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Taxes and the american citizen...
Old 04-17-2012, 02:32 PM   #1
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Taxes and the american citizen...

This article talks about people that have renounced their citizenship due to having to file US tax returns:
Special Report: Tax time pushes some Americans to take a hike | Reuters

Has anyone here thought about renouncing citizenship to stop filing tax returns? It seems like most people do not have to pay, just file.

It looks like people in "mixed marriages", one US citizen one not, have the biggest issue when the spouse does not want to file with the US govt.

Quote:
The United States is one of the only countries to tax its citizens on income earned while they're living abroad. And just as Americans stateside must file tax returns each April - this year, the deadline is Tuesday - an estimated 6.3 million U.S. citizens living abroad brace for what they describe as an even tougher process of reporting their income and foreign accounts to the IRS. For them, the deadline is June.
Quote:
The first regulation requires all Americans, including those living abroad, with at least $10,000 in overseas bank accounts, to file a supplementary form disclosing all of their foreign accounts. That includes any accounts in which the U.S. citizen has a financial interest. That could include a joint account with a spouse or child, accounts for corporations in which the American owns more than 50 percent of the value of shares of stock, or any trust or estate that benefits the U.S. citizen.
The tax compliance act - the newer law - asks foreign financial institutions such as banks, hedge funds, and private equity funds to provide the IRS with information on U.S. clients.

Quote:
Genette Eysselinck, a friend of Laederich's, renounced early this year. Her husband, a European Union civil servant, saw no good reason to share his account information with the IRS, she says. And after considering all her options, Eysselinck decided that renouncing was the best path.
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Old 04-17-2012, 02:47 PM   #2
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Personally, It would take an awful lot before I would even consider giving it up.
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Old 04-17-2012, 02:52 PM   #3
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Originally Posted by ChiliPepr View Post
Has anyone here thought about renouncing citizenship to stop filing tax returns? It seems like most people do not have to pay, just file.

It looks like people in "mixed marriages", one US citizen one not, have the biggest issue when the spouse does not want to file with the US govt.
The thought never crossed my mind, even though my wife was not a US citizen and we lived abroad.

Here's a thread from two years ago on the same subject. Giving up US citizenship This topic seems to bubble up to the surface around tax time.
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Old 04-17-2012, 03:04 PM   #4
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Most people in the USA do not have a passport, let alone dual citizenship! About 1800 people renounced last year which (I believe) is a record. One of the major problems is there are many children of "mixed marriages" running around that have never been to the USA and are unaware that they owe taxes on that little lemonade stand in the jungle. US tax law is Draconian, but there are many ways to avoid taxes or even having to file a return if you follow the 7P's!

While, I would probably never renounce "over tax reasons", I would understand if my children decided too. The Young Wife may get a "green card" in the future (if we move there) but would not get citizenship unless there were some clear advantages.

It has been estimated that approx 10 million "Baby Boomers" will permanently move overseas and try to protect their assets using real estate, which is not re-portable on tax returns, but I bet only a small % will actually renounce.
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Old 04-17-2012, 03:07 PM   #5
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Reading the article, I can see how it would be something that some would do... if you have lived overseas for many years (sometimes decades) and do not plan on ever moving back to the US.... then why not


I do think that the US tax system is a bit over the line in a number of these things... especially if there is zero taxes involved...

I can also see why banks will decide just to get rid of their American clients... not worth the hassle....
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Old 04-17-2012, 03:19 PM   #6
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Old 04-17-2012, 04:03 PM   #7
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Renouncing is still pretty rare because you have to have another citizenship before the US will let you go.

It's incredibly difficult to be a US citizen investor overseas. You have to comply with two sets of tax laws. If you are in a foreign pension plan you have to make sure it is covered in a US tax treaty. Even if it is covered it may well be treated as a foreign grantor trust and may also require filing of Passive Foreign Investment Corporation forms.

Investing outside of pensions can be highly complicated and expensive as the PFIC rules make investing in foreign mutual funds a very bad idea for US citizens and most foreign countries have similar rules for their residents, so US mutual funds may well be poor investments too.

If the US expat has any funds in the US it's not worth renouncing US citizenship as 1040s will still be required, but as a non-resident alien. If I had no funds in the US I would seriously consider renouncing US citizenship when I move back to the UK to make my tax life simpler.
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Old 04-17-2012, 04:16 PM   #8
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As a US resident with foreign assets, I find it hard enough for me to remain compliant with the US tax code. Politicians in my home country have recently proposed to tax citizens on the basis of their worldwide income, just like the US does. It would make it extremely challenging for me to remain compliant in both the US and my home country. This might force me to make a decision I don't want to make.
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Old 04-17-2012, 04:48 PM   #9
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Old 04-17-2012, 05:33 PM   #10
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I have two US colleagues who are married to non-US citizens who have decided not to register their children as US citizens/passport holders, both for tax reasons and difficulties with making investments in the children's names.
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Old 04-17-2012, 06:32 PM   #11
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Reading the article, I can see how it would be something that some would do... if you have lived overseas for many years (sometimes decades) and do not plan on ever moving back to the US.... then why not.
If they have significant assets (like retirement savings) they'll get bit by the exit tax. Sec. 877 and 877A, improved in 2008...

http://www.irs.gov/businesses/small/...=97245,00.html
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Old 04-17-2012, 09:44 PM   #12
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No, I haven't. Most people who do have lived outside the US for many years, they simply don't consider themselves US citizens.

I've got one anecdote. Friends of ours moved to Germany many years ago to do a two-year stint teaching school. They loved it and stayed. His grandparents were born in Germany, and I believe that made them eligible to become German citizens. Their youngest son was born in Germany soon after they arrived, with two US parents. So he has dual citizenship, though he has never lived in the US. I could easily imagine him, and (for that matter) his parents, giving up US citizenship.
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Old 04-17-2012, 10:10 PM   #13
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I have two US colleagues who are married to non-US citizens who have decided not to register their children as US citizens/passport holders, both for tax reasons and difficulties with making investments in the children's names.
Those kids are US citizens because a parent is a US citizen, they don't get to choose. So they must still comply with US tax law and avoid many foreign investments unless they officially renounce.
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Old 04-17-2012, 10:36 PM   #14
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Those kids are US citizens because a parent is a US citizen, they don't get to choose. So they must still comply with US tax law and avoid many foreign investments unless they officially renounce.
You made me curious. It looks like the position is a bit more complex than simply having one parent who is a US citizen: Naturalize, dual citizenship, renounce US citizenship, expatriate

If they are US citizens, then renunciation before age 18 appears to be possible but difficult.

It also raises an interesting legal issue - what happens if the child is also a citizen of a country which prohibits dual citizenship (e.g. India)?

Happily, this is not an issue I have to worry about.
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Old 04-18-2012, 01:25 AM   #15
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No big deal, unless you were a male, who never lived in the USA, who turned 18 in about 1966.
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Old 04-18-2012, 05:42 AM   #16
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It seems to me the new FATCA regulations which people are complaining about are really going to create the greatest inconvenience to the taxpayers targeted by the measures, not children or citizens abroad with little taxable economic activity. It does, however, require people abroad that are green card holders and some dual citizens to assess their situations and choose.
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Old 04-18-2012, 05:49 AM   #17
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Could I offer a comment as a retired American living abroad. It's not about a US tax liability. Period. The tax on most foreign income can be offset by use of Form 1116.

Instead, the uproar is about the 'compliance' requirements. The compliance is not new, it's the realisation of the reporting requirements that have been in place for years, but were neither evident, nor enforced before.

For example, a foreign pension isn't a pension. In the eyes of the IRS, it's a foreign trust. If it's the 'wrong' kind of foreign trust, an information Form 3520 and 3520A must be filed. If it's the 'right' kind of trust, the forms appear not to be required. The problem for those abroad is the definition of the two, and deciding if the reporting is required. Finding an understandable interpretation of the information in the Code, Treaties, or published articles is very difficult, if not impossible, for the lay person.

It will come as no surprise that a large percentage of tax returns are never seen by human eyes. They're approved by a computer. Form 8938, the new report of foreign asstes, was rushed into existence in a very short time. It has problems, one of which is it makes no sense in Part II to the average taxpayer, or professional tax advisor (See: Form 8938 and the Requirement to Report Foreign Deferred Compensation and Foreign Pe... | Bloomberg BNA ). If you tick the wrong box (and there is no way of knowing if it's the wrong box) the computer will establish a 'fact'. If that fact is wrong, due to your tick, (it determines you should have been reporting information forms 3520 or 3520A) you're for the high jump. Why? because there are stiff penalties for not filing those forms in a timely manner.

The penalty for not filing either of the above forms is $10,000. If you have been receiving a foreign pension for 5 years, and the computer wrongly decides you should have been filing the forms, you will owe NO tax, but $100,000 in penalties.

In the country I live in, professional tax advice is expensive. It would not be uncommon this year (due to the amount of paperwork required) to have a bill of $4,000 to $5,000. (My return is approaching 50 pages, and I have nothing but pensions and bank accounts.) This is for someone who knows for certain they have NO US tax liability.

My first question to all of you is this: Do you pay $5,000 for assistance on the 'form compliance', knowing you owe NO tax and are capable of completing the TAX forms on your own? The second question is even though you really don't want to renounce your US citizenship, would you feel somewhat taken advantage of by an overly aggressive tax system?

A side note: I read an article that explained that Americans abroad no longer need tax advisors. Instead, they now need to seek 'form consultants'.
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Old 04-18-2012, 06:15 AM   #18
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Sounds like a real nightmare for many people who want to comply but find it unreasonably onerous. Renouncing US citizenship is such a drastic solution. I also understand it is actually quite difficult in it's own right to accomplish.
I am a Canadian citizen/ resident who recently bought a house in Arizona. I am trying very hard to keep the IRS out of my affaires especially after reading this stuff. This reflects poorly on the reputation of the US in my view.
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Old 04-18-2012, 06:37 AM   #19
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Danmar, if your only exposure to the US is vacation home ownership, how does that expose your affaires to the IRS?
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Old 04-18-2012, 07:03 AM   #20
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Instead, the uproar is about the 'compliance' requirements. The compliance is not new, it's the realisation of the reporting requirements that have been in place for years, but were neither evident, nor enforced before.
Compliance and the penalties if you get it wrong are big burdens for the US expat. But the tax burden is an issue when it comes to investing in foreign mutual funds. It also has one of the most ridiculous compliance issues too with the wonderful form 8621. Foreign pensions are a big problem for the US expat, but the bigger issue is often where to save taxable money.

The situation is highlighted by comparing the tax compliance issues for the UK expat with those of the US expat. As a UK expat there are zero compliance issues because the UK only taxes non-residents on UK source income and that is generally done at source. 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.
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