Step-By-Step Tax Filings For a Noncovered Expatriate

This Week’s Expatriation Question

This week’s question is from reader P. Let’s pretend his name is Phil, because that would be confusing. His question:

I am going for my interview to renounce on Feb 13/15. I don’t have any US income and I am not a “cover expatriate”. I have my 5 previous tax returns and FBAR’s filed. I will have to file another tax return for 2014 within the next 2 months. Do I file my 8854 with this return and then I am finished with the US? Or what else do I have to do? What is a 1040NR? Do I need to file 2 tax returns for 2015 too? ( Jan 1/15 – Feb 13/15 and then Feb 14/15 – Dec 31/15? I will sure be glad when I am done with all this!

Quick Answer

Here’s what you need to do for your tax filings, and when. Successfully jump through these hoops and you will be out of the U.S. tax system. Note that you are not completely free until sometime in 2016.

• File your 2014 income tax return before the deadline. Depending on your situation, the deadline is either 15 April 2015 or 15 June 2015. I recommend that you file for an extension right now, and make an estimated payment that will more than cover any remaining income tax liability you think you might have to the IRS. The extension request will give you until 15 October 2015 to file your 2014 income tax return.
• File your 2014 FinCen Form 114 by the 30 June 2015 deadline.
• Your 2015 income tax return is a “dual status” tax return. It will consist of Form 1040NR, with information attached (usually in the form of a Form 1040) to explain your life from 01 Jan 2015 until 12 Feb 2015. It will also have Form 8854 attached to it. File it no later than the deadline for 2015 tax returns generally–either 15 April 2016 or 15 June 2016. Again, you can apply for an extension I would definitely do that as a pre-emptive strike prevent problems with deadlines.
• You will also file 2015 Form 8854 by the filing deadline that applies to you for your 2015 tax return: 15 April 2016, 15 June 2016 or whatever the extended filing date is, if you request a filing extension.
• File your 2015 FinCen Form 114 by the 30 June 2016 deadline.

2014 Income Tax Return When Your Expatriation Date Is In 2015

For the entire calendar year of 2014, you were a U.S. citizen. Your 2014 tax return is going to be normal in every way. Do not file the Form 8854 with your 2014 income tax return, because your expatriation date will occur in 2015. You would only file Form 8854 with your 2014 income tax return (and separately, too, of course) if you expatriated in 2014. The filing deadlines you face for your 2014 income tax return will be the same filing deadlines you have always had. My suggestion is that you request an extension of time to file your 2014 income tax return by filing Form 4868. This will give you until 15 October 2015 to file your 2014 income tax return. Even if you are going to be ready to file in April, it makes sense because you never know when something throws your well-planned life out of whack. The Visigoths could come streaming through the mountain passes at any moment, raping and pillaging, forcing Starbucks to serve nonfat latte to everyone no matter what they order, etc. You never know. It could happen. I assume you have carefully considered the universe of tax forms that might apply to you, and your 2014 income tax return is squeaky clean. Pay careful attention to foreign mutual funds and foreign retirement plans. Almost everyone has ’em and quite frequently the U.S. tax system is at a loss for how to handle them (or, worse, the U.S. tax system has a fine method for handling them, and it is oppressive, burdensome, and expensive). ‘Nuff said.

2014 FinCen Form 114

Don’t forget your 2014 FBAR filing (FinCen Form 114) which is due no later than 30 June 2015.

2015 – Expatriation Year Income Tax Return

Let’s look at 2015. This is the year you expatriate. Your expatriation date will be 13 February 2015. This means your last day as a U.S. citizen will be 12 February 2015. You will have a dual status income tax return to file. A human files an income tax return for a full calendar year. Always, except for dead humans. Which you are not. What is different for you is that for some part of the year you were a U.S. citizen and part of the year you were not. So the method of computing your tax liability flipped (on 13 February 2015, to be precise) from Method A (report your worldwide income and pay tax on it) to Method B (report your income from U.S. sources and pay tax on it). You will be “dual status” in 2015 – part-year full taxpayer, part-year nonresident alien taxpayer. The basic tax return is a Form 1040NR. You look at what you your status is on 31 December 2015 and that’s the tax return you file. You will be an alien (i.e., not a U.S. citizen) because you renounced your citizenship in 2015. You will presumably NOT be a U.S. resident for income tax purposes. (You will only be a resident for U.S. income tax purposes if you choose to be, or you get a green card visa, or you spend too many days in the United States). From 13 February 2015 until 31 December 2015, you will only report your income from U.S. sources. This will be reported directly on Form 1040NR. Deductions are different for nonresidents than they are for residents and citizens, so when you look at Schedule A you will see that a lot of stuff you could deduct in years past are not longer permitted for you. From 01 January 2015 until 12 February 2015, you will report your worldwide income, and calculate the income tax as if you were a U.S. citizen during that time, because you were. The way you pipeline your “income earned while I was a citizen” to your Form 1040NR is a bit cumbersome. We prepare a summary page (on a piece of paper) to attach to the Form 1040NR to give guidance to the IRS so they can see where the numbers came from. We also attach a Form 1040 for that part of the year, where the actual computations are made. Then the numbers are ported from the Form 1040 to the Form 1040NR with, of course, the helpful little guide to the inquisitive IRS agent who wants to know what happened and why. Form 8854 must be attached to your income tax return. Go look at the Form 8854 Instructions to see this. File this according to the normal deadlines for 2015 income tax returns. The default deadlines for you will either be 15 April 2015 or 15 June 2015. Again, I heartily encourage you to file for an extension and maybe slightly overpay your tax bill so you get a refund.

2015 – Form 8854

Form 8854 must also be filed separately with the IRS. Yes you send the same information to two different addresses for the same government bureaucracy. No particular reason, just because. The filing deadline for this is the same as the filing deadline for your 2015 income tax returns. File that Form 4868 and get an extension of time. Your blood pressure will thank you.

2015 – FinCen Form 114

Don’t forget to file your FBAR (FinCen Form 114) no later than the deadline of 30 June 2016.

2015 – Form W-8BEN etc.

If you have any income from U.S. sources, or if you have U.S. assets, look around and see if you need to notify them that they are now paying income to a nonresident alien rather than a U.S. citizen. There might be requirements to withhold tax on payments made to you.

Time and Danger

Yes it does. It takes a long time to shake the U.S. tax system out of your life. And there is some danger here. Screw up this last bit of paperwork and you might convert yourself into being a covered expatriate. (Screwing up the paperwork, doing it wrong, filing late, not paying the tax, etc. – this all could mean you fail the “certification test”). That is why I kept repeating myself–get the extension of time to file even if you don’t need it. And that’s why I am going to recommend that you get some help with the final year tax returns. Why, looky there. It’s a Routine Disclaimer coming up out of the ground!

Routine Disclaimer

I am not your lawyer, and this is not legal advice to you. If you need help, please hire someone who can advise you.

Next Week

Next week I will answer another question about expatriation. Send me an email! Phil