Tax Problems for non-US or leaving-US investors

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Tax Problems for non-US or leaving-US investors

Post by AndroAsc » Tue Dec 28, 2010 8:50 pm

I am starting a new thread that will generally discuss the tax implications for non-US investors or "leaving-the-US" investors. I hope that Bogleheads who are familiar with this topic will consider contributing their opinion.

Basically, this thread will be of interest to the following people:
(1) Non-US people living overseas (i.e. Non-Resident Aliens) who are invested in stocks domiciled in the US (e.g. Vanguard ETFs).
(2) People who decide or intend to emigrate to another country for retirement (i.e. "leaving-the-US"). In some cases, there will be tax implications even for US citizens!

Part of what I hope to achieve by starting this thread, is to be able to figure out where one should place one's retirement money. I also understand that different countries do have different tax-treaties with the US, so if you are citing a specific example that only applies because of your home country's tax treaty, please do let us know. Unless specified, I will be discussing as if the country the investor lives in or is moving out to does not have any tax treaty with the US.

At the heart of the problem is the 2 new laws enacted recently:
(1) FATCA Act
(2) HEART Act



FATCA Act

Based on what I can figure out, the FATCA Act only applies to everyone. It's basically saying "identify yourself or we will hold 30% of your money hostage", effectively imposing a 30% withholding tax to all payments made out to everyone unless the broker complies to IRS terms. The 30% withholding is not just dividends or capital gains but the entire sales proceed!!! For US persons or non-US persons residing in the country, it should not be problem since local brokers should be IRS compliant, but there may be problem trying to open offshore accounts. Unfortunately, FATCA also applies to accounts held by all non-US persons and even US-persons living overseas. The 30% withholding tax will start on 1 Jan 2013.

"The Act introduces a new 30% withholding tax on any “withholdable payment” made to a foreign entity unless such entity complies with certain reporting requirements or otherwise qualifies for an exemption. A “withholdable payment” generally includes any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income from sources within the U.S. It also includes gross proceeds from the sale of property that is of a type that can produce U.S.-source dividends or interest, such as stock or debt issued by domestic corporations."
Source: http://www.mofo.com/files/Uploads/Image ... 2FATCA.pdf

The consolation is that FATCA seems to be enacted to force non-US entities to comply with IRS bureaucracy, thus achieving the purpose of making it more difficult to hide a secret offshore account. In theory, by complying to IRS demands, the withholding can be removed:

"The new withholding tax also applies to any withholdable payment made to a non-financial foreign entity, unless the non-financial foreign entity provides the withholding agent with either (i) a certification that it does not have a substantial U.S. owner, or (ii) the name, address, and taxpayer identification number of each substantial U.S. owner. This provision does not apply to payments made to a publicly-traded non-financial foreign entity, or any of its affiliates."
Source: http://www.mofo.com/files/Uploads/Image ... 2FATCA.pdf

Another source for more FATCA details:
http://www.mofo.com/files/Uploads/Image ... 0FACTA.pdf

Conclusion: Unfortunately, I could not find much information on the implementation of FATCA withholding and I suspect much of the details are still in the grey. The best case scenario is that taxable investments for non-US persons will not change from status quo (just need to fill up more forms to comply with IRS requirements). The worst case scenario, is that non-US persons will have to file a IRS tax return to claim back the 30% withholding. It remains to be seen if non-US persons filing a tax return to claim back the 30% withholding will receive all the money... you never know, there may be an obscure clause hidden in some-unknown-paragraph-that-nobody-knows-till-it-is-too-late.

Solutions/Workarounds: Depending on the severity of FATCA implementation, it may be necessary to select a broker that is IRS-compliant (so no 30% withholding). An alternative if that is not possible is that non-US people will have to look elsewhere for investment products.



HEART Act
The HEART Act is basically designed to tax the investment portfolio of rich US-persons if they ever attempt to move out of the country.

It applies to US citizens who dumped their citizenship and even US permanent resident (who has stayed in US for >8 years) leaving the country. A consolation is that it affects only high net worth individuals, defined as somebody who has more than ~$140k (adjusted for inflation) tax liability per year (which approximates to an income of $500k/yr) or have $2mil worth of assets.

"...applies to U.S. citizens who relinquish citizenship and to long-term residents who terminate U.S. residency on or after June 17, 2008 -- the date of enactment of the HEART Act -- if the individual has an average annual net income tax liability for the five preceding years ending before the date of the loss of U.S. citizenship or residency termination that exceeds $124,000 (as adjusted for inflation after 2004 -- $139,000 in 2008); has a net worth of $2 million or more on that date; or fails to certify under penalties of perjury that he or she has complied with all U.S. federal tax obligations for the preceding five years or fails to submit such evidence of compliance as the Secretary may require.
Source: http://www.bna.com/tm/insights_tobin18.htm

"For this purpose, a “long-term resident” is a noncitizen who is a lawful permanent resident of the United States for at least eight taxable years during the period of 15 taxable years ending with the year during which the individual either ceases to be a lawful permanent resident of the United States or commences to be treated as a resident of a foreign country under a tax treaty between such foreign country and the United States (and does not waive such benefits). A “lawful permanent resident” is an alien who is a green card holder"
Source: http://www.bna.com/tm/insights_tobin18.htm

Everything is taxed by the HEART Act for those affected, and it includes (1) non-realized capital gains from taxable accounts and (2) any US-based retirement accounts (like Traditional IRA and 401k) at a flat 30% rate which cannot be reduced by any tax treaty! This has the effect of forcing you to liquidate all your assets before you leave and paying the associated taxes on it. This is nothing short of a serious fuck up for investors intending to leave the US, because it triggers a tax event in your taxable investments at a time that is not of your choosing, and the 30% tax on IRA/401k effectively negates any tax-deferred benefits it confers (and arguably even any match you may receive from your employer). At the moment, I have no idea if this applies to Roth accounts.

"....are subject to income tax on the net unrealized gain in their worldwide property as if the property had been sold for its fair market value on the day before the expatriation or residency termination... The new rules also trigger immediate tax on the value of certain deferred compensation plans, even if not yet vested! They also tax distributions from non-grantor trusts and certain tax deferred accounts, as well as (under new §2801) gift tax in certain situations."
Source: http://www.bna.com/tm/insights_tobin18.htm

"Instead, alternative tax regimes apply to “eligible deferred compensation items” and “ineligible deferred compensation items.” In the case of an “eligible deferred compensation item,” section 877A(d)(1)(A) provides generally that the payor must deduct and withhold a tax equal to 30 percent of any taxable payment to a covered expatriate with respect to such an item....
Source: http://www.irs.gov/irb/2009-45_IRB/ar10.html#d0e186

"Because the covered expatriate must waive his or her right to claim treaty benefits with respect to an eligible deferred compensation item, the 30 percent withholding tax cannot be reduced or eliminated by treaty"

Source: http://www.irs.gov/irb/2009-45_IRB/ar10.html#d0e186

One consolation is that for taxable accounts, you can deduct $600k (inflation adjusted) from your capital gains.

"Under section 877A(a)(3), the amount that would otherwise be includible in gross income by reason of the deemed sale rule is reduced (but not to below zero) by $600,000, which amount is to be adjusted for inflation for calendar years after 2008 (the “exclusion amount”)."
Source: http://www.irs.gov/irb/2009-45_IRB/ar10.html#d0e186

Conclusion: The HEART Act is going to really screw up the retirement plans of a minority people on this forum (if they aren't aware of it). Taxable accounts are least worst hit by this, and 401k/IRA will suffer the most due to the 30% flat tax. To play the devil's advocate, it may not be that bad since such a rich person would expect to retire in a very high tax bracket, and would not have access to tax-deferred accounts (at least in the later part of his/her career).



Solutions/Workarounds for US persons: There seems to be two possible workaround for US citizens who know they will be retiring overseas.
(1) Retire overseas but do not relinquish US citizenship and file US taxes with a US residential address (admittedly not a good reason if you want to lose your citizenship based on whatever reasons).
(2)Make your move early, get the other country's citizenship and wait for 5 years and then renounce your US citizenship.

"However, section 877A(g)(1)(B) provides that an expatriate will not be treated as meeting the tax liability test or the net worth test of section 877(a)(2)(A) or (B) if—

(1) the expatriate became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and has been a U.S. resident for not more than 10 taxable years during the 15 taxable year period ending with the taxable year during which the expatriation date occurs; or"




Solutions/Workarounds for non-US persons: If you are non-US person with the intention to start or you are currently maintaining a career in the US and you know you are likely to retire it another country, the following courses of action have been analyzed:
(1) Get US green card, then US citizenship and then move back to home/retirement country and wait 5 years before dumping US citizenship - WILL NOT WORK because the exception applies to natural-born US citizens!
(2) Leave the US before the triggering events occur which can either be 8 years of legal residence in the US or hitting the annual income or net worth requirement. The former option is probably not too realistic if you are trying to build up a career in the US. The latter may be a viable option for people who are near or beyond the 8 years of legal residence and cannot move out for practical reasons.
(3) Do not get a Green Card, but I guess this will limit your career lifespan in the US since the H1-B visa is only valid for 6 years max.
Last edited by AndroAsc on Wed Dec 29, 2010 9:55 am, edited 8 times in total.

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Tue Dec 28, 2010 8:53 pm

I'll make a post specific to tax-deferred accounts in response to HEART Act at a later date. For now I am pissed enough... it was a great way to ruin my Christmas. Thanks a lot to those tax evading Americans, I sure hope the IRS will hunt you down!

If you were wondering, both laws were enacting to combat tax-evading Americans but collateral damage extends to a lot of people.



I decided to start work on some examples:

Scenario 1: A person starting out a career in US but retiring overseas who will be hit by HEART taxes

The key here is starting out a career, so the person starts out in a low tax bracket but with the potential to hit the triggering factors for the HEART Act. For a person to hit the threshold annual income to trigger the HEART taxes, he/she would need to be in the 35% tax bracket.

Traditional IRA/401k: Only makes sense to contribute up to a match, since the flat 30% HEART tax upon leaving the country is a killer. Alternatively, if you know that you are going to change jobs during your US career, you can contribute fully to Traditional IRA/401k, then rollover and do a conversion to Roth and then withdraw from Roth before leaving. But there is a risk of having higher taxation if it is converted at the 25% tax bracket and subjected to 10% Roth early withdrawal penalty if the 5-year seasoning period cannot be met (effective tax of 35% vs HEART tax of 30%). Those who expect to convert at the 15% tax bracket should do so.

Roth IRA/401k: Before leaving the country, withdraw out everything from the Roth IRA/401k. The max tax triggered will be 10% which is much better than 30% from HEART. Alternative opinions state that Roth IRA/401k will not be subject to taxation, I'm still checking out on that.

Taxable: Probably the preferred place to hold your money, since capital gains in excess of $600k will be taxed.

Scenario 2: A decently (not but superbly) wealthy person with a career in US but retiring overseas who will does not expect to be hit by HEART taxes

Yes, I created a new section for such people. So if they are decently wealthy (e.g. earning $150k/yr and $1mil in net assets) why should they bother? I had just thought of the following situation which can increase their net worth to $2mil and make them liable for HEART taxes - Inheritance of life insurance payout in which the investor is the beneficiary.

So those with a wealthy family background might just want to keep that at the back of the mind.
Last edited by AndroAsc on Wed Dec 29, 2010 10:05 am, edited 3 times in total.

bpp
Posts: 2017
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Post by bpp » Tue Dec 28, 2010 9:41 pm

Based on what I can figure out, the FATCA Act only applies to taxable accounts held by all non-US persons and even US-persons living overseas.
It primarily applies to accounts of any kind (taxable or not) held by US-persons (resident in the US or not). Non-US persons are only affected if their bank cannot or will not certify that they are non-US persons.

This whole thing has the potential to put US citizens and green-card holders who live outside the US in the untenable situation of being denied financial services where they live. If applied literally the way it is written, it will probably make it almost impossible for someone living outside the US to be able to both maintain US citizenship and be able to function where they live, so is certainly a source of concern and anxiety at the moment.

However, the IRS is dribbling out clarification on how they intend to implement this thing, and it will remain to be seen just how literally/liberally they intend to execute FATCA. I would say it is too early to assess the impact on the individual investor yet.

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Tue Dec 28, 2010 9:46 pm

bpp wrote:
Based on what I can figure out, the FATCA Act only applies to taxable accounts held by all non-US persons and even US-persons living overseas.
It primarily applies to accounts of any kind (taxable or not) held by US-persons (resident in the US or not). Non-US persons are only affected if their bank cannot or will not certify that they are non-US persons.
I believe my reference quoted "foreign entity" so people living in US are not covered by FATCA. Correct me if I am wrong...

User avatar
market timer
Posts: 6191
Joined: Tue Aug 21, 2007 1:42 am

Post by market timer » Tue Dec 28, 2010 10:28 pm

I'm a US citizen planning to work and retire overseas. It seems these concerns are for people who plan to renounce citizenship. What is the benefit of renouncing citizenship? In a few years, I'll have made 10 years of contributions to Social Security, and will be eligible for Social Security and Medicare in retirement. These are valuable income streams that would presumably go away by renouncing citizenship.

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Post by jidina80 » Tue Dec 28, 2010 10:52 pm

Is the HEART act a new tax, or simply better ENFORCEMENT of existing tax law? Changing 'withholding' rules is one thing -- tax owed is quite another.

As a retired U.S. citizen retired overseas, the original post certainly has my attention. However, I've always paid my income taxes per law so I'm not very concerned. I doubt there is a higher tax for those who choose to spend their money overseas.

Just.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: Tax Disaster for non-US or "leaving-US" invest

Post by sscritic » Tue Dec 28, 2010 10:59 pm

AndroAsc wrote:[You wrote:] A partial consolation is that it affects only moderately high net worth individuals, defined as somebody who is earning more than ~$140k per year (adjusted for inflation) or have $2mil worth of assets. Unfortunately, since we are all Bogleheads and we know the value of saving for retirement, I think a disproportionate amount of Bogleheads will be affected!

[An authoritative source wrote:] "...applies to U.S. citizens who relinquish citizenship and to long-term residents who terminate U.S. residency on or after June 17, 2008 -- the date of enactment of the HEART Act -- if the individual has an average annual net income tax liability for the five preceding years ending before the date of the loss of U.S. citizenship or residency termination that exceeds $124,000 (as adjusted for inflation after 2004 -- $139,000 in 2008);
Income is not tax liability and tax liability is not income.
Is your tax rate 100%? If you make $140,000, do you pay $140,000 in tax?

james22
Posts: 1488
Joined: Tue Aug 21, 2007 2:22 pm

Post by james22 » Tue Dec 28, 2010 11:27 pm

market timer wrote:It seems these concerns are for people who plan to renounce citizenship.
I am unconcerned about the concerns of people who plan to renounce citizenship.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic » Tue Dec 28, 2010 11:36 pm

Do you pay tax on your Roth withdrawals?
(e) Treatment of specified tax deferred accounts
(1) Account treated as distributed
In the case of any interest in a specified tax deferred account held by a covered expatriate on the day before the expatriation date—
(A) the covered expatriate shall be treated as receiving a distribution of his entire interest in such account on the day before the expatriation date,
(B) no early distribution tax shall apply by reason of such treatment, and
(C) appropriate adjustments shall be made to subsequent distributions from the account to reflect such treatment.
If you took everything out of your Roth the day before the expatriation date, what tax would you pay? Of course, if you did take it out, you might owe a 10% penalty. However, by leaving the money in the Roth, it is treated as distributed and you don't owe any early distribution penalty.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic » Tue Dec 28, 2010 11:42 pm

You do know an IRA and a 401(k) are not the same, right? You keep writing IRA and 401(k) as if they are treated the same under the law. An IRA is a specified tax deferred account. Is a 401(k) a specified tax deferred account?
(2) Specified tax deferred account
For purposes of paragraph (1), the term “specified tax deferred account” means an individual retirement plan (as defined in section 7701 (a)(37)) other than any arrangement described in subsection (k) or (p) of section 408, a qualified tuition program (as defined in section 529), a Coverdell education savings account (as defined in section 530), a health savings account (as defined in section 223), and an Archer MSA (as defined in section 220).

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Re: Tax Disaster for non-US or "leaving-US" invest

Post by AndroAsc » Tue Dec 28, 2010 11:49 pm

sscritic wrote:
[An authoritative source wrote:] "...applies to U.S. citizens who relinquish citizenship and to long-term residents who terminate U.S. residency on or after June 17, 2008 -- the date of enactment of the HEART Act -- if the individual has an average annual net income tax liability for the five preceding years ending before the date of the loss of U.S. citizenship or residency termination that exceeds $124,000 (as adjusted for inflation after 2004 -- $139,000 in 2008);
Income is not tax liability and tax liability is not income.
Is your tax rate 100%? If you make $140,000, do you pay $140,000 in tax?
Ok... perhaps I have misinterpreted the statement. What's the definition of income tax liability? Based a quick google and from:
http://www.ehow.com/about_5047858_feder ... ility.html

Would the statement be interpreted as "individuals who are liable to pay $139k worth of taxes per year in the five preceding years... (which would mean that person is probably earning $500k per year)?
Last edited by AndroAsc on Wed Dec 29, 2010 12:07 am, edited 2 times in total.

NYnative
Posts: 419
Joined: Thu Mar 01, 2007 10:41 am

Post by NYnative » Tue Dec 28, 2010 11:50 pm

[quote="james22"][quote="market timer"]It seems these concerns are for people who plan to renounce citizenship.[/quote]

I am unconcerned about the concerns of people who plan to renounce citizenship.[/quote]

+1

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Tue Dec 28, 2010 11:57 pm

market timer wrote:I'm a US citizen planning to work and retire overseas. It seems these concerns are for people who plan to renounce citizenship. What is the benefit of renouncing citizenship? In a few years, I'll have made 10 years of contributions to Social Security, and will be eligible for Social Security and Medicare in retirement. These are valuable income streams that would presumably go away by renouncing citizenship.
I think many Americans living overseas renounce their citizenship because it is very difficult to maintain any form of financial accounts when you are overseas.

Under the previous tax-regime (no HEART and FATCA), if I am not mistaken non-resident aliens (non-US persons living overseas which also includes ex-US citizens) are subjected to serious withholding like 30% on all IRA/401k distributions INCLUDING ROTH. Based on my research, the IRS tax laws can be interpreted either as all IRA/401k distributions are taxed at a flat rate of 30% or the contributions are taxed at a graduated rate and earnings taxed at a 30% flat rate. I am unsure whether or not the withholding on Roth can be clawed back from IRS. SS doesn't go away, but there is a 30% flat tax on 85% of the SS payout. My knowledge is limited as I haven't done much research partially because I am at least 3 decades from retirement. The bottomline is... if you ever more overseas Uncle Sam is going screw you with taxes and the latest amendments only makes things worse.

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Wed Dec 29, 2010 12:03 am

sscritic wrote:Do you pay tax on your Roth withdrawals?
(e) Treatment of specified tax deferred accounts
(1) Account treated as distributed
In the case of any interest in a specified tax deferred account held by a covered expatriate on the day before the expatriation date—
(A) the covered expatriate shall be treated as receiving a distribution of his entire interest in such account on the day before the expatriation date,
(B) no early distribution tax shall apply by reason of such treatment, and
(C) appropriate adjustments shall be made to subsequent distributions from the account to reflect such treatment.
If you took everything out of your Roth the day before the expatriation date, what tax would you pay? Of course, if you did take it out, you might owe a 10% penalty. However, by leaving the money in the Roth, it is treated as distributed and you don't owe any early distribution penalty.
sscritic wrote:You do know an IRA and a 401(k) are not the same, right? You keep writing IRA and 401(k) as if they are treated the same under the law. An IRA is a specified tax deferred account. Is a 401(k) a specified tax deferred account?
(2) Specified tax deferred account
For purposes of paragraph (1), the term “specified tax deferred account” means an individual retirement plan (as defined in section 7701 (a)(37)) other than any arrangement described in subsection (k) or (p) of section 408, a qualified tuition program (as defined in section 529), a Coverdell education savings account (as defined in section 530), a health savings account (as defined in section 223), and an Archer MSA (as defined in section 220).
Where did you get that information? I cannot find it on the IRS webpage that pertains to HEART tax laws:
http://www.irs.gov/irb/2009-45_IRB/ar10.html

Is there another section I should be looking at?

wacodiver
Posts: 308
Joined: Sat Dec 18, 2010 9:58 am

Post by wacodiver » Wed Dec 29, 2010 12:13 am

AndroAsc wrote:
market timer wrote:I'm a US citizen planning to work and retire overseas. It seems these concerns are for people who plan to renounce citizenship. What is the benefit of renouncing citizenship? In a few years, I'll have made 10 years of contributions to Social Security, and will be eligible for Social Security and Medicare in retirement. These are valuable income streams that would presumably go away by renouncing citizenship.
I think many Americans living overseas renounce their citizenship because it is very difficult to maintain any form of financial accounts when you are overseas.
OK, this is just ridiculous. Where are you talking about? Equatorial Guinea?

I'm a US citizen. My wife is a naturalized US citizen from Chile who maintains her dual-citizenship. Our 3 daughters are all dual US-Chile citizens. I have lived in Guatemala, Brazil, and Chile and have maintained bank accounts in all 3 countries with no problem. We visit Chile annually and my wife has 2 bank accounts down there. Moving money back and forth between the US and Chile is ridiculously easy if you are talking about small amounts. I've never tried it with $100 grand or $ 1 million. We just wired $3 grand down to Chile to help pay for an operation for my mother-in-law's maid (don't ask) and it was a trivial exercise for the small local branch of my credit union. I have had no problem making deposits of US dollars into foreign bank accounts in both Guatemala and Chile by simply writing a personal check from a US bank account. And of course, when in Chile I can easily access any of my checking accounts using my ATM cards at any ATM in Chile and there are just as many there as here (if not more). And I can spend using my debit or credit cards as easily as in the US. I can see my Vanguard accounts just as easily in Chile as I can here in the US. Easier in fact because my in-laws in Santiago have a lightning-fast fiber optic internet connection that beats the pants off my cable modem here in Texas.

My wife and I have talked about retiring in Chile some day. If we were to do so we'd most certainly maintain some sort of residence back in the US for when we come back to visit the kids and so forth. I see nothing in these laws that would prevent me from taking distributions from any of my retirement accounts into a US bank account and then spending the money in Chile like any ordinary American retiree. And paying my US taxes. And I have no intention of ever renouncing my US citizenship regardless of the possible financial benefits.

What are people trying to do? Spend a lifetime working in the US and acquiring their nest egg with the benefit of American laws, the protection of American police and military, and with the benefit of American infrastructure. And then hoping to grab their nest egg and social security and escape to some foreign tax-haven where they pay none of the taxes that every other American citizen pays in retirement? If so I have no sympathy.
Last edited by wacodiver on Wed Dec 29, 2010 12:28 am, edited 2 times in total.

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Wed Dec 29, 2010 12:18 am

jidina80 wrote:Is the HEART act a new tax, or simply better ENFORCEMENT of existing tax law? Changing 'withholding' rules is one thing -- tax owed is quite another.
My interpretation is that it is more than just a change in withholding rules. HEART Act basically requires and forces high net worth individuals to sell all their money in taxable accounts and pay taxes at a unfavorable (presumably) high tax bracket and force redeem all tax-deferred retirement money at a flat 30% tax rate.

I don't see how this kind of enforcement is fair or logical. Why must people leaving the country be forced to sell and incur taxes when the logical tax management plan is to sell it during retirement when one is in a lower tax bracket?

e.g. Person A works in the US and accumulates money in his IRA/401k. At 59 he stops working and shortly thereafter he takes IRA distribution. He pays little to no taxes. Person B works in the US and accumulates money in his IRA/401k. At 59, he stops working and leaves the country but is forced to redeem his IRA and pays a 30% tax on it even if he retired (i.e. not earning any income).

atwood
Posts: 200
Joined: Wed May 27, 2009 11:57 pm

Post by atwood » Wed Dec 29, 2010 12:24 am

wacodiver wrote:
AndroAsc wrote:
market timer wrote:I'm a US citizen planning to work and retire overseas. It seems these concerns are for people who plan to renounce citizenship. What is the benefit of renouncing citizenship? In a few years, I'll have made 10 years of contributions to Social Security, and will be eligible for Social Security and Medicare in retirement. These are valuable income streams that would presumably go away by renouncing citizenship.
I think many Americans living overseas renounce their citizenship because it is very difficult to maintain any form of financial accounts when you are overseas.
OK, this is just ridiculous. Where are you talking about? Equatorial Guinea?

I'm a US citizen. My wife is a naturalized US citizen from Chile who maintains her dual-citizenship. Our 3 daughters are all dual US-Chile citizens. I have lived in Guatemala, Brazil, and Chile and have maintained bank accounts in all 3 countries with no problem. We visit Chile annually and my wife has 2 bank accounts down there. Moving money back and forth between the US and Chile is ridiculously easy if you are talking about small amounts. We just wired $3 grand down to Chile to help pay for an operation for my mother-in-law's maid (don't ask) and it was a trivial exercise for the small local branch of my credit union. I have had no problem making deposits of US dollars into foreign bank accounts in both Guatemala and Chile by simply writing a personal check from a US bank account. And of course, when in Chile I can easily access any of my checking accounts using my ATM cards at any ATM in Chile and there are just as many there as here (if not more). And I can spend using my debit or credit cards as easily as in the US. I can see my Vanguard accounts just as easily in Chile as I can here in the US. Easier in fact because my in-laws in Santiago have a lightning-fast fiber optic internet connection that beats the pants off my cable modem here in Texas.

My wife and I have talked about retiring in Chile some day. If we were to do so we'd most certainly maintain some sort of residence back in the US for when we come back to visit the kids and so forth. I see nothing in these laws that would prevent me from taking distributions from any of my retirement accounts into a US bank account and then spending the money in Chile like any ordinary American retiree. And paying my US taxes. And I have no intention of ever renouncing my US citizenship regardless of the possible financial benefits.

What are people trying to do? Spend a lifetime working in the US and acquiring their nest egg with the benefit of American laws, the protection of American police and military, and with the benefit of American infrastructure. And then hoping to grab their nest egg and social security and escape to some foreign tax-haven where they pay none of the taxes that every other American citizen pays in retirement? If so I have no sympathy.
I met a dentist who did exactly that, all to avoid paying U.S. taxes. I would guess there are others just like him, and like you, I have no sympathy for them.

As for banking problems overseas, I live in SKorea and transfer money back to the US with no problems. I have credit cards here and in the U.S.

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Post by jidina80 » Wed Dec 29, 2010 12:26 am

AndroAsc wrote:I think many Americans living overseas renounce their citizenship because it is very difficult to maintain any form of financial accounts when you are overseas.
I doubt this. As an expat, my gut feel is that most citizens who renouce citizenship do so because some countires do not recognize duel citizenship.

Too the ignorant "I don't care what people who denounce their citizenship think" posters, I can only hope they open their eyes some day and understand that there is a big world out there, made of many countries with differing laws, in which U.S. citizens with personal relationships have to manage. The U.S. may be the 'biggest' economy, but look at the quality of life metrics and you'll get a different picture.

Just.

wacodiver
Posts: 308
Joined: Sat Dec 18, 2010 9:58 am

Post by wacodiver » Wed Dec 29, 2010 12:26 am

AndroAsc wrote:
e.g. Person A works in the US and accumulates money in his IRA/401k. At 59 he stops working and shortly thereafter he takes IRA distribution. He pays little to no taxes. Person B works in the US and accumulates money in his IRA/401k. At 59, he stops working and leaves the country but is forced to redeem his IRA and pays a 30% tax on it even if he retired (i.e. not earning any income).
How does the IRS even know that Person B has even left the country? Just keep a home address back in the US and pop back in to visit the kids and grandkids from time to time? Am I missing something here? When I lived in Alaska I knew folks in the active military who maintained their Alaska residency even though they hadn't been back in years. Is there some rule I'm unaware of that says you have to file with the home address that you use the most during the course of the year?

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Wed Dec 29, 2010 12:28 am

wacodiver wrote:OK, this is just ridiculous. Where are you talking about? Equatorial Guinea?

I'm a US citizen. My wife is a naturalized US citizen from Chile who maintains her dual-citizenship. Our 3 daughters are all dual US-Chile citizens. I have lived in Guatemala, Brazil, and Chile and have maintained bank accounts in all 3 countries with no problem. We visit Chile annually and my wife has 2 bank accounts down there. Moving money back and forth between the US and Chile is ridiculously easy if you are talking about small amounts. We just wired $3 grand down to Chile to help pay for an operation for my mother-in-law's maid (don't ask) and it was a trivial exercise for the small local branch of my credit union. I have had no problem making deposits of US dollars into foreign bank accounts in both Guatemala and Chile by simply writing a personal check from a US bank account. And of course, when in Chile I can easily access any of my checking accounts using my ATM cards at any ATM in Chile and there are just as many there as here (if not more). And I can spend using my debit or credit cards as easily as in the US. I can see my Vanguard accounts just as easily in Chile as I can here in the US. Easier in fact because my in-laws in Santiago have a lightning-fast fiber optic internet connection that beats the pants off my cable modem here in Texas.

My wife and I have talked about retiring in Chile some day. If we were to do so we'd most certainly maintain some sort of residence back in the US for when we come back to visit the kids and so forth. I see nothing in these laws that would prevent me from taking distributions from any of my retirement accounts into a US bank account and then spending the money in Chile like any ordinary American retiree. And paying my US taxes. And I have no intention of ever renouncing my US citizenship regardless of the possible financial benefits.
Hey... I'm only reproducing what I've read:
http://www.nytimes.com/2010/04/26/us/26expat.html

Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge [in citizen renounciation].

Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad.

Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.

“That Americans living overseas are being denied banking services in U.S. banks, and increasingly in foreign banks, is unacceptable,” Ms. Maloney said in a letter Friday to leaders of the House Financial Services Committee, requesting a hearing on the question.


Just because you are not relinquishing US citizenship doesn't mean that other people don't intend to.
What are people trying to do? Spend a lifetime working in the US and acquiring their nest egg with the benefit of American laws, the protection of American police and military, and with the benefit of American infrastructure. And then hoping to grab their nest egg and social security and escape to some foreign tax-haven where they pay none of the taxes that every other American citizen pays in retirement? If so I have no sympathy.
Why can't people choose to retire elsewhere if they do desire?

Why must people be forced to sell off taxable money, which they have been paying taxes every year, upon leaving the country?

Why must people be taxed at 30% for tax-deferred money, when at retirement one doesn't work, so the effective tax is going to be much lower...I guess it depends on your combined tax-deferred distributions and SS payments, but are you telling me that most Americans are going to pay 30% taxes on their retirement income?

Oh please... the moment you emigrate, Vanguard places a 30% withholding on IRA distributions and you have to claw back the rest from IRS. What tax-haven are we talking about?

I have nothing against the US govt trying to clamp down on tax evasion. However, my opinion is that the HEART Act does too much unnecessary collateral damage to honest people who may have future plans to retire to another country.
Last edited by AndroAsc on Wed Dec 29, 2010 12:41 am, edited 3 times in total.

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Wed Dec 29, 2010 12:33 am

wacodiver wrote:How does the IRS even know that Person B has even left the country? Just keep a home address back in the US and pop back in to visit the kids and grandkids from time to time? Am I missing something here? When I lived in Alaska I knew folks in the active military who maintained their Alaska residency even though they hadn't been back in years. Is there some rule I'm unaware of that says you have to file with the home address that you use the most during the course of the year?
I have no idea to be honest... But if what you said is true, then the whole point of HEART Act to stop tax evasion has failed hasn't it? The HEART Act works by taxing rich people at the point they leave the country... and if it can be circumvented by simply "misreporting" your address then I am really speechless.

wacodiver
Posts: 308
Joined: Sat Dec 18, 2010 9:58 am

Post by wacodiver » Wed Dec 29, 2010 12:45 am

AndroAsc wrote:
wacodiver wrote:How does the IRS even know that Person B has even left the country? Just keep a home address back in the US and pop back in to visit the kids and grandkids from time to time? Am I missing something here? When I lived in Alaska I knew folks in the active military who maintained their Alaska residency even though they hadn't been back in years. Is there some rule I'm unaware of that says you have to file with the home address that you use the most during the course of the year?
I have no idea to be honest... But if what you said is true, then the whole point of HEART Act to stop tax evasion has failed hasn't it? The HEART Act works by taxing rich people at the point they leave the country... and if it can be circumvented by simply "misreporting" your address then I am really speechless.
Um...no. If you report and file with a US address then you pay US taxes like everyone else. No tax evasion involved. Actually I think you can file from anywhere in the world and pay your US taxes no problem. And the US has tax treaties with many countries so you can deduct your US taxes or vice versa.

What people are trying to do is take their entire US nest egg, wire it to some overseas account, and vanish. That is what the IRS is trying to stop. I think most Americans who retire overseas actually keep the bulk of their funds back in the US and more or less pay their taxes like everyone else.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic » Wed Dec 29, 2010 1:15 am

Where did you get that information?
I always like to read the law.

§ 877. Expatriation to avoid tax
http://www.law.cornell.edu/uscode/26/us ... -000-.html
§ 877A. Tax responsibilities of expatriation
http://www.law.cornell.edu/uscode/26/us ... A000-.html

I also recommend what the Joint Committee on Taxation has to say (starting on page 39):
http://www.jct.gov/x-44-08.pdf

I am not a tax attorney. I think you have to approach this as a student. Read slowly and carefully. Stick as much as possible to original sources (the actual law). If you read something that someone else has written, go back to the law to double check.

Some of the references are hard to follow. For example, deferred compensation item is defined in § 877A as
(4) Deferred compensation item
For purposes of this subsection, the term “deferred compensation item” means—
(A) any interest in a plan or arrangement described in section 219 (g)(5),
(B) any interest in a foreign pension plan or similar retirement arrangement or program,
(C) any item of deferred compensation, and
(D) any property, or right to property, which the individual is entitled to receive in connection with the performance of services to the extent not previously taken into account under section 83 or in accordance with section 83.
Now you have to go to section 219 (g)(5):
(5) Active participant
For purposes of this subsection, the term “active participant” means, with respect to any plan year, an individual—
(A) who is an active participant in—
(i) a plan described in section 401 (a) which includes a trust exempt from tax under section 501 (a),
(ii) an annuity plan described in section 403 (a),
(iii) a plan established for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing,
(iv) an annuity contract described in section 403 (b),
(v) a simplified employee pension (within the meaning of section 408 (k)), or
(vi) any simple retirement account (within the meaning of section 408 (p)), or
(B) who makes deductible contributions to a trust described in section 501 (c)(18).
So now, among other places we have to go to section 401(a):
(a) Requirements for qualification
A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section—
[conditions follow]
So where does a 401(k) fit in?
(k) Cash or deferred arrangements
(1) General rule
A profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan shall not be considered as not satisfying the requirements of subsection (a) merely because the plan includes a qualified cash or deferred arrangement.
[more follows]
What I can't quite figure out, does this mean a 401(k) satisfies 401(a) and thus is a plan or arrangement described in section 219 (g)(5) and thus a deferred compensation item? I think yes.

This would make a 401(k) a deferred compensation item while an IRA is a specified tax deferred account.

User avatar
nydad
Posts: 450
Joined: Wed Dec 01, 2010 11:10 am

Post by nydad » Wed Dec 29, 2010 1:32 am

Buy gold with cash, walk across the border... :)

User avatar
market timer
Posts: 6191
Joined: Tue Aug 21, 2007 1:42 am

Post by market timer » Wed Dec 29, 2010 2:10 am

nydad wrote:Buy gold with cash, walk across the border... :)
Needs to be less than $10K (now only 7 ounces).

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic » Wed Dec 29, 2010 2:20 am

I think the concept is simple, although the execution might be slightly tortured.

You earn money in the US. You put it into deferred accounts. You don't pay taxes at that time, but the bargain you strike with the government is that you will pay the tax later when you take it out.

If you stay in the US and you take the money out, there might be withholding or you might voluntarily ask for withholding (I have 25% of my social security withheld), and then you file your taxes and either pay more or get a refund.

If you leave the US and you take the money out, there is withholding, and then you file your taxes and either pay more or get a refund.

The problem was people wanted to take it out without paying any tax. That's not part of the original bargain that was struck.

There is some confusion about what is taxed at 30%, what is withheld at 30%, and what is taxed like any other income using the regular graduated rates.

Note also that moving out of the country does not terminate your residency for tax purposes as long as you continue to pay US taxes.
As under present law, an individual is considered to terminate long-term U.S. residency when the individual ceases to be a lawful permanent resident of the United States (i.e., loses his or her green card status through revocation or has been administratively or judicially determined to have abandoned such status). Under the provision, however, an individual ceases to be treated as a lawful permanent resident of the United States for all tax purposes if such individual commences to be treated as a resident of a foreign country under a tax treaty between the United States and such foreign country, does not waive the benefits of the treaty applicable to residents of such foreign country, and notifies the Secretary of the commencement of such treatment.
...
In the case of a long-term resident, the date that long-term residency is terminated is the “expatriation date.”
http://www.jct.gov/x-44-08.pdf

This is where the waiver of treaty comes in. If you leave the country and then claim well I'm not a resident of the US and I claim my rights under the treaty and I don't have to pay US taxes, then you won't be a resident for tax purposes any more (at least that's the way I read it). However, if you don't give up your green card and if you continue to pay US taxes on US source income, then you have not yet reached your "expatriation date." Expatriation has nothing to do with leaving the country with your suitcase.

User avatar
market timer
Posts: 6191
Joined: Tue Aug 21, 2007 1:42 am

Post by market timer » Wed Dec 29, 2010 2:22 am

AndroAsc wrote:Under the previous tax-regime (no HEART and FATCA), if I am not mistaken non-resident aliens (non-US persons living overseas which also includes ex-US citizens) are subjected to serious withholding like 30% on all IRA/401k distributions INCLUDING ROTH.
It seems strange that Roth distributions would be subject to withholding for any group. For other distributions, a withholding rate of 30% seems fair -- a minor inconvenience if you are in a lower bracket.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic » Wed Dec 29, 2010 2:50 am

market timer wrote:
AndroAsc wrote:Under the previous tax-regime (no HEART and FATCA), if I am not mistaken non-resident aliens (non-US persons living overseas which also includes ex-US citizens) are subjected to serious withholding like 30% on all IRA/401k distributions INCLUDING ROTH.
It seems strange that Roth distributions would be subject to withholding for any group. For other distributions, a withholding rate of 30% seems fair -- a minor inconvenience if you are in a lower bracket.
It's not.
If a deferred compensation item is an eligible deferred compensation item, the payor must deduct and withhold from a “taxable payment” to the covered expatriate a tax equal to 30 percent of such taxable payment. This withholding requirement is in lieu of any withholding requirement under present law. A taxable payment is subject to withholding to the extent it would be included in gross income of the covered expatriate if such person were subject to tax as a citizen or resident of the United States. A deferred compensation item is taken into account as a payment when such item would be so includible. A deferred compensation item that is subject to the 30 percent withholding requirement is subject to tax under section 871.


The withholding is only on taxable payments. If a payment from a Roth is not a taxable payment, there is no withholding. Hint: it's not since it would not "be included in gross income of the covered expatriate if such person were subject to tax as a citizen or resident of the United States."

Again, I ask that people actually read the law. What does section 871 (Tax on nonresident alien individuals) actually say?
(a) Income not connected with United States business—30 percent tax
(1) Income other than capital gains
Except as provided in subsection (h), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as—
(A) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
[other stuff]
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.

(2) [more stuff]

(3) Taxation of social security benefits
For purposes of this section and section 1441—
(A) 85 percent of any social security benefit (as defined in section 86 (d)) shall be included in gross income (notwithstanding section 207 of the Social Security Act), and
(B) section 86 shall not apply.
For treatment of certain citizens of possessions of the United States, see section 932 (c).[1]

(b) Income connected with United States business—graduated rate of tax
(1) Imposition of tax
A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 55 on his taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2) Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
The key here is "effectively connected." If you were working in the US as a resident, your salary is effectively connected to your job in the US. If you retire outside the US and then withdraw from a retirement plan money that was taken from your salary while you were working in the US, do you think it is effectively connected to the US? Would you pay a flat 30% tax or the graduated tax?

james22
Posts: 1488
Joined: Tue Aug 21, 2007 2:22 pm

Post by james22 » Wed Dec 29, 2010 2:54 am

jidina80 wrote:As an expat, my gut feel is that most citizens who renouce citizenship do so because some countires do not recognize duel citizenship.

Too the ignorant "I don't care what people who denounce their citizenship think" posters, I can only hope they open their eyes some day and understand that there is a big world out there, made of many countries with differing laws, in which U.S. citizens with personal relationships have to manage.
As an expat myself, I can only hope those who renounce their citizenship for tax evasion reasons alone open their eyes some day and recognize the debt they owe their country and understand it can be a scary world out there made up of many countries with differing laws in which US citizens have great advantages when the SHTF.

vijayvijayakv
Posts: 15
Joined: Tue Dec 28, 2010 8:27 pm

Post by vijayvijayakv » Wed Dec 29, 2010 3:56 am

Can we also discuss aspects related to (1) Non-US people living overseas (i.e. Non-Resident Aliens) who are invested in stocks domiciled in the US (e.g. Vanguard ETFs) as the discussion seems to be drifting to merits and de-merits of citizenship.

I am a non -us citizen who had lived for several years in US and opened taxable accounts and invested in the same. As most of my earnings were in US dolalrs all my retirements savings are based there in teh form of ETF's and stocks. I also keep investing in US as I have lagge amounts of dollar savings. I have promply applied for W8 BEN

I am happy to pay my due of taxation ( 15% on dividends based on current treaty). Bul all this discussion on 30% withholding is very disturbing.

I would grealty appreciate if learned members of this forum help in updating the changes proposed and a way forward for legally minimizing the taxes.

halfnine
Posts: 997
Joined: Tue Dec 21, 2010 1:48 pm

Re: Tax Disaster for non-US or "leaving-US" invest

Post by halfnine » Wed Dec 29, 2010 5:12 am

AndroAsc wrote:
(1) Non-US people living overseas (i.e. Non-Resident Aliens) who are invested in stocks domiciled in the US (e.g. Vanguard ETFs).
(2) People who decide or intend to emigrate to another country for retirement (i.e. "leaving-the-US"). In some cases, there will be tax implications even for US citizens!
Those two categories represent both my wife and myself.

As to #1, I expect that the final result won't be as bad as it may appear. The US will want foreign investment into the country and would likely be shooting itself in the foot if they made it a non-worthwhile proposition. But, I guess time will tell. Furthermore, most NRA's would be smart not to have more than 60K in the USA anyway as upon their death the estate tax will start hitting anyone above that amount and there is also no provision to pass the estate to the spouse tax free.

As to #2, I expect it will only get worse and worse over time. Expats are an easy target because we have a very small voice and (as can be seen on this thread) receive little sympathy or understanding from the masses. I would certainly recommend anyone who plans on retiring abroad to move assets over sooner than later. Even though as a US citizen you will always be obligated to pay taxes and be subjected to the whims of the US government, you can at least mitigate the damage by not having all your assets in one place. Unfortunately, if you have all your assets tied to the USA and in retirement accounts then your minimizing your options.

bpp
Posts: 2017
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Post by bpp » Wed Dec 29, 2010 6:42 am

AndroAsc wrote:
bpp wrote:
Based on what I can figure out, the FATCA Act only applies to taxable accounts held by all non-US persons and even US-persons living overseas.
It primarily applies to accounts of any kind (taxable or not) held by US-persons (resident in the US or not). Non-US persons are only affected if their bank cannot or will not certify that they are non-US persons.
I believe my reference quoted "foreign entity" so people living in US are not covered by FATCA. Correct me if I am wrong...
The "foreign entity" is the foreign financial institution, not the individual taxpayer. People living in the US are affected if they have accounts at non-US financial institutions.

I think the purpose of the law is to make it very expensive and undesirable (due to compliance costs) for non-US financial institutions to deal with US citizens and green card holders, and thus make it hard for US citizens to open accounts outside the US. Which may not be a big deal for people who live in the US, but is obviously fatally problematic for a US person living outside the US. THAT is why FATCA is such a concern for many Americans abroad, not the tax stuff.

And for everyone saying, "I've never had any problems banking abroad": you will. This is a new law, just passed earlier this year. Or at least, you will if the law is enforced literally as currently passed.

But again, we will have to wait and see how the IRS intends to enforce this thing. It can still be hoped that they will leave some reasonable carve-outs for folks with legitimate foreign banking and investment needs.

james22
Posts: 1488
Joined: Tue Aug 21, 2007 2:22 pm

Re: Tax Disaster for non-US or "leaving-US" invest

Post by james22 » Wed Dec 29, 2010 7:01 am

halfnine wrote:Expats are an easy target because we have a very small voice and (as can be seen on this thread) receive little sympathy or understanding from the masses.
Expats != those renouncing US citizenship

Grr.

vijayvijayakv
Posts: 15
Joined: Tue Dec 28, 2010 8:27 pm

Post by vijayvijayakv » Wed Dec 29, 2010 7:03 am

Hello All,

I am a NRA and i have 250K invested in taxable accounts ( mainly ETF's) jointly with my wife. Dividends are taxed at 15% and I have never sold any equity and hoped to continue investing around 20 K for next few years. I was hoping being a world economic leader with great investing opportunities, Investing around 500K as a part of my overall retirement pot and rest in Europe and Asia.

Can you pls share any pointers on what is the best way to move the money over teh long term to avoid this inheritence trap. I am 42 and Wife is 40 yo.

Thanks

james22
Posts: 1488
Joined: Tue Aug 21, 2007 2:22 pm

Post by james22 » Wed Dec 29, 2010 7:08 am

bpp wrote:I think the purpose of the law is to make it very expensive and undesirable (due to compliance costs) for non-US financial institutions to deal with US citizens and green card holders, and thus make it hard for US citizens to open accounts outside the US.
Yes, it will be harder for expats to evade US tax in the future.
bpp wrote:Which may not be a big deal for people who live in the US, but is obviously fatally problematic for a US person living outside the US.
No, it is not very difficult for an expat to use a US rather than local bank.

bpp
Posts: 2017
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Post by bpp » Wed Dec 29, 2010 7:36 am

james22 wrote:
bpp wrote:I think the purpose of the law is to make it very expensive and undesirable (due to compliance costs) for non-US financial institutions to deal with US citizens and green card holders, and thus make it hard for US citizens to open accounts outside the US.
Yes, it will be harder for expats to evade US tax in the future.
It will also be harder for us expats who do NOT engage in tax evasion to simply live our lives.
bpp wrote:Which may not be a big deal for people who live in the US, but is obviously fatally problematic for a US person living outside the US.
No, it is not very difficult for an expat to use a US rather than local bank.
That is ridiculously untrue.

1) My employer (Japanese) will only pay me by direct-deposit, and will not do so into a foreign (non-Japanese) bank. How would I get paid?

2) Are you saying it would be easy to set up my mortgage, utilities, property tax etc. payments to be taken from a US bank rather than a Japanese one? Please show me how.

3) Would you consider it reasonable for someone living in, building up their nest-egg in, and planning to retire in a foreign country to have to send all their money to the US and keep it there? If you were living and planning to retire in the US, would you feel comfortable being forced to keep your retirement money all in France or the UK or Japan, for example?
Last edited by bpp on Wed Dec 29, 2010 9:19 am, edited 2 times in total.

Wolkenspiel
Posts: 555
Joined: Wed Sep 30, 2009 7:45 am

Post by Wolkenspiel » Wed Dec 29, 2010 7:39 am

I think many Americans living overseas renounce their citizenship because it is very difficult to maintain any form of financial accounts when you are overseas.
I'm an American living overseas (temporarily) and I have encountered no difficulty whatsoever maintaining all my financial accounts. The minimal amount of planning necessary to do so is certainly not a rational incentive for renouncing citizenship.

If the motivation for renouncing citizenship is to avoid being taxed by the US on worldwide income, well, I think not too many tears will be shed.

natureexplorer
Posts: 4192
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Post by natureexplorer » Wed Dec 29, 2010 7:41 am

I heard of people simply continuing to file US tax returns with a US residential address as well as keeping US brokerage accounts with a US residential address.

AndroAsc, thanks for doing the research!

Yes, there can be circumstances where renouncing a US citizenship can be highly profitable, even if it means losing SS benefits. The US tax law is quite unique in it not stopping at the border. Here some quick search results on the matter:

Renouncing US Citizenship (“USC”) – A Cost/Benefit Analysis
http://www.expattaxandlaw.com/expatriation.html

Giving up US citizenship - on Early Retirement forum
In there is a link to a 26-page PDF published earlier this year titled "The American Expatriation Guide"
http://www.early-retirement.org/forums/ ... 50055.html

There can also be circumstance where becoming a US person for tax purposes can be highly profitable.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic » Wed Dec 29, 2010 8:03 am

The guide mentioned in the previous post is largely a political rant, but does have a lot of factual information. In particular, the guide mentions the treatment of capital gains in your taxable account.
(a) General rules
For purposes of this subtitle—
(1) Mark to market
All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.
(2) Recognition of gain or loss
In the case of any sale under paragraph (1)—
(A) notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and
(B) any loss arising from such sale shall be taken into account for the taxable year of the sale to the extent otherwise provided by this title, except that section 1091 shall not apply to any such loss.
Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence, determined without regard to paragraph (3).
(3) Exclusion for certain gain
(A) In general
The amount which would (but for this paragraph) be includible in the gross income of any individual by reason of paragraph (1) shall be reduced (but not below zero) by $600,000.
(1) says, if you meet the definition of a covered expatriate, to pretend you sold all your stocks (you don't have to sell).
(2) says compute your gains and losses. It also says to apply them to that year's tax.
(3) says that you reduce the net gains that you put on your tax return by $600,000.

Do you have more than $600,000 in unrealized capital gains in your taxable account?
What is your tax rate on long term capital gains?

plats
Posts: 406
Joined: Mon Dec 31, 2007 9:46 pm

Post by plats » Wed Dec 29, 2010 8:14 am

natureexplorer wrote:Yes, there can be circumstances where renouncing a US citizenship can be highly profitable, even if it means losing SS benefits.
Being a US citizen is not a requirement to collect SS benefits. Not that I would ever renounce my US citizenship.

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Wed Dec 29, 2010 9:30 am

sscritic wrote:
market timer wrote:
AndroAsc wrote:Under the previous tax-regime (no HEART and FATCA), if I am not mistaken non-resident aliens (non-US persons living overseas which also includes ex-US citizens) are subjected to serious withholding like 30% on all IRA/401k distributions INCLUDING ROTH.
It seems strange that Roth distributions would be subject to withholding for any group. For other distributions, a withholding rate of 30% seems fair -- a minor inconvenience if you are in a lower bracket.
It's not.
If a deferred compensation item is an eligible deferred compensation item, the payor must deduct and withhold from a “taxable payment” to the covered expatriate a tax equal to 30 percent of such taxable payment. This withholding requirement is in lieu of any withholding requirement under present law. A taxable payment is subject to withholding to the extent it would be included in gross income of the covered expatriate if such person were subject to tax as a citizen or resident of the United States. A deferred compensation item is taken into account as a payment when such item would be so includible. A deferred compensation item that is subject to the 30 percent withholding requirement is subject to tax under section 871.


The withholding is only on taxable payments. If a payment from a Roth is not a taxable payment, there is no withholding. Hint: it's not since it would not "be included in gross income of the covered expatriate if such person were subject to tax as a citizen or resident of the United States."

Again, I ask that people actually read the law. What does section 871 (Tax on nonresident alien individuals) actually say?
Yes, I am aware that Roth distributions are not taxable technically should not be subjected to withholding. But Vanguard withhold Roth IRA payments. So what should I do? Sue Vanguard?
(a) Income not connected with United States business—30 percent tax
(1) Income other than capital gains
Except as provided in subsection (h), there is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as—
(A) interest (other than original issue discount as defined in section 1273), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income,
[other stuff]
but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.

(2) [more stuff]

(3) Taxation of social security benefits
For purposes of this section and section 1441—
(A) 85 percent of any social security benefit (as defined in section 86 (d)) shall be included in gross income (notwithstanding section 207 of the Social Security Act), and
(B) section 86 shall not apply.
For treatment of certain citizens of possessions of the United States, see section 932 (c).[1]

(b) Income connected with United States business—graduated rate of tax
(1) Imposition of tax
A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 55 on his taxable income which is effectively connected with the conduct of a trade or business within the United States.
(2) Determination of taxable income
In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States.
The key here is "effectively connected." If you were working in the US as a resident, your salary is effectively connected to your job in the US. If you retire outside the US and then withdraw from a retirement plan money that was taken from your salary while you were working in the US, do you think it is effectively connected to the US? Would you pay a flat 30% tax or the graduated tax?
Technically it is still effectively connected income (ECI), because the stuff from your IRA/401k was deferred compensation from your original salary which is ECI. So the contributions should be ECI and taxed at graduated rates but the earnings are taxed at 30%

Reading law is easy to say, but I am no legal expert and there are so many ways to get it wrong. We have just seen some examples on differing opinions on the interpretation of the law.

Topic Author
AndroAsc
Posts: 1234
Joined: Sat Nov 21, 2009 7:39 am

Post by AndroAsc » Wed Dec 29, 2010 9:54 am

I have corrected my original post, removing the factually incorrect opinions. Kudos to sscritic who has helped point out the many flaws and inaccuracy in my interpretation of the latest tax laws.

In short:
1) Not much change to the FATCA side, but now I amended it to include everyone. And now, it actually makes sense why FATCA was implemented.
2) My opinions on HEART Act has been mellowed down. Technically, it's going to affect only the super rich and some correction to tax calculations shows that it is not as bad as I had thought.

Let's also stick to the technical subject at hand guys. Apparently relinquishing US citizenship is really a touchy subject!

james22
Posts: 1488
Joined: Tue Aug 21, 2007 2:22 pm

Post by james22 » Wed Dec 29, 2010 10:15 am

AndroAsc wrote:Apparently relinquishing US citizenship is really a touchy subject!
Imagine that.

james22
Posts: 1488
Joined: Tue Aug 21, 2007 2:22 pm

Post by james22 » Wed Dec 29, 2010 10:45 am

bpp wrote:That is ridiculously untrue.
There is NO chance the IRS will enforce FATCA in such a way that makes expat living ''fatally problematic.''
bpp wrote:1) My employer (Japanese) will only pay me by direct-deposit, and will not do so into a foreign (non-Japanese) bank. How would I get paid?
Employer's change policies, bpp.
bpp wrote:2) Are you saying it would be easy to set up my mortgage, utilities, property tax etc. payments to be taken from a US bank rather than a Japanese one? Please show me how.
Not easy, just not so very difficult. (I'll expect my hardship premium to reimburse my hassle.)
bpp wrote:3) Would you consider it reasonable for someone living in, building up their nest-egg in, and planning to retire in a foreign country to have to send all their money to the US and keep it there?
Hey, I don't think it's reasonable to pay tax on expat earnings, but I pay. And if I'm forced to comply with FATCA I (and my employer, US bank, landlord, etc.) will deal with it.
bpp wrote:If you were living and planning to retire in the US, would you feel comfortable being forced to keep your retirement money all in France or the UK or Japan, for example?
Were I French, British, or Japanese? Uh, yeah.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic » Wed Dec 29, 2010 10:51 am

AndroAsc wrote: Let's also stick to the technical subject at hand guys.
As a student of social security, I was interested in the part that says that 85% of your social security is taxable as a NRA.
§ 871. Tax on nonresident alien individuals
(a) Income not connected with United States business—30 percent tax
...
(3) Taxation of social security benefits
For purposes of this section and section 1441—
(A) 85 percent of any social security benefit (as defined in section 86 (d)) shall be included in gross income (notwithstanding section 207 of the Social Security Act), and ...
This is in the regular section on tax on NRA, so has nothing to do with HEART.

If you were living in the US and filing an income tax return based on all your income, the IRS would be able to see how much other income and thus how much "combined income" you have. If you are outside the US and have non-US source income, the IRS will not know about it. Therefore, they presume your other income puts you into the 85% taxable range. They also tax the taxable social security at 30% as they do interest.

At least, that's how I read it.

gd
Posts: 1577
Joined: Sun Nov 15, 2009 8:35 am
Location: MA, USA

Post by gd » Wed Dec 29, 2010 10:55 am

edited to remove what were too much opinions on public policy.

Revision:
My foreign spouse became a permanent resident well before this stuff, and I am not so happy about the current situation. She is potentially financially trapped in this country if I die first, with potential claims on assets that have nothing to do with the USA or her life here. A foreigner interested in becoming a permanent resident-- or a citizen marrying one-- needs to be very, very careful about what they're getting into. US tax law is quite different from the rest of the world, with a far greater reach.
Last edited by gd on Wed Dec 29, 2010 12:28 pm, edited 1 time in total.

bpp
Posts: 2017
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Post by bpp » Wed Dec 29, 2010 11:33 am

james22 wrote:
bpp wrote:That is ridiculously untrue.
There is NO chance the IRS will enforce FATCA in such a way that makes expat living ''fatally problematic.''
I certainly hope you're right. The only way I could really see that being true, though, would be if they excluded US citizens abroad from the category of "US persons," at least for FATCA withholding and reporting purposes. I'm guessing that is unlikely, but we'll see.
bpp wrote:1) My employer (Japanese) will only pay me by direct-deposit, and will not do so into a foreign (non-Japanese) bank. How would I get paid?
Employer's change policies, bpp.
Come on, be serious.
bpp wrote:2) Are you saying it would be easy to set up my mortgage, utilities, property tax etc. payments to be taken from a US bank rather than a Japanese one? Please show me how.
Not easy, just not so very difficult. (I'll expect my hardship premium to reimburse my hassle.)
"Hardship premium"? Sounds like you are on some kind of expat assignment sponsored by a large US corporation, which takes care of this kind of stuff for you. That is not how most people live. (At least not the ones I know.)

No, it is not merely "not easy," it would be simply impossible to be able to function without local financial accounts in most countries.
bpp wrote:3) Would you consider it reasonable for someone living in, building up their nest-egg in, and planning to retire in a foreign country to have to send all their money to the US and keep it there?
Hey, I don't think it's reasonable to pay tax on expat earnings, but I pay. And if I'm forced to comply with FATCA I (and my employer, US bank, landlord, etc.) will deal with it.
Or, perhaps your employer will decide it is not worth the hassle of employing Americans any more.
bpp wrote:If you were living and planning to retire in the US, would you feel comfortable being forced to keep your retirement money all in France or the UK or Japan, for example?
Were I French, British, or Japanese? Uh, yeah.
I really doubt you would, actually. Think about it, all your money is on the other side of the planet. Need to buy something? Ok, that will be an international wire transfer to... what? You don't even have a local bank account you can wire it to. How long does it take? What are the chances of your remittances being caught up in red tape, natural disasters, geopolitical events... whatever? And what do you do with the money once you have brought it back to where you live and spend it, keep a big wad of cash in the sock drawer?

james22
Posts: 1488
Joined: Tue Aug 21, 2007 2:22 pm

Post by james22 » Wed Dec 29, 2010 12:21 pm

bpp wrote:I certainly hope you're right.
Well, Morgan has me really doubting myself, but I'll still bet there won't be an expat who returns home because of this (and expats'll still tend to keep their retirement money in their home country).

bpp
Posts: 2017
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Post by bpp » Wed Dec 29, 2010 2:22 pm

james22 wrote:I'll still bet there won't be an expat who returns home because of this
I bet there will be. There will also be those who go the other way and sever all ties with the Old Country. Either outcome seems regrettable.
(and expats'll still tend to keep their retirement money in their home country).
For those who intend to return to their home country some day, sure, that would make sense.

For the rest, why would they do so?

Jive Turkey
Posts: 34
Joined: Tue Jun 17, 2008 9:35 pm

Post by Jive Turkey » Wed Dec 29, 2010 2:30 pm

james22 wrote:
bpp wrote:I certainly hope you're right.
Well, Morgan has me really doubting myself, but I'll still bet there won't be an expat who returns home because of this
I have known a number of Americans in Hong Kong who claimed US tax policy as one of their reasons for packing it in. There are certainly a lot fewer Americans in all fields of business here now than there were when I arrived ten years ago. It seems that pretty much all the Americans drawing incomes above the exclusion are under employment terms with American companies in which their taxes are handled by the company; otherwise, they wouldn't bother coming over. It is fairly rare to see Americans here working for non-US companies as these companies just don't want to deal with the tax issues . It seems to me, a below FEIE small potato, that it makes little sense for an American entrepreneur to do business in this sort of environment.

(and expats'll still tend to keep their retirement money in their home country).
I don't. With the arrival of some decent ETFs on the Hong Kong exchange, we do our retirement savings under the non-US person wife's name. I suppose I'll also transfer our flat to her after it is paid off and make sure I am worth less than US$60K when I die. Including personal and dependent allowances, I may never make above the FEIE, but the estate tax poses too absurd of a threat to my wife's financial security. There is no way I would allow a situation in which she pays around 1% P.A. to a US bank's trust department, plus whatever ERs they charge on the short list of actively managed investments they offer.

I have no intention of ever renouncing US citizenship, but there is a better than 50% chance that I will never live in the US again. Why would someone like me save in the US given the tax consequences for me and my wife?

I don't have any positive feelings for Americans who renounce because of tax concerns, but I don't immediately judge them for it either. For those on the forum who do, I'd like to pose a question to you. Citizens from pretty much every other developed country can go where they like without having to file tax returns or pay taxes to their own country while abroad; they can do business where ever they like without concerns for double taxation on foreign income, and this business often brings economic benefits to their home countries. Renunciation of citizenship is just not a consideration for these people. I am also unaware of any tax policies in other developed countries that would bite skilled immigrants in the way that US policies do; HM Inland Revenue or the Australian, French, Canadian or NZ equivalent don't try to collect exit taxes or death duties from skilled immigrants (or their estates) who have decided that they are ready to head home. Do you really think this situation is beneficial to the US? It seems to me that it can only reduce our presence in international business and our ability to attract the best and the brightest.

Locked