and "greenbacktaxservices.com". I've read some of their reviews but not sure if I can trust these 100% as people can be paid to do reviews. Does anyone have experience with these companies, or can recommend any that they have positive experience with to do expatriation taxes, and what are their fees like? I did enquire to one tax attorney law firm and they responded their fees are in the "tens of thousands". That sounds like for someone with 7-figure income which we do not have. Any advice would be appreciated.


Honestly, as a safely non-covered expat you can do this form yourself with relatively little difficulty. Aside from writing income numbers in to broadly match your final 1040 or 1040NR, the only other complication is from trying to value everything you own. And unless you are in any way close to the expat tax limits, it mostly doesn't matter at all what you write in here. And it is certainly not worth paying experts to do it for you.

For your home, just use what you think you would get for it now if you sold it. For its 'US adjusted basis' use what you paid in USD at the time you bought. For cash holdings, use whatever your cash accounts are worth for both current value and basis. For stocks, use current valuation and again what you paid in USD (and rather than value each on purchase, I'd just use the local currency cost basis converted at current forex rate). For defined contribution pensions, use current value and N/A or zero for cost basis, for defined benefit pensions use an actuarial value or 'cash equivalent transfer value', and for state pensions just ignore these entirely. For other stuff, make a rough guess at its worth and write it down, along with a rough guess for what you paid for it as its 'basis'. (All of this is information that a professional preparer would have to ask you for anyway; once you have created it, writing it down on a form yourself is trivial!)

Stop there. Done. Absolutely no need to spend any more time on this nonsense, since it generates no tax liability, but just a completely pointless workload for both you and the IRS. Unless you are 'covered' (or close to), nobody at the IRS will ever look at this piece of administrative nonsense. The only 8854 of value is the one that is _not_ filed. Take care to note that you have to send this to the IRS twice, once with your final return and then again separately to an address in Philly. The IRS is so disconnected here that you are now compelled to do their own internal communication for them.


----------

