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Expatriation Feelz, Bank Accounts, and Foreign Social Security
Phil Hodgen
Attorney, Principal
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Hello from Phil, and welcome once again to the Friday Edition. You signed up to get this but you can stop getting it by clicking on the Unsubscribe link at the bottom of this email.This edition is a combination of feelz, technical knowledge, and pragmatic "solve it with a hammer" tax strategy.
Feelz
I get emails. This one hit me in the feelz.Hi Phil,I'll try to keep this short - even if you are a speed reader I'm sure you get lots of emails.Yep. Inbox = 296 right now.
Born in Boston, was always proud to be an American. Brother was USMC, KIA in 1967. Met a Swiss and left the US in 1970. Live in an apartment outside Zürich, and yes life is expensive in Switzerland but it is a beautiful place to be. Semi-regular trips back to the States - half-brother still in [SmallTown USA].The US Tax forms take me hours to do - and I have never had to pay any tax. I was a teacher in the Swiss school system up to last July (end of school year). Have been fighting cancer for about two years. Finally decided to be sure my sons don't get caught up in a battle with the IRS someday and did the preliminary paperwork, went to the Embassy [in 2015], and cried like a baby while repeating the OATH/AFFIRMATION OF RENUNCIATION … . I have my Certificate - and still cry when I look at it. I wish the politicians who wrote the laws knew what they have done to normal, honest Americans living abroad … NO BANK wants American customers - when they realize one is American they "invite" you to take your business elsewhere.Here is a classic example of the impact of U.S. tax policy. Why should this woman be forced to file for divorce from her country of birth -- the country for whom her brother died -- because of the blowback of U.S. tax policy enforced abroad?I just hope that the consular official in Bern felt a twinge of guilt while watching her cry. That civil servant was personally enabling a broken system.I am past the point of giving such people a hall pass: "everybody's gotta work, hey I'm just doing my job, I do what I'm told, I'm powerless." Nope. You're helping to make things worse. At some point you must take responsibility for your actions.
Bank Accounts In Foreign Currencies
My correspondent continues with her first technical question. This is the technical part of this Friday Edition.Most important question: Part V of Form 8854I have three bank accounts - do I add the amounts and put it in column (a) … what is (b) and (c)?Bank accounts are listed on Form 8854, Part V, Schedule A, Line 1.Column (a) lists the fair market value of the bank accounts, reported in U.S. dollars. This means that a bank account full of Swiss Francs must be converted to U.S. dollars. We use the exchange rate on the date of expatriation for that calculation.Column (b) asks what your acquisition cost is for the cash in the bank. This is where things get tricky. You have to account for currency exchange fluctuations, which isn't easy to do, and it isn't easy to track. For any particular single Swiss Franc in a bank account, when was it acquired? What was the exchange rate when it was acquired? What an absurd question, right?Column (c) is the difference between Column (a) and Column (b) and shows you the currency gain or loss on the money you have in the bank.Here is an example.
ExampleLet's say my correspondent put CHF 100,000 in the bank five years ago at a (hypothetical) exchange rate of CHF 1 = USD 1. (This example is for simple explanation and is not an accurate representation of reality.) Her basis in the money is USD 100,000.Let's also assume that the bank pays zero interest on that deposit. (Again, this is an oversimplified example. For science!).On the expatriation date, the exchange rate is CHF 1 = USD 1.20. The Swiss Franc became more valuable. This means that on her expatriation date my correspondent had a bank account worth USD 120,000.In this example, Column (a) would have a value of USD 120,000, and Column (b) would have a value of USD 100,000.Column (c) is the difference between the two, which is USD 20,000.If my correspondent is a covered expatriate, that USD 20,000 currency gain will be taxable. If she is not a covered expatriate, it will not be taxable.
Solve It With a Hammer
We will often use a more expedient method of dealing with foreign currency bank accounts.If you are a normal person living a normal life, money flows into your bank account and out of your bank account at high speed. You are living life, after all. You like to eat and buy clothes and keep warm and dry in your humble abode. That all takes money. You make it, you spend it.This means that you, the American taxpayer abroad, are (in the eyes of the IRS) constantly converting U.S. dollars to foreign currency. That, in turn, means that every unit of foreign currency was acquired fairly recently.And unless you are living in a country with a free-fall currency, it is reasonable to assume that the exchange rate (CHF to USD, for instance) when you acquired that foreign currency unit (CHF 1) is more or less the same as when you spent that foreign currency unit. Or, in this case the exchange rate when you acquired that foreign currency unit is more or less the same as when you renounce your citizenship.TL;DR, unless there is a compelling reason to do it otherwise, we use the same value in Column (a) as we do in Column (b), resulting in a zero value in Column (c).Social Security on the Balance Sheet
My correspondent asked a second question:I will be eligible for Swiss AHV (Social Security) later this year - 2016 - does that info go anywhere?This one is an exceedingly interesting question. It has long bugged me. Social Security is something just like an annuity payment for life or a pension payment for life, with the only difference being that it is from a government entity instead of a private entity. It's an asset, if you look at it through financial accounting goggles. You have a vested right to a predicted stream of income for life.Teaser Alert! Stay tuned to the Tuesday Expatriation newsletter because about two or three episodes from now I will explain the legal reasons why Social Security is not an asset to be listed on your balance sheet when you expatriate.A special hat tip to Haoshen Zhong on our team, who discovered the semi-arcane (and vaguely disturbing, to me) reason why your Social Security benefits are not treated as an asset. He discovered it while surfing the web. So parents, encourage your children to surf the web.Anyway. Back to my correspondent's question. The same logic that applies to U.S. Social Security benefits applies to foreign Social Security benefits.TL;DR, don't list the Swiss social security benefits as an asset on Form 8854's balance sheet.
A Polite Observation
My correspondent finished with a polite observation about the quality of U.S. tax documentation:I sure hope you can help me - have already spent a couple days on all this stuff and wonder how "normal" (less educated) people can deal with the language. The Zürich tax instructions (we file in our canton - they forward the info to the national tax office) are about 50 pages long - and the print is big enough to read! If it were English I'd send you one - there's no comparison!Yep. I have heard the same thing from people in Singapore. They (politely) laugh at the baroque and gratuitous complexity of our tax compliance requirements. On the other hand, I have seen the visible body language of Germans when discussing tax law complexities there. If an entire human body could heave an exasperated and helpless sigh, well, I've seen it.