# Accidental american - FATCA help



## exp1010

Hi All,

Was hoping to get some advice on here before seeking more detailed professional advice if necessary, and hearing how other people have dealt with a similar situation.

I am an accidental american by birth and dual citizen from birth. Moved away shortly after, and have not returned other than for the occasional holiday. Have never worked in the US or filed taxes or the bank account forms.


I recently opened a new UK bank account and have received a FATCA letter from the bank asking me to confirm if whether or not I have US citizenship, and providing tax ID numbers. Obviously the place of birth flagged this, as I used my other citizenship in the application. As far as I can tell I have three options:

1) Fill in truthfully - however, I do not have a US tax ID number (do I fill in my passport number or put n/a?)

2) Ignore - I have not been threatened with closure, but they say they would legally have to report my details in this case

3) Fill in untruthfully - I would need to provide a reasonable explanation why I did not get citizenship at birth


In any case, I will not reach the USD 50k threshold for reporting the account, but not sure if option 2 would override this exclusion. 

Another consideration is that option 1 and 3 can be interpreted as me willfully having failed to file, thereby potentially excluding me from the Streamlined filing if I need to resort to that later down the line.


In the medium-long term I have started weighing different options:

1) Keep my head in the sand and hope that even if the new account gets reported I can keep off the radar, or if regulation changes (not holding by breath for resident based taxation). I don't want to do anything to bring additional penalties my way in case they do take an interest in me, such as exclude myself from the Streamlined process.

2) Catch up under the Streamlined process (without penalties) and keep filing each year until I have to start paying an amount of tax which outweighs my perceived benefits (very few other than shorter queue at immigration), at which point I would consider renouncing.

3) Renounce citizenship asap (ideally somehow avoiding the hefty fee with as little paperwork as possible). I don't have any plans to move there or work there in the future but would of course like to keep this option as long as it's free and not too burdensome.

Given my earnings over the previous years and foreign tax/income exclusion, I wouldn't expect to owe any tax, nor in the coming years. I live a financially simple life but obviously circumstances change in the long term, with potential investments and real estate coming into the picture.

Appreciate it's a very personal decision - if you were in my shoes, what would you suggest I do for both decisions? Pros and cons? Any other things to consider?

Thank you very much in advance.


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## iota2014

exp1010 said:


> I recently opened a new UK bank account and have received a FATCA letter from the bank asking me to confirm if whether or not I have US citizenship, and providing tax ID numbers. Obviously the place of birth flagged this, as I used my other citizenship in the application. As far as I can tell I have three options:
> 
> 1) Fill in truthfully - however, I do not have a US tax ID number (do I fill in my passport number or put n/a?)
> 
> 2) Ignore - I have not been threatened with closure, but they say they would legally have to report my details in this case
> 
> 3) Fill in untruthfully - I would need to provide a reasonable explanation why I did not get citizenship at birth.
> 
> In any case, I will not reach the USD 50k threshold for reporting the account, but not sure if option 2 would override this exclusion.


It would. And Option 3 is not worth even considering, since it's almost certainly against the money-laundering regulations and can easily be proved to be a lie.




> In the medium-long term I have started weighing different options:
> 
> 1) Keep my head in the sand and hope that even if the new account gets reported I can keep off the radar, or if regulation changes (not holding by breath for resident based taxation). I don't want to do anything to bring additional penalties my way in case they do take an interest in me, such as exclude myself from the Streamlined process.
> 
> 2) Catch up under the Streamlined process (without penalties) and keep filing each year until I have to start paying an amount of tax which outweighs my perceived benefits (very few other than shorter queue at immigration), at which point I would consider renouncing.
> 
> 3) Renounce citizenship asap (ideally somehow avoiding the hefty fee with as little paperwork as possible). I don't have any plans to move there or work there in the future but would of course like to keep this option as long as it's free and not too burdensome.


Sadly, since the question has been asked, you have two options, not three: backfile to comply, and thereafter continue to file; or renounce (paying the fee).

It sounds like you might be exempt from complying, if you decide to renounce. Check out the dual-citizenship rules in the instructions for Form 8854.

I renounced last year. Best $2350 I ever spent. 

Good luck.


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## Bevdeforges

In the short term, I'd go with option 1. If you don't have a US SSN or ITIN, just follow the instructions on the form (normally, you either fill in 000-00-0000 or mark the blank as n/a). If you don't have a US SSN, then you don't have one. (If you do have a US SSN, then provide it. Not much you can do about that.)

The form is kept only by the bank. It does not get submitted to the IRS. And even if they report your account and y/e balance to the IRS (through the national banking authority), even the IRS is well aware that there are lots of foreign bank accounts that pay little or no interest and may not have any effect on your tax status.

In the medium term, you probably should get "street legal" using the Streamlined Compliance process. If you decide to renounce formally, you may wind up having to "prove" that you're up to date on your US tax filings, and the Streamlined procedure is probably the quickest and easiest way to do that.

As long as you don't owe anything, you may want to consider just keeping things the way they are via a "nominal" compliance - or as I call it, the "render unto Caesar" approach. If your financial situation is fairly simple, you can report what you need to report, keep the IRS happy and go your merry way without any undue angoisse. Or, if you anticipate complicating factors in the future, at least you're up to date with filings and can get through the renunciation process with relatively little hassle.
Cheers,
Bev


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## exp1010

Many thanks for the responses from the both you, very helpful.

iota2014 - the dual citizenship rules you are referring to would presumably exclude me from the exit tax by not being considered a covered expatriate (which is somewhat irrelevant at this stage as I am nowhere near meeting the asset and tax liability tests) 

The last point is certifying 5 years of tax compliance - which I would need to do in any case, right? Or is there a mechanism by which I can just pay the renunciation fee and have it over and done with cleanly without having to open the can of tax worms?

Bevdeforges - I think I will opt for filling in 000-00-0000, that way I haven't broken any local laws by lying, the computer might accept it as a valid submission and will hopefully not be reported as I will be under the 50k threshold. Assuming the form doesn't go anywhere but the bank, I _should_ have a strong case for non-willful non-compliance if and when I go the Streamlined route.

With regards to owing any tax, I need to get up the curve on calculating it (not expecting to get any professional help as it seems to be very costly). Is there any free website/software that allows me to calculate the amount potentially owed (only relevant to when income goes above the foreign earned income exclusion?

Also, assuming all the income is earned as a salary from an employer, and use of the foreign tax credit (UK), would there ever be a point where there is actually tax payable? 

If so, is anyone familiar with what the rough UK earnings (in GBP or USD) would need to be for there to start being tax payable to the US?

Many thanks again.


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## BBCWatcher

iota2014 said:


> And Option 3 is not worth even considering, since it's almost certainly against the money-laundering regulations and can easily be proved to be a lie.


It might even be a criminal offence under U.K. domestic law. I can even spell offence correctly for these purposes.


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## Bevdeforges

> With regards to owing any tax, I need to get up the curve on calculating it (not expecting to get any professional help as it seems to be very costly). Is there any free website/software that allows me to calculate the amount potentially owed (only relevant to when income goes above the foreign earned income exclusion?


The only sure way to determine your tax liability (if any) is to swami up the forms and see what you get. There are "free file" sites you can use listed on the IRS website - though you need to use the IRS wizard to help you find one that can deal with overseas taxpayers (usually a function of what forms are available and whether or not the software can handle overseas addresses).



> Also, assuming all the income is earned as a salary from an employer, and use of the foreign tax credit (UK), would there ever be a point where there is actually tax payable?
> 
> If so, is anyone familiar with what the rough UK earnings (in GBP or USD) would need to be for there to start being tax payable to the US?


It's kind of tricky to predict at what point you "might" owe US taxes, since the US and UK use slightly different bases for determining income tax due, different standards for determining taxable income and of course the two countries have different tax years, which can throw off a "simple" calculation.

Actually, until your earned income rises above the FEIE amount (currently about $100,000) you're usually OK as far as earned income is concerned. However for what the US calls "unearned income" (or sometimes "passive income") the situation is considerably trickier.

Usually, as an overseas taxpayer, the places you run into the potential for having to pay US taxes include things like the following:


 interest income on "tax free" accounts in your country of residence
 any sort of revenue that you don't have to declare in your country of residence, but that is considered "income" in the US
 large gain on the sale of your personal residence (i.e. over $250K if single, $500K is married, filing jointly) that is tax-free in your country of residence

It might be helpful to take a look at IRS publication 525 on Taxable and non-taxable income.
Cheers,
Bev


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## iota2014

exp1010 said:


> Many thanks for the responses from the both you, very helpful.
> 
> iota2014 - the dual citizenship rules you are referring to would presumably exclude me from the exit tax by not being considered a covered expatriate (which is somewhat irrelevant at this stage as I am nowhere near meeting the asset and tax liability tests)
> 
> The last point is certifying 5 years of tax compliance - which I would need to do in any case, right? Or is there a mechanism by which I can just pay the renunciation fee and have it over and done with cleanly without having to open the can of tax worms?


It's my understanding that you _don't_ have to certify five years compliance, if you qualify for the Dual-Citizen exception. And that's quite helpful, because it saves you from the hassle of complying, and saves you from the covered-expatriate risk that can arise from not certifying compliance. But check the rules carefully, to make sure that that's correct. I could be wrong.

Renouncing is a separate process from placating the IRS. You can renounce as soon as you like, and it's very easy, except that you have to wait a long time ( 5 months, in my case) to receive the Certificate of Loss of Nationality, which is the official proof. You do get a receipt for the $2350, and it's marked "Renunciation". You can show that to your bank as proof that you're waiting for your CLN.


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## exp1010

Thanks again for the responses.




iota2014 - I will look into if further. As a dual citizen, if it is the case that I can just head straight for the exit without having to become compliant and provide evidence of tax compliance for the last 5 years then that is immediately a more appealing option. 

Do you suggest I contact the IRS or the consular to get a conclusive answer to the process? Seem to be mixed opinions online on other sites.




Regarding the tax amount, what forms would I need to fill in? Just 2555, 1116 (if needed) and FBAR for the Streamlined Compliance?

Last calendar year (to Dec 2015) I was still under the FEIE amount. This year I will hopefully(unfortunately) be over it. Any other passive income is negligible (sub 1k USD).

So say the following amounts would apply for the next calendar year:

150k earnings (gross in USD)
50k in foreign tax paid
20k in rent

So 150k less FEIE (assumed 100k) less rent (20k) leaves 30k. I assume any tax credits would only be calculated on what would have had to be paid on the 30k of taxable income in the foreign country? 

Would this take into account the UK's personal allowance, resulting in potentially a very low tax credit?




Finally, I'm at the moment quite interested in the process by which individuals are identified and what happens from there. Assuming my account gets FATCA'd or the IRS take an interest with me through other means, would they first send an information/warning letter and give me a chance to opt into the Streamlined process. Or would the first sign of potential trouble ahead be the feds at my door with handcuffs?




Sorry for all the questions, still quite new to this and unsure. Very much appreciate the advice.


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## iota2014

exp1010 said:


> As a dual citizen, if it is the case that I can just head straight for the exit without having to become compliant and provide evidence of tax compliance for the last 5 years then that is immediately a more appealing option.
> 
> Do you suggest I contact the IRS or the consular to get a conclusive answer to the process? Seem to be mixed opinions online on other sites.


Personally I wouldn't contact the IRS. Getting a conclusive answer is likely to be impossible unless you are willing to pay an arm/leg for a Private Letter Ruling. And you don't need it. Look at the instructions for Form 8854 - that will tell you whether or not you have to certify the five years compliance if you qualify for the Dual Citizen exception. You can rely on what it says there, so believe it.

You can contact the London Embassy to ask questions about the renunciation process but they'll probably just refer you to the DoS website.

I went to Amsterdam to renounce - partly as an excuse for a jaunt and partly because I loathe and detest Grimsnor Square with the guns and the attitude. Amsterdam worked well for me.


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## Bevdeforges

Generally speaking, the forms you'd have to fill in would be: 1040 (the main form for personal income taxes), 2555 (to take the FEIE), 1116 (one for foreign taxes paid on your "earned income", another for foreign taxes paid on "unearned" or "passive" income - not sure if you would have to have a separate 1116 form for the rental income), potentially a Schedule E (for the rental income), definitely a Schedule B (to answer the question whether you have foreign accounts or not - but it's a handy form to list your interest and dividend income if you have that).

You may want to take a look at Pub 54 to get an overview of how this stuff works from overseas.
Cheers,
Bev
PS, by the way I agree that it's pretty worthless to consult the IRS ahead of time on much of anything. They state somewhere that they won't be held accountable for any information they give out on the phone or online or using anything other than a (paid-for) Letter Ruling.


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## exp1010

Understand your points on the IRS likely being unhelpful in providing advice.

With regards to the form 8854 instructions, I can't quite pick out what would apply to me. It seems that I would qualify for the exemption as both a dual citizen and a minor, as expatriated in the mid 1980s as a toddler with no assets/income.

My interpretation is that I would still need to file the 8854 and confirm that I have complied with all federal taxes for the last 5 years before expatriation (from ages -3 to 2).

Apologies if I am being really thick here. Thanks.

_Who Must File

You must file an initial Form 8854 if you
relinquished your U.S. citizenship or
terminated your long-term residency
status.

*Covered expatriate.* You are a
covered expatriate if you expatriated
after June 16, 2008 and any of the
following statements apply.

1. Your average annual net income
tax liability for the 5 tax years ending
before the date of expatriation is more
than the amount listed next.
a. $139,000 for 2008.
b. $145,000 for 2009.
c. $145,000 for 2010.
d. $147,000 for 2011.
e. $151,000 for 2012.
f. $155,000 for 2013.
g. $157,000 for 2014.
h. $160,000 for 2015.

2. Your net worth was $2 million or
more on the date of your expatriation.

3. You fail to certify on Form 8854
that you have complied with all federal
tax obligations for the 5 tax years
preceding the date of your expatriation.

4. You expatriated before 2015 and
you:
a. Deferred the payment of tax,
b. Have an item of eligible deferred
compensation, or
c. Have an interest in a nongrantor
trust.

*Exception for dual-citizens and
certain minors.* Dual-citizens and
certain minors (defined next) won't be
treated as covered expatriates (and
therefore won't be subject to the
expatriation tax) solely because one or
both of the statements in paragraph (1)
or (2) above (under Who Must File)
applies. However, these individuals will
still be treated as covered expatriates
unless they file Form 8854 and certify
that they have complied with all federal
tax obligations for the 5 tax years
preceding the date of expatriation as
required in paragraph (3) (under Who
Must File, earlier).
Certain dual-citizens. You may
qualify for the exception described
above if you meet both of the following
requirements.
You became at birth a U.S. citizen
and a citizen of another country and you
continue to be a citizen of, and are
taxed as a resident of, that other
country.
You were a resident of the United
States for not more than 10 years during
the 15-tax-year period ending with the
tax year during which the expatriation
occurred. For the purpose of
determining U.S. residency, use the
substantial presence test described in
chapter 1 of Pub. 519.

Certain minors. You may qualify for
the exception described above if you
meet both of the following requirements.
You expatriated before you were
181
2.
You were a resident of the United
States for not more than 10 tax years
before the expatriation occurs. For the
purpose of determining U.S. residency,
use the substantial presence test
described in chapter 1 of Pub. 519._


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## iota2014

Yes, that's pretty clear. Looks like there is no way to exit IRS filing cleanly without that five-year certification. Sorry my memory was wrong, but at least you now know for sure. Not always the case with IRS requirements


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## exp1010

Any help whether right or wrong is appreciated at this stage! It's all still very much a grey mess to me.

Does 'from the date of expatriation' refer to the date that I left the US? If so, I don't think certifying should be an issue considering I wasn't even born for half of the time.

I'm starting to lean towards the renunciation option, holding on is just going to prolong the inevitable, as I start planning for investments in the UK. 

Having done a small amount of research it seems that none of the UK tax breaks are honored by the US, making it impossible to save/invest. This is without even looking at the treatment of my private pension plan!

The longer it goes on the more difficult/costly it will be to clear up with the IRS before renunciation. Especially my income will likely exceed the FEIE amount in the coming year, and I am a bit unclear on the deductions for living expenses and foreign tax paid.



Has anyone heard of how and what happens when people get a target on their backs? Is there still a chance to go the streamlined route after you find out or do you go straight to jail (without passing 'GO' and collecting $200).


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## ForeignBody

exp1010 said:


> Has anyone heard of how and what happens when people get a target on their backs? Is there still a chance to go the streamlined route after you find out or do you go straight to jail (without passing 'GO' and collecting $200).


Not sure what you mean but see here: 

https://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures

_
If the IRS has initiated a civil examination of taxpayer's returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Taxpayers under examination may consult with their agent. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures._


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## Pacifica

exp1010 said:


> Does 'from the date of expatriation' refer to the date that I left the US?


Date of expatriation in this context is the date of the renunciation. If you were to renounce on, say, August 1st, 2016, your Certificate of Loss of Nationality will read “that he thereby expatriated himself on August 1st, 2016 …”

Expatriation in the more general usage (to leave the country) doesn’t apply here because the citizenship-based tax obligations remain in that case. So for this purpose, they mean it in the specific sense of the date the citizenship was terminated.


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## exp1010

Thanks both, that is clear. Very much appreciated. 

I assume the civil examination is the first thing you would hear from them, so you won't have the Streamlined Compliance to fall back on once you get a whiff that things will start hitting the fan.


I think it's worth for me getting on the front foot, my potential tax liability will (hopefully) only increase, I don't see any regulatory changes or RBT any time soon, and the only way for the renunciation fee is up.


Would the consulate be able to provide a comprehensive list of everything needed (including IRS forms) to cleanly cut ties or is a consultation with a professional adviser needed?


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## Pacifica

exp1010 said:


> Would the consulate be able to provide a comprehensive list of everything needed (including IRS forms) to cleanly cut ties or is a consultation with a professional adviser needed?


The consulate you contact will provide a list with links to the Dept of State forms and required supporting documents. Usually they do this once you contact them, but some (eg London) has a list on their website of the forms and supporting documents they require.

It’s pretty standard everywhere, but there are some minor variations from place to place (and things can change over time), so always check with the consulate you’re planning to use.

*Department of State Forms*:

4079 – Questionnaire
The 4079 is not required for renunciation (only for the other methods of relinquishment citizenship), but consulates may use it if they wish, so some do and some don’t. Your consulate will let you know if they require it.
Some consulates have a short local form they use in lieu of (or in addition to) the 4079.

4080 – Oath of renunciation
Most of the consulates fill this out themselves. 

4081 – Statement of understanding of consequences

4083 – Certificate of Loss of Nationality 
Most of the consulates fill this out themselves. 

*IRS forms.* 

Generally the consulates stay away from the “tax stuff” and if you ask they tell you to contact IRS. At one time, London’s on-line “Renunciation Package” included IRS forms, but it looks like it doesn't anymore. (And at one time, Vancouver was sending out 8854s with the CLNs -- like the grinch at Christmas or something?? -- not sure if they still do.) Those are the only consulates that come to mind regarding tax forms.

*Professional Assistance*

There should be no need for professional assistance with the State Dept side of renunciation. That’s very cut-and-dried. 

As for tax side, maybe. Some people do the taxes themselves, others use a professional. Probably best to give it a try. If it goes well, just DIY (and ask questions here  But if your financial situation is complex or if doing them is a major hassle, then you might find it worth hiring an accountant.


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## iota2014

> I'm starting to lean towards the renunciation option, holding on is just going to prolong the inevitable, as I start planning for investments in the UK.
> 
> Having done a small amount of research it seems that none of the UK tax breaks are honored by the US, making it impossible to save/invest. This is without even looking at the treatment of my private pension plan!


Correct. Any passive income that hasn't been taxed to the hilt by HMRC is vulnerable to US taxation, unless you can offset it with tax credits.

If you decide to renounce, the dual-citizen exception can be very useful if you qualify for it. It's surprising how quickly "fair market values" of a couple of pension plans and a London home can add up to £2 million.

The US tax code is insane.


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## BBCWatcher

iota2014 said:


> The US tax code is insane.


Maybe, but real estate valuations in London are certifiably insane.


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## iota2014

BBCWatcher said:


> Maybe, but real estate valuations in London are certifiably insane.


Yes it's very sad what's happening to London. Next instalment currently being prepared.


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## exp1010

Pacifica said:


> The consulate you contact will provide a list with links to the Dept of State forms and required supporting documents. Usually they do this once you contact them, but some (eg London) has a list on their website of the forms and supporting documents they require.
> 
> It’s pretty standard everywhere, but there are some minor variations from place to place (and things can change over time), so always check with the consulate you’re planning to use.
> 
> *Department of State Forms*:
> 
> 4079 – Questionnaire
> The 4079 is not required for renunciation (only for the other methods of relinquishment citizenship), but consulates may use it if they wish, so some do and some don’t. Your consulate will let you know if they require it.
> Some consulates have a short local form they use in lieu of (or in addition to) the 4079.
> 
> 4080 – Oath of renunciation
> Most of the consulates fill this out themselves.
> 
> 4081 – Statement of understanding of consequences
> 
> 4083 – Certificate of Loss of Nationality
> Most of the consulates fill this out themselves.
> 
> *IRS forms.*
> 
> Generally the consulates stay away from the “tax stuff” and if you ask they tell you to contact IRS. At one time, London’s on-line “Renunciation Package” included IRS forms, but it looks like it doesn't anymore. (And at one time, Vancouver was sending out 8854s with the CLNs -- like the grinch at Christmas or something?? -- not sure if they still do.) Those are the only consulates that come to mind regarding tax forms.
> 
> *Professional Assistance*
> 
> There should be no need for professional assistance with the State Dept side of renunciation. That’s very cut-and-dried.
> 
> As for tax side, maybe. Some people do the taxes themselves, others use a professional. Probably best to give it a try. If it goes well, just DIY (and ask questions here  But if your financial situation is complex or if doing them is a major hassle, then you might find it worth hiring an accountant.


Thanks Pacifica.

What are the implications of just ignoring the tax side of the renunciation? Would my tax risk exposure be limited only to the years prior to my renunciation, or could they come after me in future for future earnings? 

Hopefully this risk is low as I am not in the tax system (until I may or may not get reported under FATCA). Also it would be administratively quite burdensome to pursue (for very little, if any, gain) considering they have no data on me, and my country of residence would not be entitled to disclose anything as I would no longer be a US citizen.

Pushing it a bit further - if they do open an investigation, and I renounce, what would the likely range of outcomes be? I assume I could never even visit the states again, even with my other citizenship, but unlikely to face any financial consequences in my country of residence/citizenship.


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## iota2014

> ...my country of residence would not be entitled to disclose anything as I would no longer be a US citizen.


A headsup - the US and UK do share information under the terms of the tax treaty, and renunciation doesn't make that risk go away, for periods prior to renouncing. They do have to request the information, though. And there's no collection agreement.


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## exp1010

The lack of collection agreement presumably means that I should financially be okay given I have no assets or US income for them to take.



I am struggling to weigh up the pros and cons (and quantify risks and benefits!) of just renouncing and getting the CLN, or closing out the tax side of it first and then proceeding.

I wouldn't be on the hook for any taxes over the last 5 years, nor be subject to an exit tax.

Which would you go for in my situation?



I haven't been able to find any cases where the IRS would have come after someone after renouncing. Has anyone heard of such a case? Could it potentially restrict me from ever setting foot in the US?

In any case, I would hope they have bigger fish to fry than me, as I wouldn't be a target that would constitute efficient use of resource.


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## iota2014

exp1010 said:


> The lack of collection agreement presumably means that I should financially be okay given I have no assets or US income for them to take.


It does seem likely that without a collection agreement, the costs of trying to collect overseas would outweigh the benefits.



> I am struggling to weigh up the pros and cons (and quantify risks and benefits!) of just renouncing and getting the CLN, or closing out the tax side of it first and then proceeding.
> 
> I wouldn't be on the hook for any taxes over the last 5 years, nor be subject to an exit tax.


If you renounce without filing the 8854 (and the five years returns and FBARs), you'll be a covered expatriate and be subject to the exit tax. But it comes back to the fact that there's no collection agreement.



> Which would you go for in my situation?


Maybe try to gather more information, find answers to some specific questions, in order to quantify the risk better. For instance:

1. Can you renounce without a SSN? I was asked for mine, and gave it, but I don't know if it's required. There must be many AAs who have no SSN but want to renounce.

2. Can the FATCA letter be resolved without a SSN or ITIN? Maybe not, with a US PoB and no CLN.

If you can renounce, and also avoid recalcitrant account status, without being forced to get a SSN/ITIN, that greatly increases your chances that the IRS will simply never notice you haven't filed.



> I haven't been able to find any cases where the IRS would have come after someone after renouncing. Has anyone heard of such a case? Could it potentially restrict me from ever setting foot in the US?


Renunciation doesn't stop them - they invented "tax citizenship" for just that reason, to enable them to pursue renouncing Americans and get a big chunk of their money before they are allowed to escape. But it has to be enough potential money to make it worth the chase. And again, there's no collection agreement.

Renunciation _per se_ shouldn't stop you entering the US, as long as you take your CLN to show along with your non-US passport. If there's an outstanding tax liability, trying to enter the US _might_ be risky. Someone else may know more than I about this.



> In any case, I would hope they have bigger fish to fry than me, as I wouldn't be a target that would constitute efficient use of resource.


Fingers crossed. You may be able to find a way out without becoming a target.


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## Bevdeforges

There is probably no way to assess all the possibilities you face in the event that you decide to renounce. This has been evolving over time since the first big law of this sort was passed back in 1996 (I think it was).

At that time, the law stated that someone who renounced their US nationality "for tax reasons" (determined not by the individual, but by the IRS) "could" be refused a visa by the US attorney general. Note, "could" not "will" and the visa application had to be raised to the AG level in any event.

There were also a list of exceptions to the law that those who renounced would be subject to certain specific penalties. These included things like, renouncing so you could take the nationality of your spouse, or return to the land of your ancestors. Obviously, this probably generated more confusion than clarification so further laws were added on top of this (without actually repealing the earlier ones). 



> I haven't been able to find any cases where the IRS would have come after someone after renouncing. Has anyone heard of such a case?


Officially speaking, renouncing only gets the IRS monkey off your back for what happens after your date of renunciation. For tax matters, there is a four year statute of limitations (hence the requirement that you certify your compliance for the last 5 years), but there is the little matter of no statute of limitations on income that was not declared. Technically speaking, they could dig up something you neglected to declare from any time before your date of expatriation (as they call it) and go after you for it. But admittedly, unless it's big and would yield lots of back taxes, the likelihood of them doing anything is pretty slim.


> Could it potentially restrict me from ever setting foot in the US?


Again, technically, yes. That 1996 law is still currently valid (as far as I have heard), so if your case was "notorious enough" to reach the ears of the US Attorney General, then you could be refused a visa (including an ESTA visa waiver entry) - or, I suppose, put on some kind of black list. But again, have heard nothing about this happening.

Basically, the major personal considerations when contemplating renunciation tend to be the personal and/or financial ties you have to the US. Funds in US banks and financial institutions can be seized and any entitlements to US benefits (say, social security pensions) can be blocked or frozen - or simply subject to a 30% flat withholding tax.
Cheers,
Bev


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## iota2014

> Can you renounce without a SSN? I was asked for mine, and gave it, but I don't know if it's required. There must be many AAs who have no SSN but want to renounce.


Apparently you can indeed renounce without a SSN/ITIN. You can renounce, and then apply for an ITIN if you decide to file. See HodgenLaw PC - International Tax


----------



## iota2014

> Can the FATCA letter be resolved without a SSN or ITIN?


The UK IGA Guidance says:



> Where the indicia found is an unambiguous US place of birth then the account needs to be reported unless the Financial Institution obtains or currently maintains a record of all of the following:
> - a self certification showing that the account holder is neither a US citizen nor a US resident for tax purposes,
> - evidence of the account holder’s citizenship or nationality in a country other than the US (for example passport or other government issued identification); and
> - a copy of the account holder’s Certificate of Loss of Nationality of the United States or a reasonable explanation of the reason the account holder does not have such a certificate or the reason the account holder did not obtain US citizenship at birth.


It doesn't look good. Having no SSN or ITIN shows that you've never filed, and not having the CLN shows your renunciation has not yet been approved, so you're still a US citizen.

So the next step, I would suggest, is to download one of the free or cheap tax software packages, put your numbers in, and see what your actual tax liability might be. Then post the results, and maybe ways can be found to help reduce it. If it turns out your tax bill would be manageable, that might make filing a better, less hassly choice than not filing.


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## exp1010

What free software do you recommend using that can be used by expats to get the FEIE exemptions and living expense deductions and so on? The simpler the better!

I have been below the FEIE in each of the historic years, so not really concerned about my tax liability there. It is only in the current year that it will likely be exceeded by c. $20k (but i assume the living expense deduction and foreign tax credit should take care of some or all of the excess?).

Thanks yet again for all the help.


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## iota2014

exp1010 said:


> What free software do you recommend using that can be used by expats to get the FEIE exemptions and living expense deductions and so on? The simpler the better!
> 
> I have been below the FEIE in each of the historic years, so not really concerned about my tax liability there. It is only in the current year that it will likely be exceeded by c. $20k (but i assume the living expense deduction and foreign tax credit should take care of some or all of the excess?).


I didn't file 1040s, so I haven't had much experience with the tax software programmes myself and don't know which is easiest to use. There's a sticky thread at the top of this forum. Or you could just have a go at a 1040. It all gets a lot less scary once you go through it and see exactly what you're dealing with.



> Thanks yet again for all the help.


You're welcome.


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## exp1010

Thanks. I'll have a look at the sticky site for choosing the software. Ideally looking for something free, that has all the necessary forms available. 


On the two first years I was below the filing requirements for those years. Would not filing anything for these two plus a three year vanilla streamlined compliance filing allow me to say I was in compliance for the last 5 years?


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## iota2014

exp1010 said:


> Thanks. I'll have a look at the sticky site for choosing the software. Ideally looking for something free, that has all the necessary forms available.
> 
> 
> On the two first years I was below the filing requirements for those years. Would not filing anything for these two plus a three year vanilla streamlined compliance filing allow me to say I was in compliance for the last 5 years?


You have to file for the five years immediately preceding (but not including) the year of renunciation.

I believe there's an extension available if you ask for it, so if you ask for the extension you could file "on time" for tax year 2015. (Plus FBARs)

Then, assuming you are thinking of both renouncing and filing Streamlined during 2016, you file 2012-2014 under Streamlined. (Plus FBARs)

Then one more year (2011 - plus FBARs) to bring it up to five years for the 8854 certification. 

Then next year, you'll need to file for the part year up to the date of renouncing, plus the FBARS and 8854.


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## iota2014

Correction - I forgot, it's six years of FBARs for Streamlined isn't it, so that would be 2009-2014.


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## BBCWatcher

IRS Form 4868 is the filing date extension form.


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## exp1010

Thanks.

A few further questions:

-Can the free software/sites let me do the backfiling for years 2010-2014 or only the 2015 filing?

-Can I go ahead with the renunciation first (asap) and then file all the tax paperwork? Or must it be the other way around?

-Can I file a full 5 years of taxes under the streamlined process? or would i need to submit two separate sets, one for 3 year and one for the 2?


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## Bevdeforges

> -Can the free software/sites let me do the backfiling for years 2010-2014 or only the 2015 filing?


The Free File sites are normally only for the current year. TaxAct makes the prior three years available (on their regular site) for a quite reasonable $12 to $15 a year. I suspect the other sites may have similar deals on their regular websites.



> -Can I go ahead with the renunciation first (asap) and then file all the tax paperwork? Or must it be the other way around?


You can always try and see how far you get.



> -Can I file a full 5 years of taxes under the streamlined process? or would i need to submit two separate sets, one for 3 year and one for the 2?


The streamlined process asks for the current year, plus the three prior years. I suspect that the other 2 years would just be considered "filed late." Not a huge problem if you don't owe anything (i.e. no interest charges on any balances due).
Cheers,
Bev


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## iota2014

exp1010 said:


> -Can I go ahead with the renunciation first (asap) and then file all the tax paperwork? Or must it be the other way around?


You can renounce asap. I did.

If you do it in that order, I believe you can then apply for an ITIN to use for filing. Whereas if you file before you renounce, you have to apply for an SSN, which I understand can take a long time.


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## iota2014

Bevdeforges said:


> The Free File sites are normally only for the current year. TaxAct makes the prior three years available (on their regular site) for a quite reasonable $12 to $15 a year. I suspect the other sites may have similar deals on their regular websites.
> 
> 
> You can always try and see how far you get.
> 
> 
> The streamlined process asks for the current year, plus the three prior years. I suspect that the other 2 years would just be considered "filed late." Not a huge problem if you don't owe anything (i.e. no interest charges on any balances due).
> Cheers,
> Bev


Bev, the Streamlined instructions say:


> For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed:
> if a U.S. tax return has not been filed previously, submit a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed on time, or
> if a U.S. tax return has been filed previously, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed a complete and accurate original return.


Which seems to me to indicate that the current year should be filed normally, before the extension due date, and the three Streamlined years would be 2010-2014. Am I wrong?


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## iota2014

exp1010 said:


> -Can I file a full 5 years of taxes under the streamlined process? or would i need to submit two separate sets, one for 3 year and one for the 2?


IRM 3.21.3.9.1.2 says:


> The taxpayer is required to submit delinquent tax returns for the last three years for which a US tax return is due. *However, it is acceptable for taxpayers to submit more than 3 years returns.*


https://www.irs.gov/irm/part3/irm_03-021-003r.html
So that's probably okay.


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## iota2014

iota2014 said:


> ... the three Streamlined years would be 2010-2014. Am I wrong?


Correction - too late to edit. 2012-14


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## maz57

iota2014 said:


> You can renounce asap. I did.
> 
> If you do it in that order, I believe you can then apply for an ITIN to use for filing. Whereas if you file before you renounce, you have to apply for an SSN, which I understand can take a long time.


To clarify, an ITIN cannot be issued to a person who is a US citizen because that person is eligible for a SSN. Getting a SSN when living outside of the US can be difficult and time consuming for a number of reasons, not the least of which is they generally want to see US issued identity documents which a long time expat is not likely to have. A US birth certificate alone is not enough. Also there are no SSA offices outside the US so everything has to go via the Embassy, i.e., yet another bureaucracy is involved. How much time and effort does a person want to spend getting an i.d. number which will soon be rendered superfluous?

The IRS won't allow you to file a US tax return without a SSN if you are eligible for one. Therefore the logical order in this situation is to renounce first, then file with an ITIN because after renouncing you are no longer a US citizen and no longer eligible for a SSN. I believe the application for an ITIN can be submitted along with the tax filings.


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## iota2014

maz57 said:


> The IRS won't allow you to file a US tax return without a SSN if you are eligible for one. Therefore the logical order in this situation is to renounce first, then file with an ITIN because after renouncing you are no longer a US citizen and no longer eligible for a SSN. I believe the application for an ITIN can be submitted along with the tax filings.


But presumably if the OP sends the ITIN application with the Streamlined filings, further contact will be necessary, so that he can be notified of his ITIN in order to use it the following year for final filings.

Call me paranoid but I'd just as soon never hear from the IRS if it was me. Mightn't it be better to apply for the ITIN, apply for the due date extension, use the ITIN to file for the current year and then to file FBARs and send the Streamlined filings?

Or maybe I _am_ just being paranoid.


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## BBCWatcher

maz57 said:


> How much time and effort does a person want to spend getting an i.d. number which will soon be rendered superfluous?


I wouldn't call a SSN "superfluous." Unlike an ITIN a SSN lasts for life (and beyond), so if you have a 1040NR in your future, even distant future, you don't have the hassle of getting/renewing an ITIN (not valid after 5 years). Or if there's a future Social Security benefit, spousal or otherwise, you'll need a SSN anyway.

Either way you're getting a number, so that part seems like a distinction without a difference. Anyway, the SSN gives you some more flexibility and options, including putting your renunciation date back on your clock under your control, not the IRS's. One way to think of this is that you might as well get and keep anything valuable if you can before you exit. A SSN has some value (contingent or actual), and you get to keep it even after you exit. It's kind of like the free breakfast the hotel offers. Even if you're not hungry that morning, you might as well grab a banana to go and then check out.


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## exp1010

I may have a SSN, but would have been filed away and stored (in another country!). Would having this at hand make the filing easier?

I'm starting to lean towards just renouncing and leaving it at that. Assuming I get my CLN quickly enough (through the consulate with the shortest wait), I should be able to get all my accounts off FATCA in time before the next reporting cycle.


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## iota2014

exp1010 said:


> I may have a SSN, but would have been filed away and stored (in another country!). Would having this at hand make the filing easier?


If you've got a SSN you're supposed to use that for filing. 



> I'm starting to lean towards just renouncing and leaving it at that. Assuming I get my CLN quickly enough (through the consulate with the shortest wait), I should be able to get all my accounts off FATCA in time before the next reporting cycle.


If you have a SSN you can just confirm to the bank (a.s.a.p.) that you're a US citizen. It's the failure to provide a SSN or ITIN that would be likely to get the account reported as recalcitrant. 

After renouncing, you can notify the bank that you're no longer a US citizen.

The wait for a renunciation appointment, and the wait for the CLN, are not related. But having a SSN enables you to resolve the FATCA enquiry, so waiting for the CLN shouldn't cause you any problems provided you don't want to travel to the US during the limbo period. Could be 5-6 months, or longer.


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## exp1010

I will try to get the SSN and use that on the bank's FATCA form.

With regards to the renunciation, would the following work?

1) Renounce asap
2) File 5 years of historics (2011-2015) under the streamlined process (1040,2555 and 1116) showing no tax payable including 6 years of FBARs
3) File 8854
4) Receive CLN
5) Eternal freedom


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## iota2014

exp1010 said:


> I will try to get the SSN and use that on the bank's FATCA form.
> 
> With regards to the renunciation, would the following work?
> 
> 1) Renounce asap
> 2) File 5 years of historics (2011-2015) under the streamlined process (1040,2555 and 1116) showing no tax payable including 6 years of FBARs
> 3) File 8854
> 4) Receive CLN
> 5) Eternal freedom


Yes as far as the sequence goes (I don't know about which forms are needed). Don't forget that along with the 8854 you have to file a part-year return and FBAR for the period of the year of renunciation during which you were still a US citizen.

Also bear in mind that 2015 returns and FBARs don't fit the Streamlined criteria unless you wait until the due date is past. Whether that matters, I don't know.


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## exp1010

Thanks iota2014.

I will wait until the deadline for 2015 has passed to get it all under the streamlined umbrella. 

Still need to do a bit of research and call around accountants to see if it is possible to retain citizenship in the long term without significant cost/resource.

The main points (for me at least) between US/UK seem to be:
- Dividend , capital gains, personal savings allowances not recognised
- ISAs (compounded by PFIC) not recognised
- Real estate rules (a BoJo type scenario)
- Pension plans (who knows?! seems like the IRS itself isn't even clear on treatments)

I haven't found any financial benefits of maintaining citizenship (without potentially investing in the US - which I cant be bothered with). 

Even with the benefit of being able to go to the US for longer than 90 days without a job - renunciation just seems like a no-brainer. I'd like someone to play devil's advocate here.


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## iota2014

exp1010 said:


> I will wait until the deadline for 2015 has passed to get it all under the streamlined umbrella.


There's no advantage to that. By deliberately filing 2015 late, you just risk the IRS doubting your non-wilfulness explanations (see the Streamlined certification form). If you request the extension, using the form BBC mentioned, you can file 2015 on time and not have to explain why you're filing it late.



> I haven't found any financial benefits of maintaining citizenship (without potentially investing in the US - which I cant be bothered with).
> 
> Even with the benefit of being able to go to the US for longer than 90 days without a job - renunciation just seems like a no-brainer. I'd like someone to play devil's advocate here.


Good idea to look carefully at the pros and cons before deciding.


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## BBCWatcher

iota2014 said:


> Good idea to look carefully at the pros and cons before deciding.


Yes indeed. Renunciation is irrevocable, and it isn't free. It's also quite rare -- on the order of 5,000 individuals per year.

There is plenty of time to study and to decide.


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## exp1010

BBCWatcher said:


> Yes indeed. Renunciation is irrevocable, and it isn't free. It's also quite rare -- on the order of 5,000 individuals per year.
> 
> There is plenty of time to study and to decide.


Thanks for the responses. I've done a fair amount of thinking already and fail to see the benefits outweighing the time and resource of staying tax compliant for the rest of my life. $2350 seems a small price to pay not to have to plan your future around two tax systems.

The only connection I have to the US is my birthplace - no friends/family/assets there.

What I still need to assess is the option of becoming compliant and understanding when and how much tax I will need to start paying under which circumstances.

My thinking at a high level is that the FTC should protect all my income (as UK tax rates are higher than US), and this will roll forward and accrue (unsure of what types of incomes this can be offset against other than salary).

Then the standard deduction and personal exemption should protect me from other income which is could potentially be tax free in the UK up to c. $10k per year.

Am I completely on the wrong track here or is that roughly how it could play out (appreciating it is at a very high level!).


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## Bevdeforges

Basically, I think you've "got it." 

Given your lack of financial and personal ties back to "the Old Country" I think the major potential "gotchas" lie in things like the reporting morass of things like PFICs, "foreign trusts" and the lack of recognition of non-US retirement and other investment funds. In some cases, it's just a matter of filling in the paperwork. (One form estimates the average time to fill out the forms, including figuring out the instructions, at 80 hours.) In other cases, it may or may not come down to actually paying taxes on investments that are supposed to be (at least in your home country) tax-free or tax advantaged. If you do it yourself, it's only your lost time. If you have it done, those 80 hours can cost you dearly at CPA billing rates.

And there is consideration of the time and effort required to evaluate whether or not certain types of investments or retirement savings might best be avoided to avoid invoking all the paperwork and/or potential taxes involved.

I periodically go through my financial situation to see if maybe it might be worth it to renounce, but I have some significant financial ties back to the US, and certainly for the foreseeable future it really isn't worth any $2350 to me. But you're the best judge of your own situation.
Cheers,
Bev


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## exp1010

Thanks Bev. Those 'gotchas' are exactly what I want to avoid, it either means expensive accountants fees, DIY returns and living in fear of having made mistakes or probably worst of all; avoiding saving/investment opportunities all together. 

I don't want to spend the rest of my life having to worry about what the IRS might think about certain savings/investments products or property purchases for which the local tax treatment is clear to me.

If I ever want to move to the US, I would do so through the routes available to non-citizens. I can see a rationale for relaxing entry/living visa rules for European citizens over the long term, but can't see one for easing the reporting/tax burden on expats. Also can't see the renunciation fee coming down or being waived.


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## maz57

In view of the fact that you apparently already have a SSN, it seems to me that job #1 is to find out what that number is. Whether you choose to renounce or try to become US tax compliant you will need to know your SSN. If all else fails, it might be worthwhile to contact SSA directly and explain your situation. They may be able to help.

Because of the wait times at the consulates, it might be a good idea to book an appointment now. You will have plenty of time to find that number, mull things over, and work on the tax angle. You can cancel the appointment if you decide instead to hang on to your US citizenship. Some lucky person in a rush to exit would undoubtedly be thrilled to take advantage of a last minute cancellation!


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## exp1010

As I gear up to backfile, I'll probably have several more questions but wanted to cover these key points first. 

How are the FTC calculated after claiming FEIE (considering the progressive bands in many jurisdictions - is it what would have been paid on the amount over FEIE or the total pro-rata tax payment)?

In what scenario would it be preferable to claim FEIE first and then FTC on the remaining income? The way I see it you are always better off claiming FTC as this can be accrued and carried over.


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## BBCWatcher

If you're thinking of renouncing U.S. citizenship for tax and financial reporting reasons, then it's prudent to really dig into those issues in order to understand the interplay. A couple points:

1. You can't renounce "quietly" -- it's a very "loud" act in bureaucratic terms -- so you're going to have the burden of tax and financial reporting compliance. (There is a significant percentage of citizens who aren't compliant, after all. Renunciants don't have that option realistically.) There is a school of thought that once you've figured out _how_ to comply, and done it, you've probably cleared about 80% of the lifetime hurdle. That is, the _learning curve_ is the hard part, but once you've conquered that the ongoing compliance is at least much easier. Sort of like learning to ride a bicycle. I think I agree with that school of thought. Learning how everything works was the real burden for me, but now the annual ritual isn't a big deal. (It'd be less a big deal financially for a U.K. resident. I actually pay some U.S. tax on non-U.S. source income. That's not so common for U.K. residents. Not impossible, but not common.)

2. Related to #1, it is quite possible to screw things up in tax/financial terms, in particular if you step into the briar patch of "Covered Expatriate" status inadvertently. This is not like evacuating from a building under mortar assault where you have to get out immediately and leave the pets behind (or whatever). Planning your exit, carefully, is wise so you don't experience even more problems of the sort you were trying to avoid.

3. Renunciation is irrevocable, and all the rights and privileges associated with U.S. citizenship disappear. In my view you should think of renunciation as like a divorce, that you're _never_ going to get back together -- even for a vacation. There is some political risk that Congress will raise the wall (Donald Trump's or otherwise) and bar renunciants from entry to the United States, even for tourism. De facto the U.S. already does that for many renunciants who require visas to visit the United States. Foreigners have no right of entry into the United States, and renunciants are, shall we say, "special" foreigners. At the present time many are allowed in for short visits, but there are no promises, no guarantees.

If you've got family or friends in the United States, or just love the Grand Canyon, just take that into consideration. It's a risk. We had some posts in this forum from Roger Ver, a former U.S. citizen, who has been effectively barred from the United States. He's not happy about that, but there's also nothing he can do about that. On the other hand, I have a friend who considered renunciation, but he ended up not doing it. A couple years later he spent several months in the U.S. with his father who suffers from a chronic illness, helping his mother. And thank goodness he could/can.

Some adults wait until they're well past childbearing age to renounce if they're able to pass U.S. citizenship onto their children.

Situations vary, of course. (These are just two examples.) But be aware that if it's not your country, it's their country, their rules.


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## iota2014

BBCWatcher said:


> Some adults wait until they're well past childbearing age to renounce if they're able to pass U.S. citizenship onto their children.


LoL. There's a message about intergenerational hatred in there somewhere.


----------



## BBCWatcher

iota2014 said:


> There's a message about intergenerational hatred in there somewhere.


I think we should treat this issue like adults, with at least some seriousness. U.S. citizenship, like all citizenships, is a package deal of rights, privileges, obligations, and responsibilities. Each individual weighs that package deal in different ways. Children, as it happens, don't have many obligations and responsibilities in terms of their citizenships. (Well, not with most developed economy citizenships.) But, as U.S. citizens, they do enjoy lots of rights and privileges, including the ability to be educated in and establish new careers in the world's largest economy.

Everybody is different. That's certainly what I recognize, and so do most rational adults and parents.

There are also alien spouses married to high net worth U.S. citizens who acquire U.S. citizenship in part (or even primarily) to enjoy the unlimited spousal estate tax exemption. That's another privilege of U.S. citizenship for a certain cohort.

Broadway isn't in Japan, Hollywood isn't in Ecuador, Silicon Valley isn't in Turkey, and Harvard isn't in Morocco. U.S. citizenship is often genuinely attractive to many people, even to the children (and future children) of U.S. citizens for whom citizenship is diminishing in attractiveness.

I'm not jingoistic about this stuff, but I'm also not _anti-jingoistic_ about this stuff. And it is important stuff.


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## iota2014

BBCWatcher said:


> I think we should treat this issue like adults, with at least some seriousness.


Considering whether to renounce, yes, I agree. That's a serious decision, especially for anyone with US family connections.

But the idea that would-be renunciants might decide to bring a few little huggable free-money-producing US citizens into the world, and *then* renounce, is farcical. 



> I'm not jingoistic about this stuff, but I'm also not _anti-jingoistic_ about this stuff.


Merriam-Webster on the simple definition of jingoism:



> : the feelings and beliefs of people who think that their country is always right and who are in favor of aggressive acts against other countries


Happy to hang my hat on the anti-jingoism peg.


----------



## ForeignBody

iota2014 said:


> ...But the idea that would-be renunciants might decide to bring a few little huggable free-money-producing US citizens into the world, and *then* renounce, is farcical.


I cannot see why consideration of the implications for one's children, or future children, is farcical. Children are often a major component in the decision making concerning renunciation.


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## iota2014

ForeignBody said:


> I cannot see why consideration of the implications for one's children, or future children, is farcical. Children are often a major component in the decision making concerning renunciation.


If a person finds US citizenship burdensome for themselves, why would they want to lay the burden on their unborn children?


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## maz57

BBCWatcher said:


> If you're thinking of renouncing U.S. citizenship for tax and financial reporting reasons, then it's prudent to really dig into those issues.....


For most renunciants, those are the ONLY reasons. Sure, there will always be a very few who are trying to make some sort of a "statement", and there will be a few more who must renounce if they wish to become citizens of their new country of residence. (Germany, for example) If the US had a residential based tax system like every other civilized country, the vast majority of these renunciations would not be happening. The IRS' ramping up of offshore enforcement and the FATCA witch hunt has dramatically increased the numbers, in spite of US government efforts to stem the flow by hiking the fees and restricting the number of available appointments.

You are right about US filings getting somewhat easier after doing a return or two, but that still doesn't fix all the problems caused by superimposing the US tax code on top of a home country's code. Its the loss of financial freedom and opportunity coupled with the onerous reporting that is really driving people to shed US citizenship. (Not to mention the feeling of always having to look over one's shoulder because big brother is watching.) Most reasonable people don't react well to continuously being portrayed and treated like a criminal, myself included. None of this has anything to do with collecting actual tax because most don't owe tax. What benefit accrues to the US government by severely limiting and restricting the financial options of its expats?

The sad part is that the people who renounce are effectively bound by a gag order; if they say anything to any US official about the real reasons i.e., tell the truth, they risk being banned for life from returning to the US. It all seems so stupid, pointless, and vindictive.


----------



## iota2014

maz57 said:


> Most reasonable people don't react well to continuously being portrayed and treated like a criminal, myself included. None of this has anything to do with collecting actual tax because most don't owe tax. What benefit accrues to the US government by severely limiting and restricting the financial options of its expats?


That baffled me extremely when I first tried to get my head round the US-UK Tax Treaty. Eventually I came across an article which puts forward a possible explanation: the US tries to use the tax treaties and the saving clause to make it hard for citizens to invest their money in a "foreign" country, leaving them little alternative but to invest in the US instead.



> One unique feature of US tax treaty policy – which is unlikely to be affected by either tax reform or BEPS – is the limited grant of treaty benefits to US persons. For more than 55 years the United States has been consistently reluctant to grant those benefits to its citizens and residents. Flowing directly from a hearing of the Senate Foreign Relations Committee in 1957, when Harvard Law School Professor Stanley Surrey spoke out forcefully against a 'tax sparing' provision in a proposed treaty with Pakistan, US policy has remained remarkably firm on this issue regardless of the political map or the persons inhabiting the US Treasury.(2) US treaties are not used to encourage foreign investment or other foreign activities by US persons.(3) However, the United States cannot withhold all treaty benefits from US persons because the basic 'deal' inherent in a tax treaty involves a reduction or elimination of tax in the country of source and a commitment by the country of residence to avoid double international taxation. This commitment is essential to any tax treaty. If it were not accorded to US persons, such treaties could not be concluded.
> 
> The mechanism devised to accommodate a policy of using treaties primarily to make concessions to foreign persons investing in the United States, and not to US persons investing abroad, while nevertheless abiding by commitments to residents that are indispensable to any treaty is the 'saving' clause. Found in Paragraphs 4 and 5 of Article 1 of the US model, the article dealing with the general scope of the treaty, the saving clause declares that the treaty has no application – does not exist – for US persons, including both US citizens and US residents (after application of the dual resident provisions of Article 4 of the model). Having thus removed US persons from any entitlement to treaty benefits, Article 1(5) carefully restores a limited number of benefits to all US persons and a second group of narrow benefits to US persons who are neither US citizens nor US permanent residents.The mechanism devised to accommodate a policy of using treaties primarily to make concessions to foreign persons investing in the United States, and not to US persons investing abroad, while nevertheless abiding by commitments to residents that are indispensable to any treaty is the 'saving' clause. Found in Paragraphs 4 and 5 of Article 1 of the US model, the article dealing with the general scope of the treaty, the saving clause declares that the treaty has no application – does not exist – for US persons, including both US citizens and US residents (after application of the dual resident provisions of Article 4 of the model). Having thus removed US persons from any entitlement to treaty benefits, Article 1(5) carefully restores a limited number of benefits to all US persons and a second group of narrow benefits to US persons who are neither US citizens nor US permanent residents. Into the first group fall the articles on relief from double taxation, non-discrimination and the mutual agreement procedure, as well as the commitment in Article 9 to make correlative adjustments in transfer pricing cases(4) and rules for pensions, social security payments, child support(5) and the treatment of pension funds.(6) In the latter category are other rules for pension funds, the treatment of income from government service(7) and income of students, trainees(8) and diplomats.(9) The saving clause can sometimes be overlooked or its potency underestimated, but it appears in every US tax treaty and US treaty policy cannot be understood without it.


The intersection of US tax treaty policy, tax reform and BEPS - Lexology


----------



## maz57

Nice find! We know the US tax code is designed to punish anything foreign, but I had no idea the principal was also entrenched in the various treaties.

As an aside, a number of years ago I tried to open a simple bank account at a bank on the US side near where I lived at the time. This was long before the IRS/CBT/FATCA witch hunt had begun and it was also before I had Canadian citizenship. I just thought a US account would be handy for cross-border shopping or whatever. They stopped me dead in my tracks. The reason? Not a US resident, no US address, no US phone number, and no US issued i.d. They just plain didn't want me to be their customer. As far as they were concerned, I was nothing but a homeless guy.

Expats are damned if they do and damned if they don't. The US wants US expats to maintain their investments in the US, punishes them via the tax code if they don't, but saddles US institutions with rules that prevent them from being able to do just that. On top of that, our own home governments would then be accusing us of being tax cheats because in their eyes we would be guilty of moving money to a foreign country to avoid tax. I am so glad to be rid of the whole rotten system.


----------



## iota2014

maz57 said:


> Nice find! We know the US tax code is designed to punish anything foreign, but I had no idea the principal was also entrenched in the various treaties.
> 
> As an aside, a number of years ago I tried to open a simple bank account at a bank on the US side near where I lived at the time. This was long before the IRS/CBT/FATCA witch hunt had begun and it was also before I had Canadian citizenship. I just thought a US account would be handy for cross-border shopping or whatever. They stopped me dead in my tracks. The reason? Not a US resident, no US address, no US phone number, and no US issued i.d. They just plain didn't want me to be their customer. As far as they were concerned, I was nothing but a homeless guy.


Yes, when they're looking to tax you, you're treated as if you were US resident. When you're trying to open a US bank account, you're treated as if you were an illegal immigrant. And none of it is ever explained. It's obvious to the policy-makers and treaty-writers that what's important is not the rights of the person being asked to pay the taxes, but the movement of capital into America. But the taxpayer isn't told. The taxpayer is just a means to an end.



> Expats are damned if they do and damned if they don't. The US wants US expats to maintain their investments in the US, punishes them via the tax code if they don't, but saddles US institutions with rules that prevent them from being able to do just that. On top of that, our own home governments would then be accusing us of being tax cheats because in their eyes we would be guilty of moving money to a foreign country to avoid tax. I am so glad to be rid of the whole rotten system.


Hear hear.


----------



## BBCWatcher

iota2014 said:


> If a person finds US citizenship burdensome for themselves, why would they want to lay the burden on their unborn children?


Simple: children are not adults. An adult's "burden" is not a child's, and it's "farcical" to project adult hangups onto children. Children are in very different situations. Most citizenships -- the developed economy citizenships without compulsory national service, at least -- consist of lots of rights and privileges for children (and young adults) with few or zero responsibilities and obligations.

As it happens, the U.S. tax code is very, very kind to children and young adults. It literally pays young (and even old) adults to go to college, for example. Moreover, Hollywood, Broadway, Silicon Valley, and Harvard (to pick four examples) are all in the United States. Children and young adults are full of potential, full of opportunity -- or could be, with valuable citizenships (plural is nice). Old farts are...less so. They're very different.(*)

This is not conceptually complicated or at least shouldn't be. I agree with ForeignBody.

(*) Sometimes not. Rupert Murdoch is an excellent example. He acquired U.S. citizenship as a mature adult. Why? Simple: for its enormous wealth and income generating benefits in his industry, media. There's just no serious question that he'd be a lot poorer and a lot less influential without his U.S. citizenship. He wouldn't have been able to grow his media empire nearly as much. Well, children and young adults are possible future Rupert Murdochs, but unlike Mr. Murdoch they have fewer (if any) responsibilities and obligations associated with U.S. citizenship. Rationally, logically, this is a very different deal for children and young adults, including your own. How you weight these factors is up to you, but there's just no question it's a different deal for your offspring at their ages.


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## maz57

An 8 month old Canadian child has just received a FATCA letter from her bank. This baby is 100% Canadian except for the unfortunate accident of being born in the US. This child now has 18 years of US tax filing and reporting to look forward to until she can renounce that unwanted citizenship. She is not allowed to renounce US citizenship herself until she is 18 and her parents are not allowed to renounce for her.

Baby girl drawn into CRA-IRS information sharing controversy – iPolitics

Of course, this is only fair because the child should have to pay for all that expensive publicly subsidized education she received while in the US and is now bringing back home to Canada. I certainly hope that education included instructions on filling out IRS forms because that is what she is going to be doing for the next 18 years. It is not clear if there is enough money in the account to require filling out her own FBARs.


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## iota2014

It's not likely that a person who is finding US taxation-based citizenship a burden for themselves, will want to deliberately have children *before* renouncing, thus passing the burden on to the next generation. That would be downright weird. If a person sees US citizenship as a valuable asset which they want to pass on to any children they may have, they're unlikely to be weighing the pros and cons of renunciation in the first place.

But there _are_ aspects of US citizenship which might lead the hypothetical would-be renunciant to reconsider. I'm rather surprised that only one (right of entry to the US) has been mentioned. Here are some that come to mind:

1. The US is still the world's only superpower and the world's dominant economy. If you have the right education/skills/contacts, and don't mind living in America, there may be opportunities available.

2. Pensions. The SSA gives a very good state pension, if you plan carefully and are well-informed about how it works - and provided it continues along present lines, which may or may not be likely, depending whose predictions you go with.

3. Landscape. Not so easy to access, if you have a fulltime job and can't easily travel, but certainly spectacular, in the National Parks at least.

That's all I can think of. I daresay there are others.

Most people considering renunciation probably aren't going to change their minds. It's the taxation-based citizenship that drives "US Persons" to renounce.


----------



## iota2014

maz57 said:


> It is not clear if there is enough money in the account  to require filling out her own FBARs.


This is how it works, isn't it? The family have been put on notice that any money invested for the child's future will just get her deeper into the clutches of FINCEN and the IRS. The IGA and the US tax treaty must be carefully studied before choosing any savings plan.


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## exp1010

I've run a dummy return on one of the sites, but cant seem to eliminate the liability. 

The foreign tax credit does not completely cover the liability, ending up with a net liability of 647 USD. 

The factor in line 19 of form 1116 is causing it as it is less than 1. It looks like the standard deduction isn't targeted at only the interest income and the exemption of 4k not being considered at all.

Here are the dummy figures in USD: 

Foreign salary: 150k
Bank interest: 3k (assumed to be received tax free in country of origin)
Foreign taxes paid: 50k

Does anyone have any ideas? Can't the deductions and exemptions be taken only against the taxable bank interest?

Thanks for your help.


----------



## maz57

iota2014 said:


> But there _are_ aspects of US citizenship which might lead the hypothetical would-be renunciant to reconsider. I'm rather surprised that only one (right of entry to the US) has been mentioned. Here are some that come to mind:
> 
> 1. The US is still the world's only superpower and the world's dominant economy. If you have the right education/skills/contacts, and don't mind living in America, there may be opportunities available.
> 
> 2. Pensions. The SSA gives a very good state pension, if you plan carefully and are well-informed about how it works - and provided it continues along present lines, which may or may not be likely, depending whose predictions you go with.
> 
> 3. Landscape. Not so easy to access, if you have a fulltime job and can't easily travel, but certainly spectacular, in the National Parks at least.


#1 Above: Opportunities become available whenever and wherever they are available, generally unpredictably. Personally, I moved to Canada to pursue opportunities which were not available in the US at the time. Obviously if one thought they might like to return to the US to work some time in the future, renouncing wouldn't be a consideration.

#2. US Social Security benefits depend on how long and how much one pays into their system, not on citizenship. If one is not living in the US when they retire, the interaction between the home country's system and the US system will come into play. Often it is possible to receive a partial SS benefit even if one didn't otherwise not pay into SS long enough. The totalization agreements govern how this works and it varies from country to country.

#3. Some like to cite not being able to visit the Grand Canyon as an argument against renouncing but the truth is that afterwards one will generally be able visit the US subject to the exact same rules which govern any other citizen of the home country. For example, a Canadian (even if they are a former US citizen) is normally granted a 6 month visa-free entry. Over time, according to a formula in the US rules, a Canadian would be unwise to spend more than an average of 120 days per year over any 3 year period or they risk being re-claimed by the US tax system! This is more than enough time to visit the Grand Canyon or anywhere else. I have my favorite places and visit them regularly. I stay as long as I like and I don't even come close to the 120 day limit. In theory, one could be banned under the Reed Amendment, but that is extremely rare. Even the infamous Roger Ver wasn't banned under the Reed Amendment but rather was refused entry because they suspected he was likely to work in the US.


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## exp1010

exp1010 said:


> I've run a dummy return on one of the sites, but cant seem to eliminate the liability.
> 
> The foreign tax credit does not completely cover the liability, ending up with a net liability of 647 USD.
> 
> The factor in line 19 of form 1116 is causing it as it is less than 1. It looks like the standard deduction isn't targeted at only the interest income and the exemption of 4k not being considered at all.
> 
> Here are the dummy figures in USD:
> 
> Foreign salary: 150k
> Bank interest: 3k (assumed to be received tax free in country of origin)
> Foreign taxes paid: 50k
> 
> Does anyone have any ideas? Can't the deductions and exemptions be taken only against the taxable bank interest?
> 
> Thanks for your help.


Having played around with it some more, its the bank interest that is causing it. 

I just added another 1116 for the bank interest (despite no tax having been paid/claimed), which takes my gross foreign income to the same level as my gross income from all sources.

Is this how it should be captured in the tax return?


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## Bevdeforges

exp1010 said:


> I've run a dummy return on one of the sites, but cant seem to eliminate the liability.
> 
> The foreign tax credit does not completely cover the liability, ending up with a net liability of 647 USD.
> 
> The factor in line 19 of form 1116 is causing it as it is less than 1. It looks like the standard deduction isn't targeted at only the interest income and the exemption of 4k not being considered at all.
> 
> Here are the dummy figures in USD:
> 
> Foreign salary: 150k
> Bank interest: 3k (assumed to be received tax free in country of origin)
> Foreign taxes paid: 50k
> 
> Does anyone have any ideas? Can't the deductions and exemptions be taken only against the taxable bank interest?
> 
> Thanks for your help.


One problem is that you have to apportion both the standard deduction and the personal exemption(s) between the different types of income: "earned" (i.e. salary) and "passive" (i.e. investment income). So in your example, 98% of your income is your foreign salary and only 2% is "passive" income (i.e. the interest). So, only 2% of the standard deduction and your personal exemption can be applied against the interest income. 

I'm not sure how you have to split that "foreign taxes paid" figure - but the general rule is that you have to apportion the foreign taxes paid, too, according to the type of income. Not sure if you get 0 tax credit against interest on which you paid no foreign taxes, or if you can apportion the taxes paid, and consider 2% of that 50K to be paid on the "tax free" interest. Someone with more FTC experience than I have will have to guide you on that one.
Cheers,
Bev


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## exp1010

Thanks Bev.

Having briefly spoken with an accountant here a couple of days ago, they said that normally one wouldn't pay any tax until there is a significant amount held in the UK tax free wrapper. 

Having run the example numbers now it seems that tax would be payable on the first dollar of UK tax free interest. I don't think the 50k of income tax can be offset against the interest.

Will need to look into it further.


----------



## iota2014

maz57 said:


> #1 Above: Opportunities become available whenever and wherever they are available, generally unpredictably. Personally, I moved to Canada to pursue opportunities which were not available in the US at the time. Obviously if one thought they might like to return to the US to work some time in the future, renouncing wouldn't be a consideration.


Certain kinds of opportunities are particularly American though. BBCWatcher likes to mention Hollywood, though that sounds a bit yesterday to me.



> #2. US Social Security benefits depend on how long and how much one pays into their system, not on citizenship. If one is not living in the US when they retire, the interaction between the home country's system and the US system will come into play. Often it is possible to receive a partial SS benefit even if one didn't otherwise not pay into SS long enough. The totalization agreements govern how this works and it varies from country to country.


Indeed. Hooray for totalization agreements. 

Yes, SS benefits don't depend on citizenship but accumulating the 30 years needed to get a WEP-free pension is a lot easier if you have the right to work. It seems to be a not uncommon strategy - work in the US for > 30 years and go back to home country to retire - especially if the home country is one of those where the SS benefit is paid tax-free.



> #3. Some like to cite not being able to visit the Grand Canyon as an argument against renouncing but the truth is that afterwards one will generally be able visit the US subject to the exact same rules which govern any other citizen of the home country.


 Probably.

Pros, like cons, are cumulative, and might tilt the balance towards keeping the citizenship, for someone who was undecided. There must be more benefits to US citizenship than the ones I've been able to think of.


----------



## iota2014

exp1010 said:


> Having briefly spoken with an accountant here a couple of days ago, they said that normally one wouldn't pay any tax until there is a significant amount held in the UK tax free wrapper.


As I understand it, that would be true if you also had some non-tax-free savings on which you did pay UK tax. That would give you some passive income tax credits. Maybe that was what the accountant had in mind.

There's a specifically-UK/US tax forum you could try.

US - UK Taxes


----------



## exp1010

That's what I thought.

Very difficult to build up any meaningful balance of passive foreign tax credits as the UK tax thresholds are reasonably high:

5k of divs tax free
11k capital gains
1k bank interest

Seems that the tax treaty favors the rich as they will likely have used up all their UK tax free allowances, and can offset the rest due to the tax rate differential.


----------



## iota2014

exp1010 said:


> That's what I thought.
> 
> Very difficult to build up any meaningful balance of passive foreign tax credits as the UK tax thresholds are reasonably high:
> 
> 5k of divs tax free
> 11k capital gains
> 1k bank interest
> 
> Seems that the tax treaty favors the rich as they will likely have used up all their UK tax free allowances, and can offset the rest due to the tax rate differential.


The tax treaty is supposed to prevent double taxation. By their lights, it's okay for the US to tax income which hasn't been taxed by the UK (such as a cash ISA) because that doesn't count as double taxation. It certainly feels like double taxation to the person paying though.


----------



## maz57

iota2014 said:


> Pros, like cons, are cumulative, and might tilt the balance towards keeping the citizenship, for someone who was undecided. There must be more benefits to US citizenship than the ones I've been able to think of.


I think the pro/con determination winds up being a very personal calculation. Personally, I couldn't give a hoot about Hollywood or Broadway, but the prospect of retiring somewhere warm had definite appeal. Eventually I found out that I can legally spend more time there than I would ever need without being a US citizen or a US taxpayer. What I couldn't stand was them trying to interfere with my financial life here in Canada.

US citizenship is absolutely invaluable if you want to live there, work there, retire there, or spend a very significant amount of time there. And if one is going to do any of those things, one can't really complain about their tax system. (At least not any more or less than average Joe US citizen who has never set foot outside the US!)


----------



## Bevdeforges

> I think the pro/con determination winds up being a very personal calculation. Personally, I couldn't give a hoot about Hollywood or Broadway, but the prospect of retiring somewhere warm had definite appeal. Eventually I found out that I can legally spend more time there than I would ever need without being a US citizen or a US taxpayer. What I couldn't stand was them trying to interfere with my financial life here in Canada.
> 
> US citizenship is absolutely invaluable if you want to live there, work there, retire there, or spend a very significant amount of time there. And if one is going to do any of those things, one can't really complain about their tax system. (At least not any more or less than average Joe US citizen who has never set foot outside the US!)


I really think this is the crux of the matter. It IS a very personal decision. For some people, having family back in the US can tip the scales when considered against the small (but not negligible) possibility that you might be prevented from visiting back there at some time in the future. And, of course, if someone is interested in the possibility of living and/or working in the US someday. For others, it may be precisely the things that some people cite as the "advantages" of US citizenship that are considered encumbrances.

I actually know some people whose children are very upset that they wound up being "accidental Americans" and subject to all the rules and reporting requirements - and again, it's a matter of personal circumstances and the kids' life plans where that "automatic" citizenship may turn out to be either a big advantage or a monstrous pain in the butt.
Cheers,
Bev


----------



## iota2014

maz57 said:


> US citizenship is absolutely invaluable if you want to live there, work there, retire there, or spend a very significant amount of time there. And if one is going to do any of those things, one can't really complain about their tax system. (At least not any more or less than average Joe US citizen who has never set foot outside the US!)


Personally I think anyone subjected to the American tax system, within or beyond the borders, has a positive duty to complain.


----------



## maz57

iota2014 said:


> Personally I think anyone subjected to the American tax system, within or beyond the borders, has a positive duty to complain.


Well, the folks on this forum are certainly doing their fair share. Heck, I'm not even subject to the system anymore and I'm still complaining about it!


----------



## iota2014

maz57 said:


> Well, the folks on this forum are certainly doing their fair share. Heck, I'm not even subject to the system anymore and I'm still complaining about it!


It's still sucking capital from Canada to America though.


----------



## maz57

iota2014 said:


> It's still sucking capital from Canada to America though.


I don't think our politicians are very smart. They not only allowed the US vacuum cleaner to begin sucking away our Canadian wealth, they volunteered to pay for the vacuum cleaner. Most of them still don't get it.


----------



## BBCWatcher

iota2014 said:


> BBCWatcher likes to mention Hollywood, though that sounds a bit yesterday to me.


The Motion Picture Association of America just (days ago) announced that 2015 was an all-time record revenue year for the industry. The MPAA's sister industry, television, is also doing extremely well -- so well the reviewers are complaining they can't keep up with all the wonderful program. There are about 400 scripted shows in production, another record.

With respect to U.S. Social Security, another common strategy is to work for ~20 years (for example) in the U.S. and the rest of the time in subordinate employment in a country without a social security system. (Dubai works, for example.) That yields excellent retirement and spousal benefits, no payroll taxes (for the overseas stint), and no Windfall Elimination Provision. I'm probably falling into that scenario, but we'll see. There are also scenarios that involve seasonal employment across treaty countries so that you get the 30 years of substantial earnings on the U.S. side while also qualifying for benefits from another country's system. (You don't even need to be physically present in the U.S. to pull that off.)


----------



## iota2014

maz57 said:


> I don't think our politicians are very smart. They not only allowed the US vacuum cleaner to begin sucking away our Canadian wealth, they volunteered to pay for the vacuum cleaner. Most of them still don't get it.


I guess Canada is in a somewhat different position from America's other close allies, having more US Person residents. I suspect the UK probably saw the FATCA legislation as a welcome development - a chance to increase control over the banks and crack open their records, and a model to follow. They didn't lose any time implementing their own version of FATCA - CDOT.

And the governments are used to the capital-flow game, and America cooking the rules so that it gets the biggest share. It's all there in the tax treaties. It's just us ordinary taxpayer mugs that never knew about it. As per usual I suppose.


----------



## exp1010

Bevdeforges said:


> One problem is that you have to apportion both the standard deduction and the personal exemption(s) between the different types of income: "earned" (i.e. salary) and "passive" (i.e. investment income). So in your example, 98% of your income is your foreign salary and only 2% is "passive" income (i.e. the interest). So, only 2% of the standard deduction and your personal exemption can be applied against the interest income.
> 
> I'm not sure how you have to split that "foreign taxes paid" figure - but the general rule is that you have to apportion the foreign taxes paid, too, according to the type of income. Not sure if you get 0 tax credit against interest on which you paid no foreign taxes, or if you can apportion the taxes paid, and consider 2% of that 50K to be paid on the "tax free" interest. Someone with more FTC experience than I have will have to guide you on that one.
> Cheers,
> Bev


Claiming the FTC is by income category, so I can't use any excess on earned income to offset the passive one. This means that the passive income (no matter how small) will always be subject to tax.

What could potentially be an option is to claim foreign tax paid as a deductible on Schedule A.

-This deduction appears to be applied regardless of income type (taking the earned income tax against the small amount of passive income) - can anyone confirm if this is the case?

-What are the key drivers of whether the FTC or the itemized deduction is preferable? I understand the FTC can be carried forward (beneficial if moving from a high tax to low tax jurisdiction), but I will be staying in a high tax jurisdiction for the foreseeable future.

Thanks for the help!


----------



## Bevdeforges

You can claim the foreign taxes paid on Schedule A - but if you go that way, the foreign tax paid is only a deduction against the income, not against the US tax liability. Simple example:
Income (of whatever sort) is $10,000
Foreign tax paid: $2,500 (i.e. 25%)
US tax liability: $1,500 (15%)

If you take the FTC, you offset the $2500 in US tax liability and have $1000 to carry over to next year.

If you deduct the foreign tax on Schedule A, it reduces your income to $7,500. And assuming the same 15% tax rate applies, you'll pay $1125 (15% of $7500) in US taxes.

Generally speaking the Schedule A deduction is NOT advantageous if you're looking to minimize your taxes. There are, however, some circumstances where you have other motivations when doing your US taxes. Can't think of an example off hand, but I do remember from business school our tax professor came up with some examples - not terribly common situations, admittedly, but there are some circumstances where the deduction might be preferable.
Cheers,
Bev


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## exp1010

So if I were to deduct the foreign tax on Schedule A, would I still be eligible for FEIE and housing cost exclusion? Even with those there is probably a case where the liability will eventually catch up to me because of stacking rules.

The issue I'm struggling with is that I will have a fairly high level of earned income (for which I have a number of ways of eliminating the tax charge), but can't find a way to eliminate the taxes on the small passive income (which are tax free in the UK).


----------



## iota2014

exp1010 said:


> So if I were to deduct the foreign tax on Schedule A, would I still be eligible for FEIE and housing cost exclusion?


Unfortunately, no.



> Taking Other Credits or Deductions Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income. If a foreign tax credit or tax deduction is taken on any of the excluded income, the foreign earned income exclusion will be considered revoked.


https://www.irs.gov/uac/Five-Facts-about-the-Foreign-Earned-Income-Exclusion



> The issue I'm struggling with is that I will have a fairly high level of earned income (for which I have a number of ways of eliminating the tax charge), but can't find a way to eliminate the taxes on the small passive income (which are tax free in the UK).


It's the passive income they're after. They can't tax it if the UK has already taxed it, but tax free savings accounts are sitting ducks.


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## exp1010

Thanks iota.

My interpretation is that any further deductions can't be taken on the excluded income, but that deductions can be taken on any left over earned income (not sure if the tax paid is just pro-rated, or calculated as if the leftover income was earned by itself). In any case, this would unlikely be worthwhile compared to the standard deduction.

As long as the FEIE/housing cost exclusion cover the earned income, then surely the personal exemption and standard deduction ought to apply to the passive income?


----------



## BBCWatcher

That's how it typically works, yes.


----------



## Bevdeforges

exp1010 said:


> As long as the FEIE/housing cost exclusion cover the earned income, then surely the personal exemption and standard deduction ought to apply to the passive income?


That part is correct. See Publication 54 or the instructions for the form 2555. Basically, as long as your passive income not eligible for the FEIE is less than about $10,000 (or whatever the combined total is for your filing status for your personal exemption and the standard deduction). Past that, you're dealing with apportioning your (itemized) deductions and the FTC.

OTOH, you can take the FEIE on your earned income and then also take the FTC for foreign taxes paid on your passive income. 
Cheers,
Bev


----------



## exp1010

Great. 

It's starting to look like FEIE + housing exclusion might be the way forward. This should keep me tax free for a couple of years, even with the tax free passive income.

By the time my _earned_ income breaches FEIE + housing exclusion, I will need to find myself some passive foreign tax credits that I can start using to offset the tax free passive income.

Just to confirm that my understanding is right, this approach will no longer work when either:

- Earned income exceeds FEIE + housing exclusion; or
- Passive income exceeds sum of personal exemption and standard deduction


----------



## BBCWatcher

You can still often do quite well above those amounts. The Foreign Tax Credit still applies to non-excluded foreign earned income, and the personal exemption/standard deduction is not limited to a particular income category.

With respect to tax free passive income, have you checked whether there are U.S. tax advantaged accounts that are respected within the United Kingdom's tax code (or by treaty)? If such an account exists, and if you can take advantage of it, that'd be an effective tax minimization approach.


----------



## iota2014

exp1010 said:


> Great.
> 
> It's starting to look like FEIE + housing exclusion might be the way forward. This should keep me tax free for a couple of years, even with the tax free passive income.
> 
> By the time my _earned_ income breaches FEIE + housing exclusion, I will need to find myself some passive foreign tax credits that I can start using to offset the tax free passive income.


The problem I ran into (before I realized that treaty exemptions brought my income below the filing threshold), was that although I could claim passive income tax credits on the part of my passive income for which I had paid UK taxes, I didn't have any _excess_ passive foreign tax credits to set against the tax-free passive income. I may have been missing something obvious.


----------



## iota2014

BBCWatcher said:


> With respect to tax free passive income, have you checked whether there are U.S. tax advantaged accounts that are respected within the United Kingdom's tax code (or by treaty)? If such an account exists, and if you can take advantage of it, that'd be an effective tax minimization approach.


But might not be advisable if the OP is considering renunciation.


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## BBCWatcher

iota2014 said:


> But might not be advisable if the OP is considering renunciation.


If there's a high withholding rate (30%) on those funds post-renunciation that might give one pause. But I think it's only 15% for U.K. residents. All the U.S. tax advantages carry on, and U.S. tax free (e.g. Roth IRA) is still U.S. tax free, albeit with 15% withheld then refunded. If a Roth IRA is treaty respected, that'd work.

I think it's perfectly fine in general. Plenty of former U.S. persons hold U.S. tax advantaged assets for very sensible reasons. There's even some value in tax diversification in and of itself since tax policy details change frequently.


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## iota2014

Perfectly feasible, I don't doubt, if one's prepared to go on sharing one's life with the IRS.


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## exp1010

BBCWatcher said:


> You can still often do quite well above those amounts. The Foreign Tax Credit still applies to non-excluded foreign earned income, and the personal exemption/standard deduction is not limited to a particular income category.
> 
> With respect to tax free passive income, have you checked whether there are U.S. tax advantaged accounts that are respected within the United Kingdom's tax code (or by treaty)? If such an account exists, and if you can take advantage of it, that'd be an effective tax minimization approach.


Thanks all for the responses. Very helpful - feel like I'm starting (albeit slowly) to get my head around this.

Regarding exceeding the FEIE and housing amounts. How is the FTC calculated on the non-excluded part? Say I can exclude all income but 10k USD. Would the FTC be what I would have paid on standalone earnings of 10k (in this case 0 due to the lowest UK tax bracket), or would the actual tax paid be prorated?

Would the amounts available for standard deduction and personal exemption be impacted? Would these need to be allocated by income type if I take the FTC on the remaining income? (i.e. now 10k of earned income and remaining passive).


The approach of investing in the US could work, whereby distributions/interest from a US tax efficient account (Roth IRA or equivalent) could fall within the UK tax free thresholds. Only issue is eligibility for the US accounts without a US address, and any detailed exclusions in the tax treaty.


Thanks!


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## Bevdeforges

BBCWatcher said:


> With respect to tax free passive income, have you checked whether there are U.S. tax advantaged accounts that are respected within the United Kingdom's tax code (or by treaty)? If such an account exists, and if you can take advantage of it, that'd be an effective tax minimization approach.


One thing I would be careful of here... it may depend on the details of how/why the UK (or any other country) "respects" the US tax advantaged accounts. I haven't researched it in much depth, but for example in France, they don't mess with a US retirement fund (IRA or 401K) here on the principle that if it was entirely funded before the taxpayer became resident in France, then it's only subject to US income taxes and not French on withdrawal. 

I stumbled onto that a while ago, but the implication is that, if you have funded an IRA or 401K from earned income received while resident in France and subject to French tax law, you may wind up complicating the situation significantly.

As I said, I haven't dug into this all that deeply (in part because I'm not affected) but caveat emptor and all that. 
Cheers,
Bev


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## BBCWatcher

Well, what does the U.S.-France tax treaty say?


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## Bevdeforges

BBCWatcher said:


> Well, what does the U.S.-France tax treaty say?


Absolutely nothing. Just the same old stock standard phrase about "the party of the first part...." that boils down to government pensions are taxed by the state they come from. But nothing about IRAs, nor "tax-deferred savings" nor how to handle foreign pensions on either US or French tax returns. That's the "fun" part of taxes - interpreting the gobbledy-****.
Cheers,
Bev


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## exp1010

BBCWatcher said:


> You can still often do quite well above those amounts. The Foreign Tax Credit still applies to non-excluded foreign earned income, and the personal exemption/standard deduction is not limited to a particular income category.
> 
> With respect to tax free passive income, have you checked whether there are U.S. tax advantaged accounts that are respected within the United Kingdom's tax code (or by treaty)? If such an account exists, and if you can take advantage of it, that'd be an effective tax minimization approach.



The anecdotal rule of thumb seems to be that as long as the passive un-taxed income does not exceed the standard deduction and personal exclusion one should be free of a liability as long as you are in a higher tax jurisdiction.

Is the key assumption that I am missing here that one claims FEIE and housing exclusions, and FTC for any excess? 

I cant eliminate the liability by just using FTC because the total income is higher than the earned income on which the FTC is calculated, creating a differential (lines 17 to 19 of the 1116). 

This is on the basis of 150k earned income (on which 50k foreign tax is payable) and 3k of tax free bank interest.


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## BBCWatcher

exp1010 said:


> Is the key assumption that I am missing here that one claims FEIE and housing exclusions, and FTC for any excess?


Yes, you can still claim the FTC on all non-excluded income, including on earned income over the FEIE/FHE limits.


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## BBCWatcher

Bevdeforges said:


> Absolutely nothing.


OK, so if the tax treaty is silent on IRAs (and anything like IRAs) then they're not treaty respected, and France would tax them just like any other "standard" account. That's simple.


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## Bevdeforges

BBCWatcher said:


> OK, so if the tax treaty is silent on IRAs (and anything like IRAs) then they're not treaty respected, and France would tax them just like any other "standard" account. That's simple.


Didn't realize you were talking about "treaty respected." The exception for certain foreign pension plans that were fully funded before you became French tax resident applies to all countries, not just the US. The point, if you may recall, to this whole discussion was simply to alert folks to check their country of residence rules before assuming that you can continue to fund a US tax-deferred retirement fund without tax consequences down the road.
Cheers,
Bev


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## exp1010

BBCWatcher said:


> Yes, you can still claim the FTC on all non-excluded income, including on earned income over the FEIE/FHE limits.


Makes sense. However, I am still struggling to eliminate the liability despite the passive income not exceeding the standard deduction and personal exclusion.

Does this stop applying when your earned income exceeeds FEIE and housing?

The accountant sounded confident that this would not cause a liability, but would (obviously) not tell me how!


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## BBCWatcher

All income gets apportioned to the standard deduction/personal exemption. That's not a separate "bucket" for passive income. If earned income is fully excluded then passive income happens to land there (and perhaps overflow that "bucket" if big enough). But if earned income isn't fully excluded then all the non-excluded income is effectively mixed together in that standard deduction/personal exemption "zone."

Likewise, the FTC calculation is a bit complicated since it attempts to apportion the foreign income tax across all your income.

So what does all that mean in the end result? "It depends." In the simple case, if the foreign income tax is an effective tax rate of X% across all earned and passive income, and if X% is higher than the hypothetical U.S. rate, then everything should fall to zero on the U.S. side (or even less than zero, i.e. you still have excess FTCs). If you have different foreign tax rates on earned v. passive income then "strange" things can happen. For example, if your passive income is "lightly" taxed, if it's reasonably substantial, if you've excluded earned income that is heavily foreign taxed, and if you don't have much heavily taxed earned income above the exclusion then you can lose the most "powerful" FTCs, "overwhelm" your deduction/exemption, and end up owing a bit of U.S. tax on the passive income.

Hopefully that made sense.


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## exp1010

BBCWatcher said:


> All income gets apportioned to the standard deduction/personal exemption. That's not a separate "bucket" for passive income. If earned income is fully excluded then passive income happens to land there (and perhaps overflow that "bucket" if big enough). But if earned income isn't fully excluded then all the non-excluded income is effectively mixed together in that standard deduction/personal exemption "zone."
> 
> Likewise, the FTC calculation is a bit complicated since it attempts to apportion the foreign income tax across all your income.
> 
> So what does all that mean in the end result? "It depends." In the simple case, if the foreign income tax is an effective tax rate of X% across all earned and passive income, and if X% is higher than the hypothetical U.S. rate, then everything should fall to zero on the U.S. side (or even less than zero, i.e. you still have excess FTCs). If you have different foreign tax rates on earned v. passive income then "strange" things can happen. For example, if your passive income is "lightly" taxed, if it's reasonably substantial, if you've excluded earned income that is heavily foreign taxed, and if you don't have much heavily taxed earned income above the exclusion then you can lose the most "powerful" FTCs, "overwhelm" your deduction/exemption, and end up owing a bit of U.S. tax on the passive income.
> 
> Hopefully that made sense.


Thanks BBCWatcher. I think you hit the nail on the head in explaining it like you would to a dog. I finally get it!  I never stood a chance against Pub 54.

I was trying to solve the unsolvable in the scenario I was running. Looks like I cant get away from the tax in this instance, but luckily it will be fairly minor for this year. It will likely keep growing over the years due to the generous tax breaks here for low levels of passive income.

Will need to have a look at ways around it, but I will cross that bridge when I get there.


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