Certification Test Basics

Of the three tests that an expatriate must meet to be non-covered, the certification test is the most difficult to understand. It is also the only test to which there are no exceptions – fail this test, and you are a covered expatriate.

Today’s topic will be limited to a general discussion of what it means to pass this test.

Expatriation and the three tests

Expatriation occurs when a US citizen or “long-term resident” terminates his or her citizenship or permanent residence. 1

If the expatriate meets certain thresholds for net worth and the amount of tax they have been paying over the last five years, he or she will be what is known as a covered expatriate.... continue reading

Form 8832, Community Property, and Foreign Business Entities

I received an email from Scott, a good friend who, well, does taxes in Mexico.

He had a question about an American couple in Mexico who are setting up a S de RL (Sociedad de Responsabilidad Limitada), which is similar to a U.S. LLC. One of the features of this type of entity is that it must have two owners. H and W. How convenient.

Mexico has community property laws for married couples, and Scott tells me that this S de RL is a community property asset of H and W.

Will this entity (S de RL) be treated as a corporation, partnership, or disregarded entity for U.S.... continue reading

Do Covered Expatriates Get to Use Their Suspended Passive Activity Losses?

Today’s topic: Do covered expatriates get to use their suspended passive activity losses?

Let us imagine that you are planning to expatriate in 2018, and that you will be a covered expatriate. You have a number of rental properties in the United States. Those rental properties have accumulated a substantial amount of passive activity losses (PALs) during the time that you have owned them. Because you are a covered expatriate, you will need to pretend you sold all those properties at fair market value on the day before your expatriation and report the gains or losses on your tax return as if you really sold the properties.... continue reading

Resident for Income Tax Purposes but Not Gift Tax Purposes

I received an email from a practitioner this morning and figured it’s worth a blog post.

Reader C in Sydney asked me:

Hi Phil,

Would a MFJ couple (US citizen and NRA Spouse) using Sec 6013(g) Election qualify for Unlimited Spousal transfer from decedent US Citizen?  Inquiring minds would like to know 🙂

Nonresidents who are married to U.S. persons (citizens or residents for income tax purposes) can choose to be fully subject to U.S. income tax laws.  Ordinarily, a sane person would attempt to avoid this status, if possible.

But sometimes we do the math and it actually saves tax overall to do so.  ... continue reading

Community Property for Americans Married to Nonresidents

Let’s look at the taxation of income earned by spouses living in community property jurisdictions. When a U.S. person is married to a nonresident alien, the tax rules are different.

The normal rules are described in IRS Publication 555.1 Where spouses are subject to community property rules and they file separately, community income is split equally between the two spouses. The community property jurisdiction might be California. Or it might be any one of a number of countries outside the United States.

When one of the spouses is a nonresident alien, the rules are different.... continue reading