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November 10, 2014 - Phil Hodgen

Dying between renunciation and filing the tax returns

You should subscribe to the Expatriation Only email list. You’ll get a weekly email that usually answers someone’s question about expatriation. The subject is always expatriation. This is the email that went out earlier today.


This Week

Here is a question from reader R. in the U.K.:

If I were to renounce citizenship at a U.S. consulate in early 2015 then I would have until late 2016 to file my Form 8854. [Other questions deleted. Ed]

 

Might there be a mess for my estate and non-U.S. spouse if I were to die suddenly before between renouncing and filing Form 8854? That must happen occasionally. Can executors file tax returns and a Form 8854 on behalf of a dead person?

 

I suppose the short question for your blog audience is this: what is at risk in the months between renouncing and filing Form 8854?’

 

R’s question highlights a difference between the U.S. income tax and the U.S. estate tax for the difference in the meaning of the word “resident”.

Income Tax Rules

There are two sets of rules for income tax. One set of rules says that the United States will extract income tax from U.S. citizens and “resident aliens” on their worldwide income. It does not matter where the citizen or resident alien lives.

The other set of rules says that the United States will extract income tax from “nonresident aliens”. These people only pay income tax to the United States on income that comes from sources within the United States.

The critical thing for R — and everyone else — is to know what he is. If he is a citizen or resident alien, he is taxed on everything, everywhere. If he is neither a citizen nor a resident (hence, he is a nonresident alien), then he is taxed on income earned in the United States.

Tax Return Filing Deadline

When he renounces his citizenship in early 2015, he will no longer be a citizen, of course. For that short period of time (from January 1 until the day before he renounces his U.S. citizenship), he will be a U.S. citizen and will be required to pay income tax to the United States and file an income tax return in the United States.

The filing deadline for the that tax return for the 2015 year (even though it is a part of the year only) will be June 15, 2016. It can be further extended as far out as December 15, 2016.

Income Tax Returns and Executors

R wonders what happens if he dies after expatriation but before filing his tax return for the expatriation year. No problems. An executor can file and sign the expatriation year income tax return.

The IRS has pretty good procedures for this. Look at Publication 559 to see how the tax return is filed and signed after the taxpayer dies.

Estate Tax Return

The United States has two sets of estate tax rules.

One set of rules applies to citizens and to noncitizen who live in the United States. (The rules for non-citizens require that the person be “domiciled” in the United States, actually.) The heirs of these deceased people are privileged to pay U.S. estate tax on their assets, no matter where on the planet the deceased person’s assets were actually located.

The other set of rules applies only to noncitizen who are not “domiciled” in the United States. Here, the U.S. estate tax will only apply if the deceased person owned assets physically located in the United States.

Let’s take R’s example. He lives in the U.K., renounces his U.S. citizenship, then dies.

  • The U.S. estate tax cannot be imposed on R’s worldwide assets on the basis of citizenship–at the moment of death he was not a U.S. citizenship.
  • The U.S. estate tax cannot be imposed on R’s worldwide assets because he is not domiciled in the United States. In reality his true home is the U.K. and has been seemingly forever. He is domiciled in the U.K.
  • The U.S. estate tax can therefore only be imposed on R’s U.S. assets, if he has any. He is a noncitizen who is not domiciled in the United States.

Even if R has assets in the United States when he dies, all is not lost. There may still be no U.S. estate tax imposed.

The estate tax treaty between the United States and the U.K. might prevent the U.S. from imposing the estate tax. And if the treaty does not work, his estate in the U.K. will almost certainly claim a tax credit against the IHT (aka the U.K. edition of the estate tax) for the amount of U.S. estate tax paid.

Conclusion

By renouncing his U.S. citizenship, R freezes in place the last day of the year in which he is a U.S. taxpayer–of income tax. Death after that date just means someone else signs the tax returns. There is relatively little brain damage to the surviving spouse or executor.

By really, truly living in another country, R cuts all possible U.S. estate tax on his assets located outside the United States.

Not Legal Advice

This isn’t legal advice to you, of course.  Would you make life-altering decisions based on a random email you got from some guy you found on the internet?  Nope.  Me neither.  Go hire someone.  March through the analysis and figure out what is best for you.

Expatriation