Expat or not?

Technical topics regarding tax preparation.
#1
Posts:
778
Joined:
22-Apr-2014 2:40pm
Location:
New Jersey
Married couple, US Citizens, have lived in England since 1992. Only twice in that time has earned income exceeded Foreign Income Exclusion. They are in their mid-fifties. Husband only has 35 quarters of Social Security coverage and will not qualify for a benefit. Wife's benefit is projected to be $350 a month at FRA; this information came from Social Security.

Reason for question is their personal residence, which if sold today, would produce a 1.9M gain. They believe there is no UK tax on the sale of residence (they sold a second residence this past year and while some tax was paid to the UK, it was far less than the US tax on gain of about 85K). So they ask about becoming ex-pats or possibly having husband renounce citizenship and transferring house to his name.

Aside from a bank account, they have no assets in the States.

What say you?
 

#2
Posts:
2318
Joined:
21-Apr-2014 10:39am
Location:
Los Angeles, California
Are you asking if I would give up my US citizenship for an $85k tax benefit? That would be a Hell No.

Now, if they actually feel closer ties to the UK, and have dual citizenship or some kind of residency in the UK, then they could act as their heart desires, but I would never recommend that a tax consideration be the basis of such a decision.
 

#3
WEISSEA  
Posts:
2076
Joined:
21-Apr-2014 5:20pm
Location:
California and Nevada
Need to check if they would be a "covered" expatriate. If so then IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code.

If any of these rules apply, you are a “covered expatriate.”
•Your net worth is $2 million or more on the date of your expatriation or termination of residency.

See www.irs.gov/Individuals/International-T ... iation-Tax
 

#4
Posts:
778
Joined:
22-Apr-2014 2:40pm
Location:
New Jersey
Odd situation: all assets but house are in wife's name as result of inheritances, prior ownership of US residence that was sold and tax paid 5-6 years ago. 8938 shows her assets being over 1.2 M. She is estranged from her American siblings.

Husband is from overseas. He became citizen, but only after finishing school....thus his limited exposure to Social Security.

Thanks, Mr. Weiss!
 

#5
Posts:
60
Joined:
23-Apr-2014 9:12am
Location:
Portland, Oregon
This isn't what OP asked about, but ...

The client is only 5 quarters away from qualifying for Social Security. A shame he can't get in another 1.25 years of contributions in order to qualify for benefits which, doubtless, would quickly add up to substantially more than any contributions he'd make over a mere 5 quarters. Voluntary contributions aren't allowed, but I wonder if there might be some sort of work-around (though I wouldn't know what it might be).

I assume you've checked the Totalization Agreement between the U.S. and Britain to see what it provides for.
 

#6
Posts:
175
Joined:
23-Apr-2014 6:08pm
Location:
San Diego CA
PDXTaxman wrote:This isn't what OP asked about, but ...

The client is only 5 quarters away from qualifying for Social Security. A shame he can't get in another 1.25 years of contributions in order to qualify for benefits which, doubtless, would quickly add up to substantially more than any contributions he'd make over a mere 5 quarters. Voluntary contributions aren't allowed, but I wonder if there might be some sort of work-around (though I wouldn't know what it might be).


That was my first thought upon reading the original question also. Time to fire up a US business and make some US $$ for a couple of years!
Jim
Pettit Financial Services
 

#7
Posts:
778
Joined:
22-Apr-2014 2:40pm
Location:
New Jersey
Kind of hard; he is a child psychiatrist.
 

#8
Posts:
175
Joined:
23-Apr-2014 6:08pm
Location:
San Diego CA
hehe. Tell him to start making some sort of children therapy toy and market it to US Child Psychiatrists. Problem solved! However, it sounds like he would just as soon drop citizenship, so it's probably a moot idea.
Jim
Pettit Financial Services
 

#9
Guya  
Posts:
859
Joined:
21-Apr-2014 8:08am
Location:
London, United Kingdom
There are more US citizens renouncing citizenship today than at any point in history. As my practice is based here in London, we have helped many people with the tax implications of renouncing over the past couple of years and this trend is indeed quickening.

The husband should qualify for social security under the totalization agreement, so this is not a relevant issue. It sounds as if advising them on how to avoid the s877A charge for both should be quite easy; but it is vital that this advice is correct to avoid an immediate charge to US tax.
PS – Greeting from London, England. Grey and rainy ...
 

#10
Lizzit  
Posts:
18
Joined:
16-Jul-2014 6:03am
Location:
London UK
Guya and I both practice in London. Hi Guya!

You or they SOOOOO should seek professional advice from someone who does international returns in the UK. There are at least 60 of us here plus some big companies. Giving up citizenship is pretty risky when the person is elderly and the net worth is over $600K. This is because invariably the odds are that the stateside accountant miscalculated the value of some of the assets so that their net worth turns out to be substantantially higher than £2million and thus the exit tax kicks in. Guya and I and the other 60 someodd guys and gals help them determine the actual value of the assets in a way that will stand up in the US tax court. The asset values most commonly whoopsidaisied are UK tax-free investment accounts (these are often missed and are not tax-free in America), pensions, life insurance policies, and houses (the more expensive, the riskier). Our usual advice is to arrange gifts since they can give $5million away without any tax. They gift enough away, their net worth is hopefully under $2million. Many assets such as pensions and the UK tax-free accounts cannot be gifted as the owner cannot legally change until death. It's a very messy can of worms you are playing with. Be extremely cautious.

@TaxMonkey, the tax on $85K was the gain on the sale of the second residence. The gain on the sale of the primary residence is probably in the vacinity of a million or more. That's one heck of a lot of tax to pay when the UK doesn't assess tax on sales of primary residences at all.
 

#11
Posts:
71
Joined:
9-Jul-2014 9:06am
Location:
Memphis
Lizzit, since a corporation is a person over here, wouldn't be easier if the couple just incorporated themselves and then used the loophole to go offshore? I guess they'd need two corporations.
 

#12
Smktax  
Posts:
517
Joined:
25-Apr-2014 12:02pm
Location:
Usa
I agree with Lizzit. You should definitely seek advice from someone who does international returns in the UK. Once a stateside accountant computes net worth of over $600k, it is very risky that the net worth is really over $2m. Stateside accountants are usually off in their computations by over 100% because they miss the exotic UK assets like pensions and houses.

Besides stateside accountants are not used to dealing with more than one currency. The UK accountants deal with them all the time and understand how important it is to keep them separate. For example, most U.S. accountants wouldn’t understand that £2 million is nearly $3.1 million (I bet that Doctor Watson doesn’t even understand what that squiggly symbol means).

UK accountants are so attuned to the UK real estate market that they can estimate gains on residences there in the vicinity of a million or more without even knowing when the property was purchased or for how much.

And only UK accountants know how to determine the actual value of assets in a way that will stand up in “the US tax court.”
 

#13
Posts:
778
Joined:
22-Apr-2014 2:40pm
Location:
New Jersey
£ = drachma or is it baht? :shock:

This is great advice....the point about deferred accounts is excellent.
 

#14
Guya  
Posts:
859
Joined:
21-Apr-2014 8:08am
Location:
London, United Kingdom
SFlemseter - So...you want a corporation and then want to cope with SubPart F and PFIC rules in the US and ATED in the UK? Great business for accountants and lawyers, not so good for the client...
PS – Greeting from London, England. Grey and rainy ...
 

#15
Lizzit  
Posts:
18
Joined:
16-Jul-2014 6:03am
Location:
London UK
Guya - lol! hee hee hee.

Also, shifting the entity into a corporation results in a stonkingly large transfer tax in the UK. Joy!
 

#16
Nilodop  
Posts:
18759
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Always take the Flemster man very seriously - not.
 


Return to Taxation



Who is online

Users browsing this forum: dianaf, Google [Bot], Google Adsense [Bot], ManVsTax, rkrcpa, SlipperyPencil, Wiles and 94 guests