New Tax Headaches For U.S. Citizens Abroad

Not long ago a Canadian doctor called me to talk about a surprise he just discovered related to his tax liabilities in the United States. A dual U.S.-Canadian citizen, he had accumulated retained earnings in his professional corporation of $ 2 million and suddenly he learned that he had a $ 300,000 U.S. tax liability. Since he is resident in Canada and there is no plan to transfer the retained earnings to the USA, according to the new U.S. tax law designed to force U.S. companies to repatriate foreign holdings, he was stuck. What is more, as a U.S. citizen he was required by the I.R.S. to report any amount in aggregate of $ 10,000 U.S. held in Canada at any time in the last taxation year and if he didn’t do so, he would be found out because his Canadian bank would likely have reported the holdings to the U.S. authorities under the various laws in the U.S. at the time. In short, these were shocking developments for the client and I decided to investigate further. This what I found out from my research below.

In a news release published earlier this month, the I.R.S. announced the end to offshore voluntary tax disclosure coming as at September 28th, 2018. When coupled with the recent dramatic U.S. tax reform that took place, many U.S. citizens living abroad are in for some unpleasant surprises. It’s reaching a point where some richer U.S. citizens are turning to renunciation of their citizenship to stay clear of the impact of these tax changes on their personal wealth and on their estates. The changes are the first signs of the more predatory and aggressive steps the U.S. government is prepared to take to recover tax revenues, partly in the face of the mounting 21 trillion U.S. national debt.

Offshore Voluntary Tax Disclosure

The so-called Offshore Voluntary Disclosure Program requires U.S. citizens to file a foreign bank and financial accounts report (FBAR) for accounts that in the aggregate exceed $ 10,000 U.S. in any calendar year. This means wealth, not income exceeding $ 10,000 U.S. You can find the details of the requirements here. In addition, since March 2010, the Foreign Account Tax Compliance Act (FATCA) has required all foreign financial institutions to search their records for customers with indications that a ‘U.S.-person’ holds an account with them, such as a U.S. place of birth, and to report the assets and identities of such persons to the U.S. government. You can find details of that act here. Thousands of U.S. citizens living abroad have reported themselves to the I.R.S. to comply with the spirit of these two initiatives. But thousands more have not, at least not yet.

Well now they have about six months to correct that problem.

Meanwhile the U.S. has recently adopted other tax changes that also impact dual citizens and even green card holders living outside the USA.

Transition Tax

For one thing, the U.S. has adopted a “transition tax” that imposes a one-time levy on U.S. companies and citizens on their untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. While U.S. corporations are offered relief in the form of the tax-free repatriation provisions in the Tax Cuts and Jobs act, individuals are not. What is more, the I.R.S. has indicated it will disregard any transactions undertaken for the principal purpose of reducing the transition tax. This is what the good doctor was complaining about in his call to me.

Estate tax

There are more unpleasant surprises in the new U.S. legislation dealing with estates. If a U.S. citizen has an estate of a value in excess of $ 11.8 million U.S. on death, that excess will be subject to U.S. estate tax. In short, U.S. citizens and green card holders will be subject to estate taxes on worldwide holdings in excess of the $ 11.8 million figure. What is more, if the estate does not file a tax return, then when the return is ultimate filed, the cost base for the estate will be zero. In addition, merely filing the tax return opens the taxpayer to an audit on worldwide estate holdings.

Since I am not a tax attorney or an accountant, I will leave it to these professionals to propound the details of all these tax changes impacting people like the good doctor that called me. One thing is clear. Taxes are complicated and the need for good tax advice is obvious. Being a dual citizen is not what it used to be because of changes to U.S. tax law.

That’s basically what I told the doctor who called me.

This article is reprinted from an article formerly published in the Forbes. 

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