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March 15, 2016 - Phil Hodgen

Why Social Security does not go on the Form 8854 balance sheet

Hello again from Phil. This is the bi-weekly Expatriation Only newsletter, in which we cover U.S. tax topics related to renunciation of U.S. citizenship or giving up your green card. You can stop getting this newsletter by clicking on the “Unsubscribe” link at the bottom of the email.

Why Social Security Isn’t an Asset

This week I am going to dive into the shallow pool of Tax Metaphysics and tell you why you do not put Social Security benefits on the Form 8854 balance sheet when computing your net worth.

I hope the answer aggravates you and (for those of you who can still vote in the United States elections) galvanizes your political views.

The Net Worth Test

Someone who renounces U.S. citizenship (or abandons a long-held green card) triggers possible U.S. tax consequences. I say “possible” because that person will either forced to pay U.S. tax (or not) depending on whether he/she is a “covered expatriate” (or not). Someone who is a “covered expatriate” is deemed worthy of being taxed one last time by the U.S. tax system.

One way to be a “covered expatriate” is to be rich. You are rich if your net worth is $2 million or more. That is rich to some people, and not to others. A long-time homeowner in Toronto or London might be rich due to real estate appreciation. Others might be $2 million rich due to currency fluctuations (hello, CHF).

The tax paperwork you complete (as a former U.S. citizen or long-term resident) includes Form 8854. One component of that form is a balance sheet, in which you list your assets and liabilities, and self-report your net worth to the U.S. government. If you self-report net worth of $2 million or more on your renunciation date, you are a covered expatriate. If the IRS asks you to (ahem) confirm the veracity of what you reported – and you fail – then you are a covered expatriate.

Social Security is an Income Stream For Life

The question then becomes a simple one: what do you include as an asset that you own, when completing Form 8854’s balance sheet and reporting your net worth?

And specifically, what about Social Security benefits? You will receive an income stream from the Social Security Administration for the rest of your life. The right to receive an income stream for life looks like an asset, doesn’t it?

If you have an annuity, you have a right to receive an income stream for life. That is an asset to be reported on the Form 8854 and counted toward your net worth.

If you have a pension, you have the right to receive a lump sum or an income stream for the rest of your life. That counts as an asset on the Form 8854 balance sheet, too.

If you own a bond, you have the right to receive an income stream

Yet you do not list Social Security as an asset on Form 8854 – as one of your assets. Why is Social Security different? You own a right to receive a predictable amount of retirement benefits at a certain age. How is that not an asset?

You Have No Right To Receive Social Security

The child’s game, “One thing is not like the others”, is what we are playing here.

  • With your pension, you have a contractual right enforceable in court to receive the specified benefits from the pension plan.
  • With your annuity, you have a contractual right enforceable in court to receive the annuity income stream that was promised to you.
  • A bond is a contractual right to be paid a specified amount of interest, along with the principal. You can go to court to collect your money if you are not paid on time.

But with Social Security, you have no enforceable rights. You have a unilateral promise by the U.S. government to pay you money. And the U.S. government can change its mind at any time, and alter the bargain with you.

Hope is Not An Asset

In short, you have no court-enforceable property right to receive Social Security benefits. You have a hope, an expectation, a belief that you will receive Social Security benefits. You do not have a property right. Flemming v. Nestor, 363 U.S. 603 (1960).

Hope (that you will someday collect Social Security) is not an asset. You do not report it as part of your net worth on Form 8854.

Ye Olde Disclaimer

Not legal advice. Probably wrong. Who are you to listen to someone like me? I’m some random dude on the internet whose opinion probably means nothing. Go find someone, tell them your situation, and get competent advice. Please. 🙂

See you in a couple of weeks.

Expatriation Tax and Trusts