May 5, 2015 - Phil Hodgen

Form 8854 help for a (possibly late-filing) expatriate

Every Tuesday I send out an email in which I answer someone’s question. You really should subscribe. Here is the May 5, 2015 edition.

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This week’s question

This week we delve into the mechanics of Form 8854. Lightly edited, here is an email I received from my correspondent, R:

Dear Phil,

I have a question about filling out the 8854 form.

I renounced my U.S. citizenship in September, 2013.

My question is whether I need to fill out Part II of Form 8854? It does not look like I have to if I am reading the form instructions correctly.

Also, in the income statement in schedule B. What do I fill out for number 1? It says U.S. source income not effectively connected with the conduct of a U.S. trade or business. I have interest from my banks and dividends from my U.S. brokerage accounts from stocks. Should I include these sources of income or not? They are U.S. source income, but are they are effectively connected with a U.S. trade or business?

Is it too late to avoid covered expatriate status?

Before I answer the questions, there is a hidden problem here. Did R file Form 8854 sometime in 2014? If he did not, then he is late with filing Form 8854 and he will be a covered expatriate.

Someone who expatriated in 2013 would have a filing deadline for Form 8854 sometime in 2014 – the same filing deadline as applies to the final income tax return filed for 2013.

My guess is that R did not file Form 8854 in 2014 when he should have. Otherwise he would not be asking these questions. Someone who filed the 2013 Form 8854 in 2014 would not be looking at filing another Form 8854 except in unusual circumstances, none of which R mentioned in his email.

If my guess is right, he will be a covered expatriate because he missed the deadline for filing.

Form 8854, Part II – does not apply

Onward to R’s first question. He wants to know if he should fill in Part II of Form 8854.

The answer is no.

Part II applies to people who expatriated on a date between June 3, 2004 and June 17, 2008. Since R renounced his citizenship in 2013, Part II does not apply to him. He should not complete it.

Form 8854, Part V, Schedule B, Line 1 – how to complete it

R’s second question is about the income statement – Form 8854, Part V, Schedule B.  In particular, he is puzzled by Line 1. He has this type of income, but the instructions tell him to report income that is “not effectively connected with the conduct of a U.S. trade or business”.  He is appropriately puzzled by this.

It’s a conspiracy 🙂

The magic phrases – “effectively connected” and “U.S. trade or business” – are insider jargon. These two items of jargon are not mathematically precise. The government and taxpayers argue endlessly about these two concepts.

At the extremes, there is agreement – there is or is not a “U.S. trade or business”, and a particular dollar of income is or is not “effectively connected” to that U.S. trade or business. But in the middle, it’s a mess.

By the way. If you see common-sense words bolted together to mean something obtuse, you can be sure that this is a way for the priesthood to subjugate the laity. That’s the case here.

Why it matters

The upshot of finding that income is “effectively connected with the conduct of a U.S. trade or business” is that the income is taxed at the normal income tax rates (income minus allowable deductions, multiplied by the appropriate tax rate).

If income is NOT “effectively connected with the conduct of a U.S. trade or business” it is taxed at a flat 30% rate, with no deductions.

In both cases, income tax treaties can alter the result. And in both cases, R (and people like him) are only at risk for U.S. income taxation if the income is received from sources in the United States.

R’s situation is easy to solve

In R’s case, I can make an educated guess. My guess is that R has some stocks, bonds, and cash in an account in the United States, but he does not have an operating business here. I further guess that he does not work in the United States.

Based on that guess, there is no “U.S. trade or business”. A business only exists when you are doing things again and again to make money from customers. There must be more than one action in order for there to be a business. It’s kind of like a line. If you have a single point, you cannot have a line. As soon as you have two points, you can have a line.

The same is true for a business. Do one thing, and it is impossible to be in business. Do two things, and you might have a business.

R sounds like an investor rather than an entrepreneur. The only thing he is doing in the United States is buying stocks, bonds, and holding cash. People who buy and sell stock constantly can be engaged in business as a trader. But this is not R’s situation. I’m going to guess he is an investor. He parks his money in the stock market and waits for the stock price to go up.

If R is merely an investor, then he is not engaged in a U.S. trade or business. Since he is not engaged in a U.S. trade or business, his income cannot possibly be effectively connected with a U.S. trade or business.

R, your answer is that you fill in Line 1 of the income statement with the information requested. Take the data from your brokerage statements for January 1, 2013 through the day before your renunciation date in September, 2013.


R, this is not legal or tax advice to you. Your email to me had many, many unknowns in it, and I have no idea what reality looks like for you. I am just showing you one way to analyze your situation. It may be right or it may be wrong. Go hire someone to help you, please.

Until next Tuesday, stay out of the sun. I didn’t, and now I’m a little bit sunburned.