Philip D. W. Hodgen is the principal attorney of HodgenLaw PC, an international tax law firm based in Pasadena, California. He earned his undergraduate degree from Claremont McKenna College and his law degree from the School of Law at the University of California, Los Angeles. He then went on to earn a Master of Laws degree with a specialty in taxation from the University of San Diego School of Law. Admitted to the California bar in 1982, Phil spent nine years in law firms and with a large U.S. bank before starting his own firm in 1991.
Phil is a past chair of the International Tax Committee of the State Bar of California's Tax Section and was a member of the Executive Committee of the State Bar of California's Tax Section for 2004-2007. Phil frequently speaks on a variety of international tax, trust and estate topics to attorneys, accountants, and real estate professionals.
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Tax laws change over time, and the information in this post above may be less accurate today than it was at the time of the last revision. This post is not tax advice for your specific situation. Please contact an international tax professional to get personalized advice for your situation.
Hi Ben,
The W-8CE is filed by covered expatriates. You will not be a covered expatriate. Therefore you just give the pension administrator Form W-8BEN.
The tax situation will be semi-complex when you start getting distributions. Yes the IRS will want some tax, but maybe a tax treaty will solve that so your home country will be the only place where the distributions will be taxed. I can’t tell you because pension distributions across borders have too many variables to give simple answers. :-/
Phil
I just became an expatriate (not a covered expatriate) in August 2014. Have completed all my tax returns for 2014. But, I still have a pension account in the US. Do I need to file W8-CE? Do I need to pay tax when I receive distributions from my pension account after my retirement?
@expatriate,
Sorry I am traveling now. Can’t respond fully.
First of all, thank you so much for this information. I would be very grateful if you could clarify the following point.
On Form 1040 you have to report “your worldwide income from January 1 of the expatriation year until the day before your expatriation date”. I assume that, assuming bona fide residence in another country for this entire period, the total number of days between these two dates would be the “number of days within your qualifying period” (Part VII, line 38 of Form 2555, which would accompany the 1040)? However, at the top of Form 1040, would this be for the default year from Jan. 1, 2014 – Dec. 31, 2014, or would you need to say it’s an “other tax year beginning Jan. 1 and ending [the date before expatriation]”?
Many thanks in advance!
@bubblebustin,
The United States imposes income tax based on two major theories. The first is citizenship/residence. If you have that status, the U.S. government insists that you pay income tax on your worldwide income. If you do not pay, then the United States will throw you in prison. Not to put too fine a point on it, but the U.S. government owns you. You are an income-generating asset, much like a cow wandering around in a pasture. (The pasture’s fence is to be found on the border.)
The second way the United States imposes tax is on source. If the income arises from a source within the United States, then the United States claims the right to tax it. (All countries are like this). The justification is that the government services and protection of the military gave rise to the beneficent conditions that allowed you to make an investment and reap the rewards. And that’s pretty reasonable.
When a person is a nonresident and noncitizen of the United States, the only way the United States can possibly impose tax is on income from the U.S. source. Someone who renounces U.S. citizenship and does not live in the United States is both a nonresident and a noncitizen of the United States. Therefore, only investments made in the United States will generate income that will be taxable in the United States.
Classic examples of this are stocks — you buy the shares of a U.S. corporation, and the dividends you receive are taxable. They are from a U.S. source — the U.S. corporation. Another classic example is rental real estate. You buy an apartment building in the United States and your tenants pay rent. The rent is from a U.S. source.
This means that if you — as an expatriate — never invest any money in U.S. stocks and bonds, and never buy U.S. real estate, and in fact strenuously avoid investing in anything that has a U.S. flavor at all (because the “source of income” rules can be cumbersome and counterintuitive), then you will always be safe from the IRS claiming that you owe U.S. income tax return.
I hope that helps.
…unless your money touches the United States… this is the part I do not understand . The part about an investment : you hold 1000 shares of IBM …dividends are taxed (withholding tax) at source through your broker but any capital gains from a sale of such investment have no US tax consequences any more since you do not file a 1040 anymore. Would this be correct ?
If you expatriate you are indeed finished with the IRS for the rest of your life, unless your money touches the United States:
1. You make investments in the United States, so you have U.S. source income. (You are taxed as an ordinary nonresident).
2. You have assets in the United States and you exercise a moment of poor judgment — you die. (Your assets are subject to estate tax in the normal fashion that applies to nonresidents).
3. You make gifts to U.S. persons, or you leave an inheritance to U.S. persons. (The recipient pays gift tax for the privilege of receiving money from a covered expatriate, if you were one).
“For all years after you expatriate, you will be treated as a nonresident alien for U.S. income tax purposes.”
But Phil am I correct in saying if a dual citizen does expatriate (with CLN) he is done with filing anything to the IRS for the rest of his life ?