Renounce or relinquish?

Sticking with the UK State Pension as an example, and speaking only for myself, I would say it doesn't affect Schedule A, because the FMV of a pension which can't be sold, bequeathed, transferred, or given away, is zero.  That was my initial good faith assessment, now confirmed (in my opinion) by Notice 95-whatsit.

A pension which could be given away, and be subject to Gift Tax, presumably would have a non-zero market value, and would affect the person's net worth.  Can a pension be given away?  Even after the pension is in payment?  I have no idea, but it obviously is a crucial question for anyone at risk of Covered Expatriate status.

A couple of links which may or may not be of interest to anyone scratching their head over 8854:

http://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/joint_fall/2010/lepree_aba_exit_tax_present.authcheckdam.pdf

http://www.kplaw.com/pub/docs/Confronting%20the%20New%20Expatriation%20Tax%20-%20ACTEC%20J%20-%20Winter%202009%20-%20JLC%20%20MJS.pdf

Waxing speculative, I hazard a guess that the reason "deferred compensation" items come in for such brutal and unfair treatment under the exit tax provisions, is precisely because the IRS can't bully a foreign pension "payor" into colluding with punitive US taxation of ex-citizens.  Forcing the pensioner into waiving treaty rights, as a condition of deferred payment?  I'm not a lawyer but I just wonder whether that would ever stand up in a UK court. 

Note that there is nothing said in the U.K. treaty’s saving clause about taxing former citizens of the United States.

http://hodgen.com/treaties-wont-always-help-after-expatriation/

Pensions
Pensions in drawdown status
Final salary pension with right of survivor
Final salary pension in drawdown status with right of survivor
Annuities
Annuities with a beneficiary
Annuities with a beneficiary in drawdown status
Personal pensions
Personal pensions with a beneficiary
Trusts
US Social Security
UK State Pension
All sorts of additional pensions from sources outside either the US or UK

Two phrases come to mind: "It's a jungle out there", and "Someone's pulling my leg".

I believe it was Liz Zitzow who once said on a forum somewhere - "If net worth is over the ~$600,000+ exemption amount, seek expert advice".

Edit to add - The FMV is the sticking point. If the "Gift tax" rules come into being for FMV, and a deferred compensation item is to be "sold" on the day before renouncing, an ineligible pension becomes a lump sum cash amount (say for example $600,000). That (say) $600,000 could be "gifted", so it means (say) $600,000 being listed as FMV on Line 7. Or, is the FMV $0? As I said, I've seen examples where the (say) $600,000 was used. This is where I am unsure, and Hodgen does not make it clear. To be honest, I'm not sure anyone is really clear as to what is exactly the proper way to compute Part V of 8854. No matter where you look, there is a lot of avoiding the issue and giving a direct response. In other words - tons of waffle.

Exactly.  No guidance, or very little, and what little there is, comes in the IRS Bulletin, not in the 8854 instructions.  So is clearly aimed at tax advisors, who are dependent on the IRS and therefore easily controlled.

Why is there so little guidance, and none of the worksheets, for instance which accompany many other IRS forms?  Probably (I would guess) because the IRS doesn't have access to the non-US-resident ex-citizen's information, so can't threaten to do these calculations itself and force the ex-citizen to accept the results.  Leaving the requirements vague may encourage some citizens to provide more information than is actually germane, simply because they aren't sure what will happen to them if they fail to mention this that or the other item.

That's how it looks to me.  ICBW, obvs.

Here's Hodgen on "deferred compensation":

http://hodgen.com/chapter-7-taxation-of-deferred-compensation/

This has always been the puzzle for me: (from Hodgen)
"Deferred compensation items (think “pensions”) will either be taxed as a lump-sum distribution or tax will be withheld as distributions are made to you. This applies, however, only to Covered Expatriates."

So,..... do you calculate them to determine IF you are a covered expatriate, or do you ignore them in first calculations, and only include them if the first calculations determine you are a covered expatriate? From what I've observed, they are part of the first calculation. I may be wrong.

Interesting letter to the IRS from the American College of Trust and Estate Counsel, commenting on issues arising from Form 8854: http://www.actec.org/resources/letter-regarding-form-8854/

The following is concerned with the Schedule A question about trusts, rather than pensions, but the recommendation that the IRS should reword the question to comply with Notice 95-19, by stipulating the "subject-to-gift-tax" condition, would apply also to the Schedule A question on pensions:

Line 9 Analysis: Line 9 requires the expatriate to include as part of his or her net worth all assets held in trusts that he or she is treated as owning under sections 671 through 679 (a “grantor trust”). This requirement is inconsistent with guidance contained in Notice 97-19 (the “97 Notice”).5 The 97 Notice contains the most recent guidance issued by the Service on the subject of the determination of an expatriate’s net worth. The Notice does not require inclusion in an expatriate’s net worth of assets held in his or her grantor trusts. Under the 97 Notice, trust assets are includable in net worth only if they would have been subject to gift tax if the expatriate had transferred his or her interest by gift immediately before expatriation.
The 97 Notice states that Treasury and the Service expect to issue regulations under section 877 and to incorporate the notice’s guidance in those regulations. It also states that taxpayers are required to comply with the Notice until regulations are issued.

In order to comply with the 97 Notice, we suggest that Line 9 of Schedule A to Form 8854 be revised to read as follows: “Assets held in trusts that would be subject to U.S. gift tax if you had transferred your interest by gift immediately before your expatriation (see instructions).” Corresponding changes to the instructions should be made."

The letter also points out that the Code does not define net worth.

Edit to add - The FMV is the sticking point. If the "Gift tax" rules come into being for FMV, and a deferred compensation item is to be "sold" on the day before renouncing, an ineligible pension becomes a lump sum cash amount (say for example $600,000). That (say) $600,000 could be "gifted", so it means (say) $600,000 being listed as FMV on Line 7.

The imaginary sale doesn't apply when answering the Schedule A questions, because Schedule A is required for all current expatriates - not just for Covered Expatriates.  Non-covered expatriates will never be required to pretend that their belongings have been "sold".  Therefore (I reason), it is whether or not the pension itself would be subject to gift tax if given away, that determines whether it should be included in net worth*.  And I reason further that if a particular pension can't be a gift, it can't be subject to gift tax.  So the FMV for pensions is the total of all the expatriate's pensions which could be given away, and if none can be given away, the FMV is $0.  IMO

* Or perhaps I should have said, "determines whether it has a non-zero FMV".  Confusing!

First of all, I am not going to counter any conclusion you have arrived at. I think we're both searching for an answer which is not readily available. I also think we've looked at many of the same sites.

So allow me to offer an additional find.

The following is a presentation by The Wolf Group, a global finances organization that includes among its offerings Exit Tax Planning. They are located in Fairfax, VA (read Washington DC).

http://www.thewolfgroup.com/services/tax-services/exit-tax-planning/

They prepared a presentation for the 1818 Society of the World Bank Group (The World Bank). It's the retiree group of past employees of the World Bank. Quite why the presentation to this group, I have no idea. The presentation can be found by googling

1818 Society Exit Tax Presentation Final

It opens via (See Edit). From slide 9 of the presentation:

Net worth test
* Global assets minus global liabilities
* Value of assets determined under “gift tax principles”
* Tax liability determined under “estate tax principles”
* Present value of pension is included in net worth calculation

Food for thought. 

EDIT - Oops, sorry, it opens in a PowerPoint Presentation. Anyway, the stance from another viewpoint. The presentation can also be found here:

http://slideplayer.com/slide/2486919/

 

First of all, I am not going to counter any conclusion you have arrived at. I think we're both searching for an answer which is not readily available. I also think we've looked at many of the same sites.

Very likely - however, others  following the thread may find some of the links of interest.  There have been a lot of views registered for this thread. 

The Wolf Group presentation doesn't seem to me to be a different point of view.  Value of assets to be determined by "gift tax principles" and included in net worth - as per Notice 95-19.  What's unclear is how to determine the value of an asset under "gift tax principles", if the asset can't be a gift.

Hodgen says:

For purposes of your analysis, you treat the assets you can give away as part of your balance sheet.

http://hodgen.com/chapter-4-are-you-a-covered-expatriate/

What's unclear is how to determine the value of an asset under "gift tax principles", if the asset can't be a gift.

Due to its unique tax free status with HMRC, a cash ISA cannot be "gifted" (transferred) to a second party (unless under the new rules to a spouse upon the death of the account holder). Does that mean the value of a cash ISA should not be included in the net worth calculation? 

(A normal bank account can have a second name added to the account, and the second name can then withdraw (transfer) all assets in the account in favour of themselves.)

Due to its unique tax free status with HMRC, a cash ISA cannot be "gifted" (transferred) to a second party (unless under the new rules to a spouse upon the death of the account holder). Does that mean the value of a cash ISA should not be included in the net worth calculation? 

The accountholder has control over the value of a cash ISA, and can easily draw out the cash and give it away.  Not so with the UK State Pension - the pensioner only has control over the distributed amounts, and only these can be given away. 

So my answer to your question would be that the money in a Cash ISA (some of which might well have come from UK State Pension payments) is indeed part of one's net worth for the 8854 calculation of net worth. 

As always, that's just my opinion.  (As it happens, I do have a Cash ISA, and will be including the day-before-E-day balance in the balance sheet when I file 8854.)

The accountholder has control over the value of a cash ISA,...

And therein lies the rub. Have a close read of Notice 97-19:
"Determination of net worth.
For purposes of the net worth test, an individual is considered to own any interest in property that would be taxable as a gift under Chapter 12 of Subtitle B of the Code if the individual were a citizen or resident of the United States who transferred the interest immediately prior to expatriation........
An interest in property includes money or other property, regardless of whether it produces any income or gain."

It says nothing about control or the ability to transfer, only an interest. A pension is a monetary investment ("interest in property includes money") which the individual has an interest in, and that could include the UK State Pension. It almost certainly includes many types of personal pensions. The same goes for a cash ISA (the vehicle itself) which cannot be "transferred immediately prior to expatriation", although equally the individual does have an interest in it.
 
And, that's just my opinion. I admit to playing Devils' advocate here, but there is "something" involved which is beyond my very limited knowledge.

I tend to think this, or something similar, is the "gotcha". The fact it is very vague is the reason CPAs, both in the States and for their counterparts abroad, will not go without food on the table. We're dealing with "foreign pensions", a term which seems to be left intentionally extremely vague in any IRS communication. This is where the CPAs earn their money, and know the ins and outs of what stance will survive in a "US tax court". I don't know what precisely is included in "the net worth test", but a qualified international CPA should know (CPAs practicing exclusively in the States could be dangerous in this situation).

Vagueness is the tax advisors friend. Unfortunately for us basic unskilled punters, it's the enemy preventing us from doing it ourselves. Anyway, a competent advisor will find a way for most to avoid the exit tax, even if it's advising to "gift" funds of up to $5Mil. in order to be below the $2Mil. threshold.     

Interpretations are often influenced by personal circumstances.  Having little income, no US assets, and no interest in ever returning to the US, I feel free to ignore the IRS "gotcha's" and rely on a common-sense reading of the English language to conclude that a pension which can't be given away cannot be subject to a gift tax.  I might feel differently if I were at risk of Covered Expatriate status.  As it is, I'm only interested in doing what's unambiguously stated as required.  The way I see it, the IRS has had a good few years to make their wishes known with regard to Schedule A, but they haven't done so.  They don't even say that the Balance Sheet must be used to figure one's net worth - only that "you can use it.". Permission - not command - and unaccompanied by any of the usual threats and menaces.  Very un-IRS-like.

Vagueness is the tax advisors friend. Unfortunately for us basic unskilled punters, it's the enemy preventing us from doing it ourselves. Anyway, a competent advisor will find a way for most to avoid the exit tax, even if it's advising to "gift" funds of up to $5Mil. in order to be below the $2Mil. threshold.

I wondered (after I read Notice 97-19, and then read the gift tax rules) why intending renunciants at risk of the exit tax don't make more use of giving away money to reduce net worth.  If I were in that position, I think I would set about arranging to pay tuition for promising young persons, to the extent needed to bring assets down below $2,000,000.  Better to give the money away for something worthwhile, than to pay a tax advisor for such obvious advice, and much better than paying it to the IRS.

Thanks for your helpful comments on these subjects.  As for me, I feel I know enough now to be able to "file and forget" , so that's what I shall do.  Happy days!

Just popping back to say (in case it might be useful to anyone else) that I've now filed my 8854 (no 1040/1040NR as I was below my filing threshold). 

The "Where to File" address given in the 8854 instructions does not accept deliveries from private delivery firms.  The "timely posted = timely filed" rule has apparently been extended to include at least some international postal services, but I wanted proof of delivery.  So I sent it via International Tracked.  Cost £8.70, posted 1 Feb, delivered 12 February.

Done, dusted.  Happy days.  :-) 

Thanks again for all the helpful forum advice.

Just popping back to say (in case it might be useful to anyone else) that I've now filed my 8854 (no 1040/1040NR as I was below my filing threshold). 

The "Where to File" address given in the 8854 instructions does not accept deliveries from private delivery firms.  The "timely posted = timely filed" rule has apparently been extended to include at least some international postal services, but I wanted proof of delivery.  So I sent it via International Tracked.  Cost £8.70, posted 1 Feb, delivered 12 February.

Done, dusted.  Happy days.  :-) 

Thanks again for all the helpful forum advice.

IRS instructions say to file 2 copies of the 8854s. The one attached to the dual status returns can be delivered by courier. The copy sent separately cannot be filed by courier.

IRS instructions say to file 2 copies of the 8854s.

"...if required to file...".  I'm not, as my gross income is below the applicable threshold.

 

The copy sent separately cannot be filed by courier.

But can be filed (from the UK) using International Tracked, which gives proof of delivery. 

That's why I thought it would be worth taking a moment to pop back and mention that it worked for me, as others in similar circumstances may find it a useful tidbit.

The 8854 instructions say:
IRS Notice 97-19 (http://www.unclefed.com/Tax-Bulls/1997/Not97-19.pdf) says:
A UK State Pension cannot be transferred, so cannot conceivably be taxable as a gift.  So I think it should not be included as an asset for the 8854 Balance Sheet.  Only as income (Schedule B).

In case it may be of interest to anyone currently scratching their head over Form 8854, Phil Hodgen has recently posted an article on his blog in which, among other things, he promises to explain in a future article why social security benefits (US or foreign), should not be included as assets for the Net Worth test (i.e. Schedule A on the 8854).

Waiting with interest to find out if it's because social security pensions such as the UK State Pension can't be given away, as I suggested above, or whether they've found a different logic that leads to the same conclusion.

The article also comments on how to fill in columns a, b, and c when reporting cash.

http://hodgen.com/expatriation-feelz-bank-accounts-and-foreign-social-security/