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April 5, 2017 - Phil Hodgen

A former green card holder’s post mortem on expatriation and U.S. tax law

We recently helped a green card holder clean up his tax situation so he could avoid covered expatriate status. This is his own post-mortem of the process.

It is a familiar story: green card holder returns to his home country but does not formally cancel his immigrant visa.  He does not know about the ongoing tax-filing obligations imposed by the U.S. on green card holders.

Eventually, he learns of the problem and wants to file Form I-407 and tie up his loose ends.  He is not rich enough to be a covered expatriate ($2,000,000 or more net worth) but his tax returns for the previous five years were not up to snuff.... continue reading

Expatriation
March 31, 2017 - Phil Hodgen

Form 5471, Constructive Ownership, and Exceptions

“You Don’t Own It But the IRS Treats You as if You Do”

Sometimes the IRS treats you as something you’re not. They might think that you own stock of a foreign corporation even if you don’t.

You really aren’t a shareholder:

  • You cannot exercise the voting power that a shareholder has — because you are not a shareholder.
  • You do not receive dividends — because you are not a shareholder.

Yet the IRS says you are a shareholder, at least for some (but not all) requirements of U.S. tax law.

None of the benefits, but plenty of U.S. tax downside potential.... continue reading

Friday Edition
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