U.S. Citizens Retiring Abroad: “Tax Trigger” Situations and Related Disclosure Forms
The following is a bolded checklist of important situations that may “trigger” a tax review by a skilled United States tax professional. Many of these situations also require a simultaneous review by a foreign tax professional. It is generally best practice for these tax professionals to work together to minimize their common client’s overall world-wide tax liability.
When Moving Abroad
Affirmatively terminating a taxpayer’s state domicile at the time the taxpayer moves abroad may be advisable to prevent state taxation of a taxpayer’s world-wide income received by the taxpayer after the taxpayer has left the state.
Working abroad will require consideration of:
The U.S. foreign earned income exclusion and U.S. foreign housing exclusion.
The U.S. foreign tax credit.
The U.S. self-employment tax and totalization treaties (for the self-employed).
Owning Interests in Foreign Businesses
Interests in controlled foreign partnerships and controlled foreign corporations must be reported on Form 8865 and Form 5471, respectively. The related income may have to be reported by the U.S. owners.
Marrying a Nonresident Alien (NRA):
Tax and disclosure considerations include:
Lifetime Transfers. Transfers made by a U.S. citizen to an NRA spouse may trigger income taxes and/or gift taxes. Transfers made by an NRA to a U.S. spouse must be disclosed if their annual value exceeds $100,000.
Bequests. Bequests made by a U.S citizen to a NRA spouse do not automatically qualify for the unlimited estate tax marital deduction. A bequest made by a deceased NRA to a U.S. spouse must be disclosed if its value exceeds $100,000.
Filing Status with NRA Spouse and Exemption for NRA Children. The filing of a joint U.S. income tax return with an NRA spouse requires an affirmative U.S. tax election. The U.S. income tax exemption for NRA children living abroad is lost unless these children are legally adopted by and living with the U.S. taxpayer.
Making Gifts to Nonresident Aliens
The lifetime exemption for gifts by citizens to nonresident aliens is limited to $148,000 for 2016, indexed for inflation.
Receiving Gifts and Bequests from Nonresident Aliens
Gifts and bequests received from nonresident aliens must be disclosed if their value exceeds $100,000.
Making Charitable Gifts to a Foreign Charity
Charitable gifts made to foreign charities might not qualify for the United States charitable deduction for U.S. income tax purposes.
Becoming Involved with a Foreign Trust
Involvement with a foreign trust may trigger important reporting requirements. Involvement includes being a settlor or trustee of a foreign trust. Involvement also includes the transfer of property to a foreign trust by gift or loan; the receipt of property from a foreign trust by gift or loan; and the uncompensated use of a foreign trust’s property.
Owning Foreign Mutual Funds
Unrealized increases in the value of foreign mutual funds (“PFIC’s”) may be subject to current United States income taxation.
Owning Foreign Retirement Accounts
Income may be recognized for U.S. income tax purposes before the related income is recognized for foreign income tax purposes. As a result, the U. S. foreign tax credit might not be available to avoid double taxation.
Owning Foreign Life Insurance Policies
The build-up in cash surrender values of foreign life insurance policies may be subject to current United States income taxation.
Important Disclosure Forms
There may be severe penalties for failure to timely file the following disclosure forms:
FBARs: Disclosing foreign bank and other financial accounts.
Form 8938: Disclosing certain foreign financial assets.
Form 3520 and Form 3520A: Disclosing involvement with foreign trusts and disclosing the receipt of foreign gifts and bequests totaling over $100,000 in a year. See above.
Form 8865: Disclosing the financial information and income of controlled foreign partnerships. See above.
Form 5471: Disclosing the financial information and income of controlled foreign corporations. See above.