Taxes and the american citizen...

[F M All]

. The US tax system is much like it's healthcare system, overly complex, inefficient and more concerned with protecting vested interests and locked into a mind set that is detrimental to the fundamental goals.

Absolutely right, you foreigner/heretic/socialist/communist/Brit/...... (delete as appropriate!!!!). Now you will be shot at dawn for daring to criticise the good 'ol US of A.

Here come the mods........

 

[nun]

Absolutely right, you foreigner/heretic/socialist/communist/Brit/...... (delete as appropriate!!!!). Now you will be shot at dawn for daring to criticise the good 'ol US of A.

Here come the mods........

The ones I'd delete would be communist and foreigner.......As I'm British it's obvious that I'm not a foreigner, everyone else is though

I made the comparison between US tax and healthcare because they are both systems that are collapsing under their own bureaucratic weight and have better implementations overseas, IMHO. I'm very worried by the IRS's regulations that it applies to overseas entities that deal with US citizens, making the US expat a financial pariah. I will one day be a US/UK dual citizen living in the UK so I have researched the tax implications and I have a fairly detailed plan of how to deal with everything. But I'm a tax geek and the penalties and compliance issues should just not be so onerous. The level of either ignorance or worry when it comes to taxes on expat forums convinces me that the IRS is creating more problems that it is solving.

 

[MichaelB]

Sometimes the rhetoric can be as excessive as the regulation. These measures will inconvenience some, but most US citizens, at home and abroad, should be able to get by without too much effort. They will have to learn to prepare new tax schedules. Some will have to pay more tax. As long as the US economy is the world's biggest and the US$ is the global reserve currency I don't see much risk of institutions abroad turning away US clients.

If the new measures are as complex as some have claimed this represents an excellent opportunity for self employment as a specialized tax adviser.

 

[F M All]

Sometimes the rhetoric can be as excessive as the regulation. These measures will inconvenience some, but most US citizens, at home and abroad, should be able to get by without too much effort. They will have to learn to prepare new tax schedules. Some will have to pay more tax.

This shows you do not understand and have not had to fill out the relevant schedules - many foreign investments are completely alien to the IRS and it is practically impossible to comply with their (naturally) US centric view of products. Their forms do not allow for the correct reporting of some investments, sometimes the information is not available because foreign investment companies follow a different methodology as dictated by their local requirements. As Nun said foreign pensions are often in this category. The new 8938 is a particularly badly designed form, introduced in too much of a hurry, by people who don't appear to have enough knowledge of what they are asking for, but carrying a large penalty for the user's failure to do the impossible.

. As long as the US economy is the world's biggest and the US$ is the global reserve currency I don't see much risk of institutions abroad turning away US clients.

The US laws and IRS governance are doing all they can to help change this. This is not to say that similar issues won't exist under the new leading economy!!!

If the new measures are as complex as some have claimed this represents an excellent opportunity for self employment as a specialized tax adviser.

Er, isn't that w**k?

 

[MichaelB]

This shows you do not understand and have not had to fill out the relevant schedules - many foreign investments are completely alien to the IRS and it is practically impossible to comply with their (naturally) US centric view of products.

I may not understand (although I think I do) but I have filled out the relevant schedules for taxpayers abroad many times. My first was in 1977, my most recent was last thursday, and most years in-between.

 

[nun]

I may not understand (although I think I do) but I have filled out the relevant schedules for taxpayers abroad many times. My first was in 1977, my most recent was last thursday, and most years in-between.

Planning and familiarity definitely makes filing easier. However, it's almost an impossibility for the novice and even many professionals, and it's necessary to keep up to date with all the new IRS rules.

A simple situation like a US expat with a UK employer sponsored pension into which the employee contributes more than their employer will probably lead to the need to file foreign trust forms along with PFIC and a mark-to-market on an annual basis, although there is language in the treaty that could be interpreted that the gains can accrue tax deferred so you should probably file an 8833 to make the treaty claim. I say probably because tax professionals differ on the interpretation and there is no IRS ruling. So you now need to read and understand the US/UK Tax Treaty which is wonderful bedtime reading and I can show you at least one Article in it that is regularly mis-interpreted by the IRS. In fact the explanatory notes to the treaty say something completely different from the Article in the tax treaty. IRS agents and 99% of enrolled agents are not familiar with the tax treaty, the nature of foreign pensions and accounts or how they interact with US taxation and of course you need to go through a similar set of laws and regulations to pay tax where you live.

Now throw in the out of phase UK and US tax years and the situation quickly spirals into a Kafaesque series of forms, FTCs and offsets. If the innocent US expat then decides to invest in a UK stocks and shares ISA they are in for a nighmare of forms and draconian tax rates and notice I haven't even mentioned FBAR and FATCA which are just informational forms that add to already complicated paperwork. Most US expats do not comply with IRS filing requirements and the IRS did not previously enforce the rules with much conviction. But that has changed and once people start filing FBAR and FATCA the IRS will start to ask "where's that 3520, or 8833 etc".

Next you have to deal with UK taxation. If you have UK income it will be taxed at source, but you need to know how much you've paid to get a US tax credit. If you have US income, the UK will probably tax that on an arising basis, but will also give you credit for US tax paid, leading to "chicken and egg" scenarios.

My next question would be how does the US expat deal with the new UK NEST pension plan on US taxes........Many US expats who work in the UK will be automatically enrolled in this UK pension plan arrangement. Should they opt out, thus loosing the employer contribution? or deal with the IRS tax filing consequences?

Even if this stuff was easy it would still be more than an inconvenience because of the associated fines and penalties.

 

[theOAP]

These measures will inconvenience some, but most US citizens, at home and abroad, should be able to get by without too much effort.

I must say, I really do enjoy your sense of humour.

From a GAO report to Congress regarding duplicative reporting (FBAR and Form 8938), dated 12 February 2012:

Since the Form 8938 and FBAR were developed to meet two different governmental needs—tax administration and law enforcement—some filers have to report the same or similar information twice, but through different mechanisms and at different times. This increases the compliance burden and adds complexity that can create confusion, potentially resulting in inaccurate or unnecessary reporting. Currently, the instructions and guidance for both forms lack any explanation of why and where duplication exists. (emphasis mine)

http://www.gao.gov/assets/590/588921.pdf

 

[george76]

I will one day be a US/UK dual citizen living in the UK so I have researched the tax implications and I have a fairly detailed plan of how to deal with everything.

I have thought about living abroad for a few years at some point before I die. But these nightmare stories that one hears about regarding US expats and the IRS makes me have second thoughts. I read on a different forum that somebody spent 38 hours just on these two different forms even though the person at the end didn't owe anything to the IRS.

I am curious, if you don't mind, what you have regarding a detailed plan for how to deal with things. I have looked at tax treaties on the countries I am interested in but that doesn't address these new forms they are requiring. And hiring a CPA is not necessarily the answer as I have heard that the forms are so complicated that the CPA does necessarily help.

 

[MichaelB]

I must say, I really do enjoy your sense of humour.

From a GAO report to Congress regarding duplicative reporting (FBAR and Form 8938), dated 12 February 2012:

Well, clearly you're bothered. But most taxpayers will not notice.

Planning and familiarity definitely makes filing easier. However, it's almost an impossibility for the novice and even many professionals, and it's necessary to keep up to date with all the new IRS rules.

Perhaps my view is colored by the fact that I was exposed to the business side of US tax regulations for many years in addition to paying my taxes while abroad when there was no enforcement mechanism or audit trail. US taxes are complex and ever changing by design, and the issue here is not greater complexity, but increased reach. Tax complexity is not the result of rules, it is the byproduct of exceptions.

I can imagine nothing more frustrating than being employed overseas by a US company that manages to avoid paying US taxes on its income earned abroad while I am taxed on the income it is paying me, even as it deducts my compensation as an expense to lower its US tax bill.

 

[nun]

Well, clearly you're bothered. But most taxpayers will not notice.


Perhaps my view is colored by the fact that I was exposed to the business side of US tax regulations for many years in addition to paying my taxes while abroad when there was no enforcement mechanism or audit trail. US taxes are complex and ever changing by design, and the issue here is not greater complexity, but increased reach. Tax complexity is not the result of rules, it is the byproduct of exceptions.

Filling out the IRS forms isnt that much of a chore, it's the interpretation of the law that poses the difficulties and dealing with 2 tax authorities. Right now I trying to find out how the UK taxes a US 457 plan as it is not specifically covered in the treaty. Little things like that make cross-border tax complex

 

[theOAP]

Well, clearly you're bothered. But most taxpayers will not notice.

Yes, you're right, the vast majority of US taxpayers will never notice the issues we're discussing. What also bothers me is the number of individuals who may wish to w**k abroad, thereby expanding their knowledge of the world and the contributions such knowledge can offer the US, and US business. After realising the issues involved for the expat American, they may be much more reluctant to take that step. It then becomes a loss to the US.

Tax complexity is not the result of rules, it is the byproduct of exceptions.

Very true. Now, if those of us abroad could only get those who live in the US and feel they are exceptional to stop fiddling their taxes by not reporting foreign assets, the life of the expat American would improve. Although not what you meant, the exception in this case is US taxation by citizenship.

 

[MichaelB]

Filling out the IRS forms isnt that much of a chore, it's the interpretation of the law that poses the difficulties and dealing with 2 tax authorities. Right now I trying to find out how the UK taxes a US 457 plan as it is not specifically covered in the treaty. Little things like that make cross-border tax complex

I guess the positive way to look at that is once you figure it out, you're good for a couple of years. Next year will be easier. Not that it is of any consolation, but I do feel some of your pain.

Yes, you're right, the vast majority of US taxpayers will never notice the issues we're discussing. What also bothers me is the number of individuals who may wish to w**k abroad, thereby expanding their knowledge of the world and the contributions such knowledge can offer the US, and US business. After realising the issues involved for the expat American, they may be much more reluctant to take that step. It then becomes a loss to the US.

I don't see these regulations as affecting potential employees looking for experience abroad. For them, not much has changed. This has much greater impact on the choice to become a permanent resident or citizen if one does not intend to live permanently in the US or has substantial income or assets abroad. This will be especially though for married couples that did not have to consider this when they joined together.

Very true. Now, if those of us abroad could only get those who live in the US and feel they are exceptional to stop fiddling their taxes by not reporting foreign assets, the life of the expat American would improve. Although not what you meant, the exception in this case is US taxation by citizenship.

When some citizens are taxed on all their income and others on part, and the only difference is the location of the taxpayer when the income was earned, the exception is the excluded income. That a majority of countries practice that exception does not make it less of one.

 

[ERD50]

Tax complexity is not the result of rules, it is the byproduct of exceptions.

But every rule creates exceptions. If we tax income, what is 'income', what is an 'exception'? If we allow charitable contributions, what qualifies, what is an 'exception'? And on and on....

Most 'unintended consequences' of our tax code are not 'unforeseeable', they were either just ignored, or more like very intentional.

-ERD50

 

[nun]

I don't see these regulations as affecting potential employees looking for experience abroad. For them, not much has changed. This has much greater impact on the choice to become a permanent resident or citizen if one does not intend to live permanently in the US or has substantial income or assets abroad. This will be especially though for married couples that did not have to consider this when they joined together.

FBAR, which has been required since the 1970s, and FATCA have done nothing to change the tax filing requirements on foreign assets, but they have given those requirements a higher profile. Unfortunately that profile is not high enough with the average US expat and with the increased IRS enforcement many will be caught in expensive mistakes.

An employee who gets their taxes done as part of a foreign posting won't worry at all unless they decide to stay longer and discover the difficulties of investing and having pensions in foreign countries once they have to do their own taxes.

 

[nun]

I am curious, if you don't mind, what you have regarding a detailed plan for how to deal with things. I have looked at tax treaties on the countries I am interested in but that doesn't address these new forms they are requiring. And hiring a CPA is not necessarily the answer as I have heard that the forms are so complicated that the CPA does necessarily help.

FBAR and FATCA are just informational forms and you have to understand what foreign accounts need to be reported on each. FBAR is probably unavoidable as it has a $10k threshold, but FATCA has a $200k threshold for a single person living outside the US so careful account management should take it out of the picture.

My plan is particular to the UK and you'll have to adapt it for other countries in light of their domestic taxes and the tax treaty. I am also lucky that I have my assets in the US and HMRC (UK equivalent of IRS) deals with foreign assets in a far less complex way than the IRS.

The UK recognizes the tax deferral of US retirement funds and I will consolidate my US retirement funds into IRAs to make reporting and tracking easier and so that I'll only have 10% US withholding tax when I take income. I'll take this as a UK tax credit and pay the UK the difference of the 10% and the UK tax rate.

As ROTHs are also recognized by the UK I will make annual IRA to ROTH transfers taking into consideration the US and UK income tax brackets.

I will qualify for both US and UK social security and I have thoroughly researched how each benefit is taxed. There is an anomaly in the US/UK tax treaty in that as a US citizen living in the UK my US SS is only taxable in the UK, but my UK SS is taxable in both countries. This is because of wording in the treaty that, IMHO, does not actually achieve the objective of the treaty.

For taxable assets the US PFIC rules make UK mutual funds a bad idea, and I've never liked the paperwork overhead of buying individual stocks, so I will invest in US mutual funds that have UK reporting status. This means that they will not fall under the UK restrictions on investing in overseas mutual funds.

 

[george76]

FBAR and FATCA are just informational forms and you have to understand what foreign accounts need to be reported on each. FBAR is probably unavoidable as it has a $10k threshold, but FATCA has a $200k threshold for a single person living outside the US so careful account management should take it out of the picture.

My plan is particular to the UK and you'll have to adapt it for other countries in light of their domestic taxes and the tax treaty. I am also lucky that I have my assets in the US and HMRC (UK equivalent of IRS) deals with foreign assets in a far less complex way than the IRS.

The UK recognizes the tax deferral of US retirement funds and I will consolidate my US retirement funds into IRAs to make reporting and tracking easier and so that I'll only have 10% US withholding tax when I take income. I'll take this as a UK tax credit and pay the UK the difference of the 10% and the UK tax rate.

As ROTHs are also recognized by the UK I will make annual IRA to ROTH transfers taking into consideration the US and UK income tax brackets.

Thank you very much, Nun. This is very helpful.

By the way, I have checked several countries. Some countries recognize IRA's and ROTH IRA's. Some don't recognize them whatsoever and treat them as regular income in the year the gain was earned.

 

[Danmar]

Danmar, if your only exposure to the US is vacation home ownership, how does that expose your affaires to the IRS?

If I spend too much time down here, I need to file in US. Determining the requirement to file is a two step process 1) if the number of days in US for the current year, plus 1/3 of the days of the previous year, plus 1/6 of the days of the second previous year equal 183 or more, you must file unless you spent less than 183 days in the current year and can prove (IRS decides) you have a closer connection to another country(presumably in my case Canada). It's fairly complicated but nothing like the issues for US citizens outside US. I have been advised that you never want to rely on the IRS to agree you don't have to pay tax to the US.

 

[kumquat]

If I spend too much time down here, I need to file in US. Determining the requirement to file is a two step process 1) if the number of days in US for the current year, plus 1/3 of the days of the previous year, plus 1/6 of the days of the second previous year equal 183 or more, you must file unless you spent less than 183 days in the current year and can prove (IRS decides) you have a closer connection to another country(presumably in my case Canada). It's fairly complicated but nothing like the issues for US citizens outside US. I have been advised that you never want to rely on the IRS to agree you don't have to pay tax to the US.

Don't forget US estate tax.

 

[Alan]

Thank you very much, Nun. This is very helpful.

+1

I'm in exactly the same situation so I appreciate you sharing the details should we decide to re-locate permanently in the UK. I am currently receiving a UK pension, will start collecting a 2nd one at age 65 and then UK SS also.

Our children have lived in the USA pretty well their whole lives so we have no plans to permanently re-locate, but it is our safety net if healthcare becomes prohibitively expensive.

 

[Danmar]

Don't forget US estate tax.

Oh yea. I did indeed forget about that. The house is owned by a Canadian cross border trust that solves many of the estate tax issues. I think estate taxes are really unfair. Don't have them or gift taxes in Canada. Deemed disposition of property at death with any resulting cap gains taxes paid at that time. This seems much more rational to me. The fact that estate taxes tend to change so much each year is also weird. Tough to plan. If I hadn't used a trust estate taxes could have been up to $500k if I had died the next day. Not sure what Uncle Sam did to deserve such a windfall?

 

[clifp]

Reading this thread makes my brain hurt.
I have simple (he he) question. If I wanted to spend a couple of years living in a place like Costa Rica or Thailand how much of this crap would I have to worry about. Assume that almost all of my assets remain in the US and I just have checking accounts in the other countries.

 

[Texas Proud]

I will throw in a wrench just so some can think about what to do...

When I was in the UK, we had a temp employee who had an offshore corp which he was the sole employee... this corp rented him to the temp agency which is who we paid... he said it helped out a lot on taxes and reporting...

He was a citizen of Australia.... so might not help if you are a UK citizen...

 

[nun]

I will throw in a wrench just so some can think about what to do...

When I was in the UK, we had a temp employee who had an offshore corp which he was the sole employee... this corp rented him to the temp agency which is who we paid... he said it helped out a lot on taxes and reporting...

He was a citizen of Australia.... so might not help if you are a UK citizen...

That sound like an arrangement for UK tax purposes and as an Australian living in the UK he would not have had any Australian tax obligations on income earned in the UK. The difficulties with cross-border taxation are significantly more complex for the US expat just because of the US taxes on citizenship in addition to residence.

 

[MichaelB]

Reading this thread makes my brain hurt.
I have simple (he he) question. If I wanted to spend a couple of years living in a place like Costa Rica or Thailand how much of this crap would I have to worry about. Assume that almost all of my assets remain in the US and I just have checking accounts in the other countries.

As long as you continue to file your US taxes and report your foreign bank accounts you would be fine. One hassle is you cannot file electronically when you have a non-US address.

 

[nun]

Reading this thread makes my brain hurt.
I have simple (he he) question. If I wanted to spend a couple of years living in a place like Costa Rica or Thailand how much of this crap would I have to worry about. Assume that almost all of my assets remain in the US and I just have checking accounts in the other countries.

Thailand offers a "retirement" visa that is renewable each year. If you are on that you can avoid becoming Thailand tax resident and you don't even pay tax on any money you bring into Thailand. Your US tax obligations would not change