travellerva

I'm a single British citizen but have lived in the US for most of my working life - several decades. I am not a US citizen but have a green card. I'm thinking of relinquishing my green card and moving back to the UK as my permanent domicile. During my working life in the US, I accumulated retirement funds in an IRA and another pre-tax deferred compensation account. Having retired several years ago and being over 70, I've been withdrawing income from the accounts as required by the IRS, which is taxable as income when withdrawn.

My basic question is what happens to these accounts when I give up my green card and repatriate? I think I have two options but it's not clear what the position might be.
1. I could continue withdrawing from these accounts and file US taxes annually. Since I would then be UK domiciled, though, would they also be subject to UK income tax (although available for tax equalisation)? The accounts are based in the US. If I did this, would I also have to report other non-US income and capital gains on those tax returns even though I'd be a "non-US person"?
2. I could withdraw the balance before I leave and pay US income taxes on the entire sum in one year (at punitive tax rates!).

Since I would be giving up my green card, I guess I would be subject to the US Exit Tax since i would then be a "covered (US) expatriate", which I understand to be based on whatever gains were made on assets at the time of departure from the US. Are retirement accounts considered to be part of this calculation? If so, how does the IRS calculate the gains on a pretax account or would they just assume that Option 2 above was exercised and charge me taxes as if I had withdrawn the entire amount at exit from the country?

A related question is whether I would continue to receive US Social Security payments after moving my domicile back to the UK?

Exp76

I'm going to give the condensed answers, as with all dealings with government there are "details".

Last question first, YES you would continue to receive full Social Security payments, which would be taxable in only the UK. Luckily you are moving to the UK,
for most other countries the US taxes are 25% of the payment ! There are tax treaties between US and individual countries which specify these details.
You would only be considered a "covered expatriate" if you met certain criteria, such as net worth when you expatriate and whether you had been tax compliant
the 5 previous tax filing years. Google or a search of this forum will.tell you more. You will find details on what tax you would have to pay, in short the accounts
would be "marked to market" on the day you expatriate and you would owe taxes on the net gain.

Withdrawal from IRA's are only taxed by the UK, no need to file a 1040NR but some people do it just in case. Be sure to file a a W8BEN with the relevant brokers
so that they don't withhold anything. In case they do (some brokers ignore the W8BEN, then you need to file the 1040NR to get your money back.
You would also need to file a 1040NR if you do any Roth conversions as these are not taxed in the UK but only in the US. Be aware that once you leave
you will no longer be allowed to open new accounts, so if Roth's are in your thoughts it's best to open one before you leave.

BTW You only need to report US income on a 1040NR so if you getting a partial UK pension or anything else from investments in the UK once you are there,
it's none of the US's business.

Assuming that you have a substantial amount in the account, cashing out before you leave would be painful if you don't need to do it for immediate access to cash.

OK that's it for the condensed version, it's a bit of a minefield and hopefully others will chip in if I've missed something and on the "what ifs" that will undoubtedly arise.

travellerva

That's excellent help, thank you. I have a couple of follow up questions.

I will be classified as a covered expatriate according to my calculations owing to net worth. Thus, if the retirement accounts are marked to market at my departure, does this mean I would need the cost basis of all the contributions and subsequent investments to determine the gain in the accounts? If so, that's going to be a bummer as I've not kept track of these over many years (on my original assumption I'd never need to as long as I'd be withdrawing them while a US person). Would the IRS make other assumptions if I don't have the cost basis recorded?

Also, if I had paid green card exit tax on these accounts when I leave, would the IRS tax redemptions by my beneficiaries of these accounts after my death as they would if I died as a US person? Surely, since taxes will have already been paid, they would not be double taxed?

If I was a US person at my death, the retirement accounts don't become part of my estate for probate. Would they be part of my estate as a UK person? If so, they might be triple taxed!! First, at exit from the US; second when withdrawn as income to my beneficiaries and third as part of mu UK estate? Surely the tax treaty between the UK and Us would address that problem?

Thanks again.

durham_lad

theOAP

You've raised some interesting questions.

For form 8854 purposes (Exit Tax), the determination of the "net worth" test is by the value of the assets. For deferred compensation (pensions), the relevant figure is the value of the pension at the time you leave. In other words, what would be the cost of replacing the pension as like for like, or, what is the transfer value of the pension. 8854 determines IF you reach the net worth threshold. If you do, then the actual calculations done to leave the US cleanly are determined by the rules for your final IRS 1040 filing. IF the pensions are "qualified" (almost all US sourced deferred compensation is), then the tax is applied differently than for non-qualified deferred compensation. Non-qualified deferred compensation (say a UK company pension) is subject to immediate taxation and all tax is due on the final return. Qualified deferred compensation (a US company pension or IRA) is taxed at 30% (I believe), and it is accomplished by having 30% deducted from each distribution (eg monthly payment). NOTE: this is how it works for USCs subject to the Exit Tax. The details available from the IRS for the average person really doesn't distinguish between what happens for the USC VS. the NRA (as you would be). In fact, many of the details regards the Exit Tax are very vague for everyone. The assumption (always dangerous) is the Exit Tax is applied the same. IF there is any way to avoid the Exit Tax (pre-disposition of the assets), it is suggested that may be the route to pursue. Anything to avoid the Exit Tax.

It's worth noting there are a group of USCs living abroad who would love to renounce their US citizenship, but can't, due to the fact that paying the Exit Tax would wipe out all their savings.

The second interesting question relates to beneficiaries. Under the "covered expatiate" rules, if one is a covered expatriate, then any amount they bequeath to a US Person is subject to a 40% tax, payable by the beneficiary, on the gross amount. Is this absurd? Yes, it is. There have been comments about this ridiculous situation (implying don't leave an inheritance to a US Person) but it has fallen on deaf ears in the IRS and Congress. Do the same rules apply to NRAs who are covered expatriates for US purposes? I don't know the exact answer to that,....so, I would suggest that good tax advise is sought, preferably from an advisor familiar with both US and UK tax law.

EDIT TO ADD: The amounts for Form 8854 are determined by IRS "Gift Tax" rules. The amounts calculated for a final 1040 are determined by IRS "Estate (Inheritance) Tax" rules.

An Estate Tax Treaty exists between the US and the UK to resolve these problems.

https://www.gov.uk/guidance/inherita...axation-relief

Exp76

I sent you a private message with a link to a site.