EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

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Topic Author
assyadh
Posts: 85
Joined: Tue Sep 18, 2018 12:44 pm

EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Fri Nov 08, 2019 6:15 pm

Hi Everyone,

I am originally from France, and currently working in the US. I just had a green card, and don't plan to take the citizenship route in light of the current nightmare for US Persons living out of the US (FATCA, PFIC, FBARs, Worldwide taxation) as I know I will leave the US at some point.

I plan to leave the US in the next 7/10 years and not be subject to an exit tax (< 2M net worth anyways).

I participate into my workplace 401k up to the match, and put the rest in a taxable brokerage account with Schwab (which I will transfer to IB before leaving the US) in a mix of VTI/VXUS.

Depending on the amount in the 401k at this point, I may or may not withdraw everything. My best choice would be to severe ties with the IRS because I don't want to have to file a 1040NR tax return, deal with witholding by my broker etc..


I am well aware of navigating the tax treaties, the saving clauses and how I could theoretically not pay US taxes (by applying a FTC) but I don't want the headache that comes with having ties with the IRS.

Also, After my time in the US, I will probably move to a no cap gains country and sell off my investments (Belgium, Switzerland, UAE or Malaysia are on my radar).

My question: To people with a similar experience (@ TedSwipett :sharebeer ), what do you think about my overall plan?
If you could do it again, would you still apply for US Citizenship?

Thanks.

TedSwippet
Posts: 2477
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by TedSwippet » Fri Nov 08, 2019 7:02 pm

assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I plan to leave the US in the next 7/10 years and not be subject to an exit tax (< 2M net worth anyways).
The sort of thing that might catch you out here would be an unexpected inheritance. Also stock option payoff. Or less likely, lottery win. Just a thought. I didn't expect to be caught by the 'exit tax' either, but circumstances change. Also, laws change. The exit tax didn't exist when I took out a green card, otherwise I probably would not have done so, but survived on L1 and H1b instead. The $2m asset limit might not be $2m when you encounter it. It could be higher, or it could be lower. Or it could be zero. Of note is that it is not indexed for inflation.
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I participate into my workplace 401k up to the match, and put the rest in a taxable brokerage account with Schwab (which I will transfer to IB before leaving the US) in a mix of VTI/VXUS.
If you do not withdraw everything (see below), look closely at how your new country will tax both VTI/VXUS (unwrapped) and your 401k. Some countries have PFIC-like tax for 'offshore' funds, though even at their worst these are normally mere pale shadows of the US's PFIC horror. And some do not recognise US retirement plans as retirement plans.
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
Depending on the amount in the 401k at this point, I may or may not withdraw everything. My best choice would be to sever ties with the IRS because I don't want to have to file a 1040NR tax return, deal with witholding by my broker etc..
It should be possible for you to live in many countries and not have to file 1040NRs or any of the other menagerie of US forms. If your broker or platform is competent -- and it seems a fair few are not, particularly when it comes to IRAs and 401ks -- and you send them a short W-8BEN every few years, the US tax withholding will exactly match your US tax liability, if any, on what they send you. In that case, you do not have to file any US tax returns. Unlike US citizens, nonresident aliens whose US tax is fully satisfied by withholding so that they have a zero tax liability have no US tax filing requirements.

Where you have a less than competent broker or pension provider though, you might want to file a 1040NR to get back what they overwithheld through not paying attention fully to the rules regarding receipt of a W-8BEN. So there's that danger. Closing and withdrawing everything would remove it entirely, but beware of the 10% early withdrawal penalty on IRAs and 401ks if under age 59.5. That might be quite a price to pay for just not having to file the occasional W-8BEN or US tax form.
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I am well aware of navigating the tax treaties, the saving clauses and how I could theoretically not pay US taxes (by applying a FTC) but I don't want the headache that comes with having ties with the IRS.
As noted above, headaches are entirely possible, but they are not guaranteed. Your level of interaction with the IRS might be painful, or it might be nonexistent. Mostly it depends on your broker's competence with foreign resident account holders. (There's always the spectre of having to file a 706NA nonresident alien estate tax return, but that's not strictly your problem at all!)
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
If you could do it again, would you still apply for US Citizenship?
I didn't apply for US citizenship the first time around. I certainly wouldn't do differently if given a second opportunity. It's worthwhile if you plan a definite return to the US in future. Otherwise, it's just a horrifically expensive option with perhaps a very low probability of exercise.

Topic Author
assyadh
Posts: 85
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Fri Nov 08, 2019 7:38 pm

First of all, thanks for your message.
I already have I strong EU Citizenship, and a backup plan with another North African citizenship, so really having a US Passport does not bring anything to the table for me.

My remarks follow:
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I plan to leave the US in the next 7/10 years and not be subject to an exit tax (< 2M net worth anyways).
The sort of thing that might catch you out here would be an unexpected inheritance. Also stock option payoff. Or less likely, lottery win. Just a thought. I didn't expect to be caught by the 'exit tax' either, but circumstances change. Also, laws change. The exit tax didn't exist when I took out a green card, otherwise I probably would not have done so, but survived on L1 and H1b instead. The $2m asset limit might not be $2m when you encounter it. It could be higher, or it could be lower. Or it could be zero. Of note is that it is not indexed for inflation.
Yes, I have to be careful. My brokerage account is jointly held by my wifeand I, so in theory it could grow to slightly less than 4M before hitting the exit tax. I would be loooong gone before that as my target right now is around 1.5M. We would need a really high return/inflation to bring us to 4M before us exitting the US.
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I participate into my workplace 401k up to the match, and put the rest in a taxable brokerage account with Schwab (which I will transfer to IB before leaving the US) in a mix of VTI/VXUS.
If you do not withdraw everything (see below), look closely at how your new country will tax both VTI/VXUS (unwrapped) and your 401k. Some countries have PFIC-like tax for 'offshore' funds, though even at their worst these are normally mere pale shadows of the US's PFIC horror. And some do not recognise US retirement plans as retirement plans.
The French tax treaty with the US only taxes IRAs in the US. It is shielded by the most recent protocol (even roths). Also, France has an estate tax treaty with the US.
Concerning VTI/VXUS (which are the bulk of my taxable), the position would be closed in a no cap gains country in favor of a VWRA or IWDA EMIM mix before going back to France.
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
Depending on the amount in the 401k at this point, I may or may not withdraw everything. My best choice would be to sever ties with the IRS because I don't want to have to file a 1040NR tax return, deal with witholding by my broker etc..
It should be possible for you to live in many countries and not have to file 1040NRs or any of the other menagerie of US forms. If your broker or platform is competent -- and it seems a fair few are not, particularly when it comes to IRAs and 401ks -- and you send them a short W-8BEN every few years, the US tax withholding will exactly match your US tax liability, if any, on what they send you. In that case, you do not have to file any US tax returns. Unlike US citizens, nonresident aliens whose US tax is fully satisfied by withholding so that they have a zero tax liability have no US tax filing requirements.

Where you have a less than competent broker or pension provider though, you might want to file a 1040NR to get back what they overwithheld through not paying attention fully to the rules regarding receipt of a W-8BEN. So there's that danger. Closing and withdrawing everything would remove it entirely, but beware of the 10% early withdrawal penalty on IRAs and 401ks if under age 59.5. That might be quite a price to pay for just not having to file the occasional W-8BEN or US tax form.
Right, My tought is that if I relinquish a green card in the beginning of the year after selling it all, then even with the 10% penalty, the tax bill could not be that high (exemption, child tax credit etc..). Of course, if the 401k is worth 500k+ it's another story. Right now we are talking 30k, however it may go up fast if I get an employer with a relatively high match (think large tech megacorp with 50% match no limit).
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I am well aware of navigating the tax treaties, the saving clauses and how I could theoretically not pay US taxes (by applying a FTC) but I don't want the headache that comes with having ties with the IRS.
As noted above, headaches are entirely possible, but they are not guaranteed. Your level of interaction with the IRS might be painful, or it might be nonexistent. Mostly it depends on your broker's competence with foreign resident account holders. (There's always the spectre of having to file a 706NA nonresident alien estate tax return, but that's not strictly your problem at all!)
I have read good things about IB and how they apply withholding. But I still feel that it's a luck game. ie getting your broker to respect a 0% withholding..
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
If you could do it again, would you still apply for US Citizenship?
I didn't apply for US citizenship the first time around. I certainly wouldn't do differently if given a second opportunity. It's worthwhile if you plan a definite return to the US in future. Otherwise, it's just a horrifically expensive option with perhaps a very low probability of exercise.
Thanks for your feedback, I do think it's an expensive bill. I am not a doom and gloom guy, but with the incoming election and the tax plans of some candidates, I don't see thing going a good way for US Persons abroad and non US Persons. Even if they pass a residency based taxation bill, what would happen with PFICs, FBARs etc. I think the dream of a real RBT is still far away.

User avatar
Watty
Posts: 17369
Joined: Wed Oct 10, 2007 3:55 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by Watty » Fri Nov 08, 2019 8:21 pm

A few thoughts.

1) You did not mention a spouse or any kids so I would assume that you are single. If so there is a reasonable chance that you might end up getting married and having your plans change so you might decide to stay in the US because of spouse and and possible kids. It would be good to keep your plans flexible since they might change.

2) In your planning you also need to consider your state taxes and maybe move to a state with no income tax before your leave the US. This could help you avoid the state taxes if you do liquidate your investments. Establishing tax residency in a different state can be more complex than just moving so be sure to research how to do it right. Some states will be aggressive in trying to collect the state taxes.

3) I have only heard a little bit about it but it sounds like French inheritance laws are very different than US laws. It would be good to make sure that your will, account beneficiaries, and related paperwork is all in order and will not run into problems with the differences in the two countries laws. The US estate taxes for a non-resident alien can be outrageous so you should look into this if you leave the US.

4) Normally you need to pay into Social Security for 10 years to collect any Social Security when you are retired. If you are thinking of leaving the US after you have worked in the US for 9.5 years then it might make sense to work six months longer to qualify for Social Security. The exact rules are a bit more complicated and the tax treaties with the country you have citizenship in and the country you are living in also make a big difference. A non-US citizen who paid into Social Security may or may not be able to collect Social Security depending on the details of the tax treaties with the countries involved. This gets complex but you should be sure to research this.

Topic Author
assyadh
Posts: 85
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Fri Nov 08, 2019 8:29 pm

Watty wrote:
Fri Nov 08, 2019 8:21 pm
A few thoughts.

1) You did not mention a spouse or any kids so I would assume that you are single. If so there is a reasonable chance that you might end up getting married and having your plans change so you might decide to stay in the US because of spouse and and possible kids. It would be good to keep your plans flexible since they might change.

2) In your planning you also need to consider your state taxes and move to a state with no income tax before your leave the US. This could help you avoid the state taxes if you do liquidate your investments. Establishing tax residency in a different state can be more complex than just moving so be sure to research how to do it right. Some states will be aggressive in trying to collect the state taxes.

3) I have only heard a little bit about it but it sounds like French inheritance laws are very different than US laws. It would be good to make sure that your will, account beneficiaries, and related paperwork is all in order and will not run into problems with the differences in the two countries laws. The US estate taxes for a non-resident alien can be outrageous so you should look into this if you leave the US.

4) Normally you need to pay into Social Security for 10 years to collect any Social Security when you are retired. If you are thinking of leaving the US after have worked in the US for 9.5 years then it might make sense to work six months longer to qualify for Social Security. The exact rules are a bit more complicated and the tax treaties with the country you have citizenship in and the country you are living in also make a big difference. A non-US citizen who paid into Social Security may or may not be able to collect Social Security depending on the details of the tax treaties with the countries involved. This gets complex but you should be sure to research this.
Thanks Watty, I am married (both French) and all of our family is in France. Staying in the US long term would not make sense for us.

I live in a no income tax state.

I plan to use Ireland based ETFs with IB. Avoiding the US taxation, but will still have to wait for my estate to be released by the IRS.

Regarding social security, France has a totalization agreement with the US, which means that my working years in France count towards the 10 year minimum (the payment is prorated though) which means I should qualify next year (started working in 2010).

wineandplaya
Posts: 68
Joined: Fri Sep 14, 2018 9:42 am

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by wineandplaya » Fri Nov 08, 2019 9:08 pm

You might want to do Roth 401(k) instead of traditional. You can then get your contributions back when quitting your job without tax consequences. Traditional (on top of your pretax employer match) might push you up to a higher tax bracket. Your penalty will be much smaller also since it will only apply to the earnings.

Topic Author
assyadh
Posts: 85
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Fri Nov 08, 2019 11:01 pm

wineandplaya wrote:
Fri Nov 08, 2019 9:08 pm
You might want to do Roth 401(k) instead of traditional. You can then get your contributions back when quitting your job without tax consequences. Traditional (on top of your pretax employer match) might push you up to a higher tax bracket. Your penalty will be much smaller also since it will only apply to the earnings.
Good idea. I have already put some money in a traditional 401k this year. Any possibility of recharacterization of this year's contributions?

Starting next year, I'll probably do roth.

The match is still going to be pre-tax

wineandplaya
Posts: 68
Joined: Fri Sep 14, 2018 9:42 am

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by wineandplaya » Fri Nov 08, 2019 11:22 pm

assyadh wrote:
Fri Nov 08, 2019 11:01 pm
Good idea. I have already put some money in a traditional 401k this year. Any possibility of recharacterization of this year's contributions?
I doubt you can do that. If you change employer, you could roll it over to a Roth IRA however, and be able to access the money penalty-free five years later. You might also want to make use of the first-time home buyer rule to access IRA money penalty-free; it should also work if you are buying a house oversees, assuming that you are renting now. Another idea: use the possibility to roll IRA into an HSA and use up the money for medical expenses.

This all assumes that you want to empty all your 401(k)/IRA money when leaving the US, which I'm not sure is the best idea. If you leave it there once in Europe, it will continue to grow tax-deferred protected from European taxation by double taxation treaties in many cases.

TedSwippet
Posts: 2477
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by TedSwippet » Sat Nov 09, 2019 4:55 am

assyadh wrote:
Fri Nov 08, 2019 7:38 pm
Thanks for your feedback, I do think it's an expensive bill. I am not a doom and gloom guy, but with the incoming election and the tax plans of some candidates, I don't see thing going a good way for US Persons abroad and non US Persons. Even if they pass a residency based taxation bill, what would happen with PFICs, FBARs etc. I think the dream of a real RBT is still far away.
This is for me the the core of the problem. The continual deterioration of tax laws for people with international lifestyles. Not specifically the "incoming election" -- expat-bashing is one of congress' very few bipartisan activities, and both parties are equally good at it -- but rather the continual change in rules that inevitably disadvantage non-voting expats and foreigners. HEART, FATCA, GILTI, Ex-PATRIOT (if they ever get it through), and so on. All with names that torture the English language in order to childishly come up with a 'snappy' acronym.

You have the advantage of saving in 401ks and IRAs in an era where the exit tax is a known feature, giving you an element of control. I did not. I saved heavily, so that my 401k was a significant chunk of my net worth when I left the US. Secure in the knowledge that it would be fully protected by treaty until retirement and withdrawals. Then, boom. A new treaty-violating US tax law with effectively retroactive effects, that had it been in place at the time would have significantly changed my plans and approach.

This, more than any lingering paperwork burden with the IRS, should I think be your major driver here. The probability that congress will pass something new that messes up your plans and costs you a significant sum in unavoidable double-tax. Or makes pensions entirely unavailable. It is not hard to imagine some new anti-terrorism law that mandates that 401k providers erect withdrawal security features that are impossible for nonresident aliens to overcome.

While you live in the US, you are in a majority when it comes to holding 401ks and IRAs, and being in a majority helps keep you insulated from nonsense like this; too much potential backlash from large numbers of people keeps US tax law at least somewhat in check. Once you have left though, you are not just a minority, you are an outlier. And a non-voting one, at that. At best, congress will simply not give a fig about you. At worst, it will view you as a defenceless cash cow.

In a nutshell, the current tax laws such as the exit tax, bad though they are, can be mitigated by good long-term planning. What you really need to fear are the unknown future tax laws. They may be financially devastating, and you cannot plan for them. The only real defence is to stay flexible, monitor every proposed tax law, and make sure that not only can you exit at very short notice, but also -- critically -- that you can take your money with you when you go.

Topic Author
assyadh
Posts: 85
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Sat Nov 09, 2019 11:21 am

TedSwippet wrote:
Sat Nov 09, 2019 4:55 am
assyadh wrote:
Fri Nov 08, 2019 7:38 pm
Thanks for your feedback, I do think it's an expensive bill. I am not a doom and gloom guy, but with the incoming election and the tax plans of some candidates, I don't see thing going a good way for US Persons abroad and non US Persons. Even if they pass a residency based taxation bill, what would happen with PFICs, FBARs etc. I think the dream of a real RBT is still far away.
This is for me the the core of the problem. The continual deterioration of tax laws for people with international lifestyles. Not specifically the "incoming election" -- expat-bashing is one of congress' very few bipartisan activities, and both parties are equally good at it -- but rather the continual change in rules that inevitably disadvantage non-voting expats and foreigners. HEART, FATCA, GILTI, Ex-PATRIOT (if they ever get it through), and so on. All with names that torture the English language in order to childishly come up with a 'snappy' acronym.

You have the advantage of saving in 401ks and IRAs in an era where the exit tax is a known feature, giving you an element of control. I did not. I saved heavily, so that my 401k was a significant chunk of my net worth when I left the US. Secure in the knowledge that it would be fully protected by treaty until retirement and withdrawals. Then, boom. A new treaty-violating US tax law with effectively retroactive effects, that had it been in place at the time would have significantly changed my plans and approach.

This, more than any lingering paperwork burden with the IRS, should I think be your major driver here. The probability that congress will pass something new that messes up your plans and costs you a significant sum in unavoidable double-tax. Or makes pensions entirely unavailable. It is not hard to imagine some new anti-terrorism law that mandates that 401k providers erect withdrawal security features that are impossible for nonresident aliens to overcome.

While you live in the US, you are in a majority when it comes to holding 401ks and IRAs, and being in a majority helps keep you insulated from nonsense like this; too much potential backlash from large numbers of people keeps US tax law at least somewhat in check. Once you have left though, you are not just a minority, you are an outlier. And a non-voting one, at that. At best, congress will simply not give a fig about you. At worst, it will view you as a defenceless cash cow.

In a nutshell, the current tax laws such as the exit tax, bad though they are, can be mitigated by good long-term planning. What you really need to fear are the unknown future tax laws. They may be financially devastating, and you cannot plan for them. The only real defence is to stay flexible, monitor every proposed tax law, and make sure that not only can you exit at very short notice, but also -- critically -- that you can take your money with you when you go.
Agreed. All the law changes in the last 10 years against people living abroad are painful.

I have made a change to my 401k contribution to go to roth rather than traditional.

This way I minimize the impact when I'll be leaving

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