Steve_

I thought this might be of interest: http://business.financialpost.com/20...wns-in-canada/

There's also this article, which I thought was a bit scaremongering to be honest: http://www.financialpost.com/persona...975/story.html

It's not that big of a deal to be a non-resident US citizen, in 95% of cases you simply need to file a 1040, 2555 and maybe an FBAR every year (if you have foreign accounts totalling more than $10,000). If you work out on the 2555 that your income is under the foreign exclusion limit, the 1040 basically works out with your name, address, SSN and zero at the bottom.

You certainly don't need to pay an accountant $10,000 like that article says, that's total BS. (And you don't need TurboTax either).

Another point worth making is that the IRS has for as long as I can remember allowed people who have found out they are US citizens to file seven years worth of previous returns without penalty as many people aren't aware they are US citizens.

I wouldn't freak about it if you're in this situation.

theOAP

After an admittedly quick scan of the above links, I think the core of the articles have to do with FATCA, Form 8938, the ramifications for banks located outside of the US (with 'US Person' accounts), and the potential undesirable consequences for those who depend on accounts in those foreign banks.

As much as it hurts to say this, in this instance, I'm on the side of the banks.

It could not only complicate the lives of USC's abroad, but expats living in the US with foreign bank accounts (such as British Expats with accounts in the UK).

More rigorous filing of US tax returns resulting from identifying 'US Persons' is a result of the initiative, but the real issue could be the ability to maintain an account outside of the US.

Steve_

The key point though is that regardless of that law, US citizens abroad must file tax returns, and really it's not that hard to do in the vast majority of cases. 1040/2555/FBAR should suffice 95% of the time and I'd expect that the vast majority of filers are also under the foreign exclusion limit, so completing the paperwork is easy.

This is basically why Jim Flaherty thinks the whole thing is so stupid, the chances of it raising any money are close to nil because most of the time it's just a reporting requirement.

One of those articles contains an idiotic comment from some professor that the US method of taxing people by citizenship is better because it's often hard to determine domicile - so it's dead simple to determine citizenship then? Seen various posts on here where people have been surprised to find out they're US citizens. It's not always clear because one of your parents might be a dual citizen for example and never bother to tell you, pretty common here in Canada.

theOAP

I don't disagree with your premise (1040/2555/FBAR), but I think the 95% figure is too high.

A number of folks can't use 2555; they have no 'earned income'. There are a number of 'US Persons' retired abroad. Due to the source of their pensions, and the nature of their investments (even simple savings accounts), reporting to the IRS can be a minefield. Filing a US return from the UK, by a pensioner, can include 1040, Schedule B, 1116 passive, possibly 1116 resourced by treaty, 6251, 1116AMT passive, possibly 1116AMT resourced by treaty, and 8833 to prevent double taxation on US SS. Then there's FBAR and eventually 8938. Mailing an envelope to the IRS may be a thing of the past. I'm now investigating the cost of shipping containers due to the size of the return. And TurboTax has no idea what a treaty is. (If someone knows of a package that includes treaties, please let the rest of us know!)

Given the above, proffessional preparation in the UK (to coordinate with HMRC rules, and hopefully prevent 'draconian penalties' as well as criminal prosecution), will set you back at least US$2,000 if you hire someone you have confidence in. Note the above list does not include US IRA's, trusts, 3520, etc.

The Treasury help site on FBAR has issued comments indicating that individuals with an aggregate $10,000 plus in foreign institutions, but with no/little income and no need to file 1040, still have to file Scedule B (as well as FBAR and possibly 8938).

Yes, it's 'stupid' to think doing away with 2555 will increase revenue to the US Treasury. People will just use 1116, and probably be better off as a result.

And my hat's off to the Canadians. They are the only government willing to visibly challange to US.

But I'm serious about FATCA. It could cause real problems for 'US Persons' who have a bank accounts or other investments outside the US. FFI's (if they go that route), are not happy and the account holder may be left with substantial additional charges, or no account at all. Let's hope the Canadian example gains momentum.

Bluegrass Lass

We're getting ready to move to Scotland, and this who tax crap really has me worried. I'm starting to wonder if we should just leave our savings here in the US, and only move what we need as we need it, over there. Do you wind up paying taxes on accounts that have more than $10k or is it just that you to declare them to the IRS?

theOAP

If you have a normal checking/savings/fixed rate (term) account in the UK:

For UK taxes: if it's an ISA or other tax free investment, you pay NO tax to HMRC. You do pay tax on all other accounts. The bank/building society withholds 20% for tax (sort of PAYE) on taxable accounts. If your total income (from all income sources) is below the personal allowance, you can make a claim not to have the tax withheld.

For US taxes: all interest on any bank/building society account in the UK is taxable by the US (from $1 upwards), even ISA's. You offset the UK tax paid (on UK taxable accounts) on Form 1116 passive for your US taxes.

You can contribute a maximum of £5,100/tax year into a cash ISA. You can contribute a like amount into a stocks and shares ISA. But be warned: a stocks and shares ISA will greatly complicate reporting to the US.

Since the ISA is tax free in the UK, you will have no interest to 'offset' against US taxes on Form 1116. Unless it's larger amounts of interest, your US personal exemption and standard deduction will usually save you from US taxation on the amount.

nun

How you are taxed will depend on your citizenship and residency status. If you are a US citizen, then moving out of the US will not change how the IRS taxes you, but you will be able to apply credits or get exemptions for foreign taxes or earnings and also apply the tax treaty rules which are particularly important for pensions. However, moving back to the UK will definitely change how HMRC taxes you as they tax based on residency and if you also become domiciled in the UK they'll tax your worldwide income so leaving stuff in the US won't help in that situation.

The UK and US has well developed tax rules that stop double taxation, but they add a lot of complexity to the tax return so I agree with theOAP about that. However, if you have a pretty stable situation you can pay for professional help for the first couple of years and then do the returns yourself.

If you are moving to the UK and have US IRAs one good strategy is to rollover into a ROTH. You'll have a US tax bill that year, but the ROTH is tax free in the US AND the UK.....so no future tax to pay on gains or withdrawals.

nun

A quick question for theOAP. I've never paid tax in the UK because I left straight after college so how does HMRC inform you of the tax withheld on UK accounts and your earned income? Also are there UK equivalents of Turbotax as I imagine the US/US tax complications require UK self assessment.

theOAP

Excellent point. It comes down to paying on the 'arising basis' verses paying on the remittance basis ('not ordinarily resident' or 'not domiciled'). If it's remittance you only pay UK tax on amounts used in the UK. If it's Non-Dom, you pay a standing charge of £30,000/year.

If you're a UKC, and reside more than 91(?) days a year in the UK, then you'll more than likely be taxed on the 'arising' basis which would include worldwide income (including interest from accounts in the US). You can offset any US tax paid on the interest by filing a Self Assessment form in the UK. You then 'offset' any UK taxes paid by using 1116 (FTC) in the US. If this all begins to sound like a never ending daisy chain, welcome to the USC abroad tax world.

I see you've another response. More following.

theOAP

They do inform you.....and they don't inform you.

If you're on PAYE and never see a tax form, then the only way you know is the annual statement from the bank/building society. BUT, if you're PAYE and are in the 40%/50% bracket, you should inform HMRC of changes to the amount on interest yearly. (Interest is the last item to be calculated for taxes.) I have a sneaky suspicion few do this.

If you're taxed on the arising basis and have foreign income (interest or pensions for example), then you're required to use the Self Assessment form (provided you have total income over the personal allowance). HMRC send statements of how the tax was calculated, and it notes the UK interest taxed as well as the foreign income. If you owe additional taxes, then you're sent a demand at a later date.

Complications arise when HMRC do not withhold enough tax from your UK income, or do not have the right amounts for your additional payments on account (where you additionally pay twice in the year). You're then at risk of not having enough credits to offset on 1116 FTC for US taxes, and unless you've built up enough excess credits you could end up owing the US. But you do pay the tax eventually in the UK, and the daisy chain continues.

I've never used a tax package, so I'm unable to answer. I've played with TurboTax for the US, but was never satisfied with the results. I've always felt that even if it was mind bending to comprehend how both countries tax you, especially the US, the knowledge gained was well worth it. As you've discovered on your work on ROTHs/IRAs, the straight forward simple answers don't always apply. My minimal understanding the US system has nonetheless saved me from making some dire mistakes.

nun

I'm not going to be in a high tax bracket, but my taxes will be very complex as I'll be a US/UK dual citizen living in the UK and I'll be taxed by HMRC on an arising basis ad by IRS on my worldwide income too. I'll also have a number of US retirement accounts including, SS, ROTH, IRA, 457, 403b and an MA state defined contribution retirement plan as well as the UK basic state pension. I will probably be doing a 72t from the IRA until I reach 59.5 and I also have US taxable mutual funds ....which is another reason to keep my UK income tax bracket low as gains and dividends from them will be taxed by HMRC as income. I'm going to invest in US based mutual funds as it's better than dealing with PFIC or the paperwork involved in individual stocks.

theOAP

It's always good to have a plan.

Just some thoughts:

Be careful not to end up too tax free in the UK if you're depending on FTC to offset any US taxes due.

Consider whether it is better to be taxed in the US (lower rates) than the UK, if you can avoid double taxation (this involves considerable playing with the figures before you file the returns). But HMRC always have the first call. I prefer to give HMRC the first whack (I consider it as a benevolent contribution to the NHS, and as you may have surmised, I'm not in the lower tax bracket) and then end up owing zilch to the US. It makes your tax returns soooooo much simpler.

Tax professionals love filing Form 1040X for you, over and over. The real killer is, of course, the respective tax years do not cover the same periods.

From experience, I can assure you that tax legislation in both countries changes.....often.

Treaties can change.

Capital Gains are tax free in the UK for the first £10,100 (or is it £10,200?) within rules.

Among other ways to be caught out by US tax are the sale of stock options (possibly leading to AMT) or the sale of your home (tax free in the UK without limits, within rules).

The CYA statement: I am not a tax professional/advisor, and all of the above may be entirely incorrect.

Getting back to Steve's original post, the opportunities of a 'US Person' making very innocent errors on US tax/Treasury regulations are ample. With the US in need of funds right now, the USC abroad is an easy target (no real representation, and those in the US see all USC's abroad as tax evading fatcats). Even ACA (American Citizens Abroad), a usually conservative organization representing the issues of USC's abroad very well, has come out strongly against FATCA (they are campaigning to have it repealed) and the FBAR (they call to penalties unconstitutional). I never really thought I'd say this, but, I'd caution any USC (or US Person) to consider the implications carefully before deciding to move out of the States at this time. The banking issue alone could become a real pain in the backside.

nun

Just a quick observation about this point. As a US/UK citizen living in the UK the capital gains situation on mutual funds is messed up.

If I own US based funds I'll pay US capital gains, but then HMRC will tax those gains as income.....I imagine I can offset the UK income tax with the US capital gains tax I have already paid.

If I own UK mutual funds I get a nice UK tax free capital gains allowance, but I'll have to jump through the hoops of PFIC, probably doing mart to market each year. My strategy is to keep all my mutual funds in the US inside retirement accounts and my taxable accounts will be entirely cash and long term saving plans

theOAP

The following is of interest only if you cannot avoid offsetting US tax paid on your UK return.

To offset US tax paid on your UK Self Assessment form: Have a look on the HMRC site for publication SA150-6, 'How to fill in your tax return'. The 'Foreign Tax Credit Relief' is on page FN 3. A specific 'Capital gains summary' is on page TRG 5.

As I understand it (and as always, I could be wrong), Foreign Tax Credit Relief can be done by 1 of 2 methods. You chose which you want to use, but you can use only one. Or alternatively, you can elect to have HMRC calculate it for you. Both methods are completed prior to the calculation of tax (somewhat similar to claiming foreign taxes on US 'Itemized Deductions' on Schedule A, 1040). They are not deducted after tax calculation as is achieved by use of US Form 1116 (FTC). As always, there are HMRC rules (possible limitations) on page FN 3 defining availability of the credit.

JAJ

All that said, there isn't any strong evidence that so far, the IRS are "out to get" overseas Americans who are simply behind in their tax filings and don't have any US tax due. The reports from those who have used the IRS field office in London are generally positive.