A misleading tax article for US citizens

[nun]

This article goes over the local tax rules and rates that apply for resident expats. I assume it's aimed at US citizens as the author is a US citizen and it was published in US News and World Report. It touts the low or no local tax places....however it fails to mention that where every you live your tax liability with the IRS still taxes your worldwide income

The Most Tax-Friendly Places to Retire Abroad - Yahoo! Finance

 

[Texas Proud]

This article goes over the local tax rules and rates that apply for resident expats. I assume it's aimed at US citizens as the author is a US citizen and it was published in US News and World Report. It touts the low or no local tax places....however it fails to mention that where every you live your tax liability with the IRS still taxes your worldwide income

The Most Tax-Friendly Places to Retire Abroad - Yahoo! Finance

Since there is no place in this world you can live and not pay the US tax (as long as you are a US citizen and do not cheat)..... it is a non-issue...

So, the next thing is to reduce all your other taxes... I still see places in the US that are cheaper tax wise than the countries listed....

 

[NYEXPAT]

This article goes over the local tax rules and rates that apply for resident expats. I assume it's aimed at US citizens as the author is a US citizen and it was published in US News and World Report. It touts the low or no local tax places....however it fails to mention that where every you live your tax liability with the IRS still taxes your worldwide income

The Most Tax-Friendly Places to Retire Abroad - Yahoo! Finance

" A few countries including the United States tax residents on their worldwide income. These are places where becoming a legal foreign resident is expensive."

and exactly how is this misleading?

 

[Alan]

" A few countries including the United States tax residents on their worldwide income. These are places where becoming a legal foreign resident is expensive."

and exactly how is this misleading?

I'm afraid it has mis-lead you, as this is not the same thing at all, since regardless of where you reside you are subject to US taxes if you are a US citizen.

The statement above says that if you reside in a country that taxes worldwide income, then your US income may be subject to double taxation, by your country of residence and the US.

 

[Alan]

" A few countries including the United States tax residents on their worldwide income. These are places where becoming a legal foreign resident is expensive."

and exactly how is this misleading?

I'm afraid it has mis-lead you, as this is not the same thing at all, since regardless of where you reside you are subject to US taxes if you are a US citizen.

The statement above says that if you reside in a country that taxes worldwide income, then your US income may be subject to double taxation, by your country of residence and the US.

To clarify this further with an example. The UK taxes worldwide income, but does not tax that income of its citizens if they reside in a foreign country.

I am a UK citizen living in the USA, and have UK income, but I don't have to pay UK taxes on anything, and don't have to file a UK tax return. I do have to pay US taxes on the UK income.

If the situation were reversed and I lived in the UK and am also a US citizen, I would still have to file a US tax return, although there is a tax treaty in place between the countries to avoid double taxation.

 

[nun]

To clarify this further with an example. The UK taxes worldwide income, but does not tax that income of its citizens if they reside in a foreign country.

I am a UK citizen living in the USA, and have UK income, but I don't have to pay UK taxes on anything, and don't have to file a UK tax return. I do have to pay US taxes on the UK income.

If the situation were reversed and I lived in the UK and am also a US citizen, I would still have to file a US tax return, although there is a tax treaty in place between the countries to avoid double taxation.

That's my problem with the article....when it says

" A few countries including the United States tax residents on their worldwide income. These are places where becoming a legal foreign resident is expensive."

why doesn't it say "residents and citizens". The omission is highly misleading and implies that if a US citizen becomes non-resident they won't be taxed by the IRS.

Just a quick question. As you know I'm in a similar situation to you, UK/US citizen resident in the US, but I have no UK income, gains, accounts etc.

I'm surprised you don't have to file a UK self assessment for the UK income or at least claim a treaty exemption if you are getting income from UK pensions etc. If you have earned income from work in the UK wouldn't you pay UK tax and then take a foreign tax credit in the US?

 

[Alan]

That's my problem with the article....when it says


why doesn't it say "residents and citizens". The omission is highly misleading and implies that if a US citizen becomes non-resident they won't be taxed by the IRS.

Just a quick question. As you know I'm in a similar situation to you, UK/US citizen resident in the US, but I have no UK income, gains, accounts etc.

I'm surprised you don't have to file a UK self assessment for the UK income or at least claim a treaty exemption if you are getting income from UK pensions etc. If you have earned income from work in the UK wouldn't you pay UK tax and then take a foreign tax credit in the US?

My current situation is that I have no earned income in the UK, just a pension plus some interest from a savings account.

The interest on savings was easy in that I had to file an HM Revenue (HMR) form with the bank stating that I am not resident in the UK and they then stopped withholding UK tax. That has been the case for decades.

As soon as I started to draw my UK pension 5 years ago the HMR set a tax code and the pension company (Mercer) started witholding taxes. HMR also wrote to me asking for information on all my other sources of income. However, I applied for a certificate from the US IRS stating I was a US resident and paid US taxes. (cost me $35) I then filed the appropriate form (FD13) with the certificate attached to HMR and they instructed Mercer to refund the taxes they had held and to stop all future witholding. The process took less than 2 months to complete and it is all covered under the double taxation treaty between the UK and US.

In conclusion, I pay US taxes on both my UK pension and UK savings interest. For the UK pension I file IRS form 4852(?) as a substitute 1099-R explaining why Mercer does not issue a 1099-R. There is no cost basis since I never paid tax on my pension contributions. This does mean of course that HMR is losing out on the tax on those contributions as it is now going to the US IRS.

For the first 5 years I was here I did have some earned income in the UK, to keep up my UK NI contributions and qualify for a UK State pension when I am 67. In those days my Megacorp provided tax accountants to handle it all, but I'm certain I still never filed a UK tax return. I really don't know how it all worked - sorry

 

[nun]

Thanks Allan, that's good to know. If I'm still in the US when I'm 67 and start to get UK state pension it looks like a pretty simple matter to claim the treaty exemption from HMRC so that it's only taxable in the US.

However, back to the article I posted. I went on to read around the author's website and it's full of glowing reports of retiring and investing outside the US. There are many great places to retire with many advantages, but the complex tax implications for US citizens that invest overseas are never addressed, they may be in the authors books, but putting them on the website would probably frightened many away.

 

[MichaelB]

I'm afraid it has mis-lead you, as this is not the same thing at all, since regardless of where you reside you are subject to US taxes if you are a US citizen.

The statement above says that if you reside in a country that taxes worldwide income, then your US income may be subject to double taxation, by your country of residence and the US.

Thanks, Alan. That is an important clarification that many people might miss.

 

[nun]

Here is a little flavour of the approach to offshore finances that is being promoted.......To hell with FBAR and FATC...if the IRS catch a US citizen hiding money overseas the penalties are massive.

Belize | Best Places To Retire | Kathleen Peddicord

Safe, Easy Banking Off The Radar​

You can open a bank account at a bank in Belize with zero dollars. Why? Because, as I’ve been explaining, Belize banks are focused on attracting small- to medium-sized investors. They’re not going after mega-clients. Mega-clients attract attention. Remember, Belize is a low-key jurisdiction, happy to stay off the world’s radar.
Americans and Canadians can open either a personal account or what’s called a structure account. This is the preferred option. It’s an account formed for you by someone else that’s not in your personal name but in the name of a structure–a trust, a company, or a foundation, for example.
Once you’re offshore, you want to do as little in your own name as possible. Put everything possible in the name of a structure.

 

[theOAP]

I think nun is being quite reserved with his comments on this article, as I'm positive he is aware of FATCA legislation and it's potential consequences for any Americans that live outside the US. There is a possibility that a US Citizen may be unable to obtain even a basic local bank account abroad, which could make living outside the US difficult. The full consequences are unknown at this point in time, and I would not advise anyone to retire outside the US until the full consequences are established (2014). I won't even start on the reporting issues, particularly when investments are involved.

As for the UK State Pension, no one resident in the UK is taxed at source on the UK State Pension. It only comes into calculations when your total taxable income for the year is greater than your personal allowance.

 

[Alan]

Thanks Allan, that's good to know. If I'm still in the US when I'm 67 and start to get UK state pension it looks like a pretty simple matter to claim the treaty exemption from HMRC so that it's only taxable in the US.

However, back to the article I posted. I went on to read around the author's website and it's full of glowing reports of retiring and investing outside the US. There are many great places to retire with many advantages, but the complex tax implications for US citizens that invest overseas are never addressed, they may be in the authors books, but putting them on the website would probably frightened many away.

I agree that the article does not cover this adequately. If we do decide to return to the UK then I would definitely pay a tax accountant over there to do the taxes, at least for a couple of years until I understood all that was needed.

It has been discussed on this site before that increasing numbers of Americans are renouncing their citizenship each year to avoid this issue when they retire abroad.

Here is a little flavour of the approach to offshore finances that is being promoted.......To hell with FBAR and FATC...if the IRS catch a US citizen hiding money overseas the penalties are massive.

Belize | Best Places To Retire | Kathleen Peddicord

I think FATC is intended to catch more of those folks who invest abroad and don't declare the income. It won't affect us personally as we always declare and pay US taxes on our income from the UK, and the filing of the FBAR each year is actually very simple.

For all I know the tax treaty between the UK and US already requires UK financial institutions to report my income to the US, I certainly assume it does, so FATC does not affect us.

I'm in favor of catching those who evade taxes illegally.

 

[MichaelB]

FATCA has two objectives: tax US sourced income earned by non-residents that is subsequently transferred abroad, and track assets that belong to US citizens and residents after the assets have been relocated abroad. Money laundering and tax regulations can have severe criminal penalties that are often not related to the amounts involved, so it is a good idea to make sure one is always in compliance.

People with legitimate business or interest in countries where money is easily laundered will be impacted by these regulations.

 

[theOAP]

...tax US sourced income earned by non-residents that is subsequently transferred abroad,...

Just to add a bit more clarification: the 'non-resident' can be either a US Citizen, or a non-US Citizen. If the funds go to, or through, a non-FATCA compliant Foreign Financial Institution (bank, broker, fund manager, etc.), 30% of the funds transfered will be with held. If you can afford to have 30% of your funds held in the US, paying 0% interest for the rest of the year, then you may have no problem. It makes no difference how diligent you are with FBAR, FATCA (Form 8938), and 1040 filing in your own respect. At present, this applies to all foreign countries.

It becomes essential to find a FATCA compliant FFI in the foreign country. And therein lies the rub: at present, it's not clear which FFI's will chose to be compliant. The cost of compliance will be quite expensive, and some FFI's are already either dumping or segregating US Citizens.

 

[NYEXPAT]

It becomes essential to find a FATCA compliant FFI in the foreign country. And therein lies the rub: at present, it's not clear which FFI's will chose to be compliant. The cost of compliance will be quite expensive, and some FFI's are already either dumping or segregating US Citizens.

or a trustworthy Hawala broker (aren't they all)!

 

[nun]

Just to add a bit more clarification: the 'non-resident' can be either a US Citizen, or a non-US Citizen. If the funds go to, or through, a non-FATCA compliant Foreign Financial Institution (bank, broker, fund manager, etc.), 30% of the funds transfered will be with held. If you can afford to have 30% of your funds held in the US, paying 0% interest for the rest of the year, then you may have no problem. It makes no difference how diligent you are with FBAR, FATCA (Form 8938), and 1040 filing in your own respect. At present, this applies to all foreign countries.

It becomes essential to find a FATCA compliant FFI in the foreign country. And therein lies the rub: at present, it's not clear which FFI's will chose to be compliant. The cost of compliance will be quite expensive, and some FFI's are already either dumping or segregating US Citizens.

The situation is still unclear, but everything I've read is that most FFI that reputable people use will be FATCA compliant. There are issues with EU privacy laws, but some compromise will be worked out and US citizens will probably have to sign a form allowing the FFI to communicate with the IRS.
Also $50k looks like it will be the threshold for FATCA reporting.

So the best case scenario here is that FFI simply asks if you are a US citizen and you sign a form allowing them to share your account details with the IRS. Then there will be no 30% FATCA withholding on any money you transfer form the US to your FFI......you'll still have to do regular tax withholding on any pensions etc on the the W-4P though. You won't have to do any FATCA reporting unless the account goes above $50k.

 

[theOAP]

The situation is still unclear, but everything I've read is that most FFI that reputable people use will be FATCA compliant. There are issues with EU privacy laws, but some compromise will be worked out and US citizens will probably have to sign a form allowing the FFI to communicate with the IRS.
Also $50k looks like it will be the threshold for FATCA reporting.

So the best case scenario here is that FFI simply asks if you are a US citizen and you sign a form allowing them to share your account details with the IRS. Then there will be no 30% FATCA withholding on any money you transfer form the US to your FFI......you'll still have to do regular tax withholding on any pensions etc on the the W-4P though. You won't have to do any FATCA reporting unless the account goes above $50k.

I tend to 2nd your opinion, and hope we are correct, but I would like to see the articles you refer to. Since your interests lie in the UK, I would expect HSBC and Barclays to become compliant. RBS and Lloyds/HBOS are a bit more of a mystery, although UK Govt. ownership may dictate their actions. It's the building societies that remain vulnerable where the cost of compliance will be more critical, but the largest (Halifax, C&G, and Birmingham Midshires) are owned by Lloyds/HBOS. Other forms of FFIs will depend on their need to do business with the US.

I don't know if you've read the instructions for 8938 yet, but the thresholds now depend on various factors: your country of residence, your filing status, and the amount in the account during the year and at the end of the year. Minimum is $50,000 (Single or MFS, resident in the US, and with $50,000 at Dec. 31) to a maximum of $600,000 (MFJ, resident abroad, with $600,000 during the year, or $400,000 at Dec. 31).

 

[nun]

I tend to 2nd your opinion, and hope we are correct, but I would like to see the articles you refer to. Since your interests lie in the UK, I would expect HSBC and Barclays to become compliant. RBS and Lloyds/HBOS are a bit more of a mystery, although UK Govt. ownership may dictate their actions. It's the building societies that remain vulnerable where the cost of compliance will be more critical, but the largest (Halifax, C&G, and Birmingham Midshires) are owned by Lloyds/HBOS. Other forms of FFIs will depend on their need to do business with the US.

I don't know if you've read the instructions for 8938 yet, but the thresholds now depend on various factors: your country of residence, your filing status, and the amount in the account during the year and at the end of the year. Minimum is $50,000 (Single or MFS, resident in the US, and with $50,000 at Dec. 31) to a maximum of $600,000 (MFJ, resident abroad, with $600,000 during the year, or $400,000 at Dec. 31).

I've read a couple of articles from Deloitte and Grant Thornton and compliance seems like a necessity for all FFI of any size. They just have to do it to continue to do business with the US.

I've just read the instructions and it looks like as a single US citizen living abroad if you have less than $200k an the end of the years and less than $400k during the year in foreign assets you don't have to file form 8938. I'll easily be able to comply with this for thinks like savings and bank accounts, but what about real property like houses, are they included? If I have a mortgage I can see that having to be declared and needing to get the loan form a FATCA compliant FFI, but what if I buy the house outright.....say the house is worth $300k would I have to put it on form 8938? Also are foreign SS pensions excluded?

 

[theOAP]

.....but what about real property like houses, are they included? If I have a mortgage I can see that having to be declared and needing to get the loan form a FATCA compliant FFI, but what if I buy the house outright.....say the house is worth $300k would I have to put it on form 8938? Also are foreign SS pensions excluded?

I think it will depend on your owner status. Some in the UK are using 'trusts' as an ownership method (for their personal residence) to cut down on stamp duty and CGs. I would guess trust ownership would need to be declared on 8938, but at present, don't quote me on that. I know trusts are a common ownership practice in the US. Normal ownership in your name for your personal residence: I've yet to discover any requirement to declare the value of your home on 8938. I'm not certain of the reporting requirements as regards rental property which you own, but the accounts used are subject to reporting.

UBS in Switzerland are segregating USCs who purchase homes there, and have a mortgage with UBS. All their banking has to be done through the Zurich head offices (if forums are to be believed).

For info: the average home cost in my area (nowhere near London) is $465,000 (@1.60). The 'average'(?) individual yearly income is $35,000 for the area. Home values have dropped by 15% since 2009. To say the future of the UK housing market remains unclear is an understatement.

As for pensions, you know more about that than I do. I would guess it depends on the type of pension (or annuity). If I understand your planned situation correctly, if you are in the US at 67, your UK State pension (your only UK income) will likely be below the UK personal allowance, so there would be no HMRC repoting requirement and no need for the treaty. As you undoubtedly know, the UK State pension would not need to be declared on FATCA or FBAR. Once in the UK, your ROTHs are tax free (but HMRC may require notice) per the treaty, but if the Mass. pension, US SS, and other taxable income are remitted to the UK, you'll be above the PA. As I noted earlier, the UK State Pension is not taxed at source, so I can certainly see the bi-annual tax payments to HMRC in your future.

 

[nun]

I think it will depend on your owner status. Some in the UK are using 'trusts' as an ownership method (for their personal residence) to cut down on stamp duty and CGs. I would guess trust ownership would need to be declared on 8938, but at present, don't quote me on that. I know trusts are a common ownership practice in the US. Normal ownership in your name for your personal residence: I've yet to discover any requirement to declare the value of your home on 8938. I'm not certain of the reporting requirements as regards rental property which you own, but the accounts used are subject to reporting.

UBS in Switzerland are segregating USCs who purchase homes there, and have a mortgage with UBS. All their banking has to be done through the Zurich head offices (if forums are to be believed).

For info: the average home cost in my area (nowhere near London) is $465,000 (@1.60). The 'average'(?) individual yearly income is $35,000 for the area. Home values have dropped by 15% since 2009. To say the future of the UK housing market remains unclear is an understatement.

As for pensions, you know more about that than I do. I would guess it depends on the type of pension (or annuity). If I understand your planned situation correctly, if you are in the US at 67, your UK State pension (your only UK income) will likely be below the UK personal allowance, so there would be no HMRC repoting requirement and no need for the treaty. As you undoubtedly know, the UK State pension would not need to be declared on FATCA or FBAR. Once in the UK, your ROTHs are tax free (but HMRC may require notice) per the treaty, but if the Mass. pension, US SS, and other taxable income are remitted to the UK, you'll be above the PA. As I noted earlier, the UK State Pension is not taxed at source, so I can certainly see the bi-annual tax payments to HMRC in your future.

I understand the tax situation for the pensions etc......but the confusion comes from what is exactly included in FATCA. UK personal pensions definitely, but are UK benefits and basic state pension. UK state pension isn't reportable on FBAR, but is it on FATCA? From your answer it's not.

I think foreign mortgage loans would be covered by FATCA in "Any financial instrument or contract that has an issuer or counterparty that is other than a US person." But if I was to buy the house outright would the house still be included as a foreign asset?

 

[nun]

This article says that if you own the real estate through a trust it's reportable on FATCA, but if you own the property it isn't.....I'm still uncertain about mortgages though.

The Foreign Account Tax Compliance Act

 

[theOAP]

I remember struggling with this when I first read the instructions.

From Form 8938, General Instructions, Page 1:
Specified foreign financial assets include any financial account maintained by a foreign financial institution and, to the extent held for investment, any stock, securities, or any other interest in a foreign entity and any financial instrument or contract with an issuer or counterparty that is not a U.S. person.

Is your home an investment? Is a mortgage a contract?

From Page 3:
Specified Foreign Financial Assets
c. Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.

These are the only references I could find in the instructions that would relate to a foreign mortgage.

It would be hard to argue that rental property is not held for investment, so that's an easy one. Is the primary purpose of a home for habitation, not investment (well, after 2009 anyway). I concluded that a mortgage was a contract though, and the issuer would not be a US Person.

Since I do not have a mortgage, I stopped. So the simple answer is - I don't know! You can try, but I doubt you'll get a straight answer from Guya.

 

[nun]

Since I do not have a mortgage, I stopped. So the simple answer is - I don't know! You can try, but I doubt you'll get a straight answer from Guya.

That's an in joke.......but a funny one

You've come to the same conclusions as me. Mortgage maybe FATCA I don't really know.....so if I buy a home in the UK I won't have a mortgage, just use proceeds of my US home sale to buy the UK one outright.

I seem to remember certain Govt things like social security being excluded form FATCA, but what about insurance contracts. If I move to the UK I'll need car and home owners insurance. Again I remember reading that insurance without an investment component is excluded from FATCA which is good, but foreign life insurance would count

 

[sengsational]

Is your home an investment? Is a mortgage a contract?

Not sure how I found this "Leif Simon" Lief Simon | The Experts, character, but from the introductory stuff, he seems to be saying if you hold foreign real estate in your own name, then it's not reportable. Unfortunately, I can't show you the actual link to the text because it's behind a login. But he says this:

Here is some good news:

You know that, as an American, wherever in the world you go, Uncle Sam
requires you to report on your worldwide income and assets. But there are a
couple of investments that the government doesn't require you to report on.
No questions asked. They're simply not interested.

The first is foreign real estate.

Yes, you can own a second home (whether
for investment or personal use) in a foreign
country and you are not obliged to inform
the U.S. tax authorities that you own it (if
you own it in your own name).

And, while new laws may make it easier for
the government to get at your bank account
overseas, it's a heck of a lot harder for
someone (assuming they can track it down
in the first place) to physically remove your
foreign property.

Here's a link to the whole intro thing: take_the_emergency_exit.pdf

 

[Ed_The_Gypsy]

If the situation were reversed and I lived in the UK and am also a US citizen, I would still have to file a US tax return, although there is a tax treaty in place between the countries to avoid double taxation.

If I remember correctly, double taxation is reduced, not eliminated. When working in Canada, I paid Canadian taxes first, then still paid some US tax. Beware.