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March 28, 2017 - Phil Hodgen

The Tax Liability Test for Covered Expatriates

You can become a covered expatriate if your average tax liability for the previous five years is above a certain amount ($162,000 for expatriations in 2017).

Calculating this average amount is a bit of a pain.

Covered Expatriate Status is Bad

Don’t be “covered expatriate”.

  • Covered expatriates pay income tax when they renounce U.S. citizenship or give up permanent resident visa status.1
  • Covered expatriates cannot make tax-free gifts or bequests to U.S. persons.2
  • They also risk being barred from re-entering the United States, because they might be considered tax-motivated. The dreaded Reed Amendment gives the State Department the power to exclude these people from entering the United States.
... continue reading
Expatriation
March 23, 2017 - Haoshen Zhong

Your Stock Options in a PFIC

Getting a stock option from a PFIC

Here is a question from an email:

I am employee of a PFIC. My employer issued some stock options to me as part of my compensation. Do I have a PFIC problem?

This post describes why you cannot avoid passive foreign investment company (PFIC) taxes by holding onto an option or selling the option directly. But you may want to hold onto the option to reduce annual reporting requirements.

The option is an issue because of attribution rules

A passive foreign investment company (PFIC) is a special subcategory of foreign corporations. US shareholders of a PFIC are subject to punitive tax rules, so US persons want to avoid owning shares of a PFIC.... continue reading

PFIC and CFCs
March 17, 2017 - Phil Hodgen

U.S. Citizens Married to Noncitizens Who Own Foreign Corporations

This week I am going to highlight the “constructive ownership” rules in U.S. tax law. This means that the IRS can pretend that you own something — we will talk about stock of foreign corporations — even though you don’t really own it.

We will talk about U.S. citizens married to noncitizens. First, a simple example, then a more complicated (and realistic) example. The realistic example — one I have seen many times — yields a “Who knows what the answer is!” conclusion.

Here is the practical advice:

If you are a U.S. citizen living abroad, married to a noncitizen, look out for the combination of foreign corporations owned by trusts.

... continue reading
Friday Edition
March 14, 2017 - Phil Hodgen

Covered Expatriates and Nongrantor Trusts. It’s Probably Pointless.

Renounce, Receive Foreign Income and Get Tax Troubles1

Is it possible to renounce your U.S. citizenship, live outside the United States, collect 100% foreign income, and still be under the IRS’s thumb? (YouTube).

Yep. Or at least it looks that way.2 But who really knows?3

The Facts

Here is what it takes:

  • You are a covered expatriate.
  • You are the beneficiary of a foreign nongrantor trust.
  • The foreign nongrantor trust has no U.S. assets, and has no U.S. income.
  • You receive a distribution from the foreign nongrantor trust.

The Results

Here’s what happens to you:

  • No U.S.
... continue reading
Expatriation
March 9, 2017 - Haoshen Zhong

When You Have to File Both Form 5471 and Form 8621

Filing Form 5471 and Form 8621 for the same foreign corporation

This is a question that we get a lot:

If I own shares in a foreign corporation, and I file Form 5471, then I do not have to file Form 8621, right?

The answer to this question is “incorrect”. There are situations under which you have to file both Form 5471 and Form 8621 to report the same corporation. Here are a few common situations we have seen arise in the course of our work.

Background to Form 8621 and Form 5471

Form 8621 is a form that US persons use to report investments in passive foreign investment companies (PFICs).... continue reading

PFIC and CFCs