This interview is part of TaxConnections Tax Intelligence Report Series as we profile our tax professional members. This week we present Olivier Wagner who has written many helpful articles read by tens of thousands of our readers interested in expatriate taxes. Olivier Wagner, Tax Managing Director, 1040 Abroad, Toronto, Canada is highly knowledgeable and educates taxpayers on expatriate tax matters. This interview provides many valuable links to his writing during this special interview. If you are an expatriate taxpayer you will want to read this interview and access these valuable and educational links.
Kat Jennings: Can You Tell Me How You Got Started Doing Expatriate Tax Returns?
Olivier Wagner: Funny story. I always had the “foreign on my mind”, as I dreamt of leaving France. I was working at Moody’s, the credit rating agency in New York when the 2008 hit, while my position was safe, and I wasn’t concerned about losing my job, the work conditions did get noticeably worse.
I started to dream of working for myself and have a location independent business.
In 2011, I moved to Canada, and I was a US citizen at that point. Given my skill set, I figured that preparing tax returns for US citizens who live outside the US was a good fit. In addition, I figure that my clients would be spread out geographically, which would serve me well in having a location independent business.
In the coming months became an Enrolled Agent, I subsequently became a CPA (New Hampshire) and became fully nomadic from 2016-2018. I am based in Toronto, Canada but I still regularly hit the road.
Kat Jennings:Can You Tell Us About The New IRS Program That Enables Former U.S. Citizens To Become Compliant With U.S. Tax Law Without Risking Any Penalties?
Olivier Wagner: Yes, absolutely. By way of background, people were renouncing without having filed the prior 5 years of tax returns which, wither due to ignorance or defiance. It would by itself make them covered expatriate, subject to the exit tax.
The IRS found it somewhat unfair, for people who are no longer US citizen, have not and possibly never regarded themselves as US citizens.
The requirement is that:
– They are not otherwise covered expatriates
– They never filed US tax returns (hence my comment above)
You are absolutely correct in that penalties are not assessed, but it gets better than that:
– If the amount of tax owing is less than 25,000 USD, you wouldn’t actually have to pay it
– A lesser benefit is that one doesn’t need a Social Security Number to use the Relief procedure for certain former citizen. A SSN is however required if using the Streamlined Foreign Offshore Procedure, hence that is a benefit for the Relief procedure for certain former citizen for those who don’t have an SSN..
Kat Jennings: How Can The Recovery Rebate Credit Help Me In Renouncing US Citizenship?
Olivier Wagner: Well, there are certain compliance costs associated with renouncing, to file the 5 years of tax returns required to avoid covered expatriate status.
Then, one would pay the 2,350 USD of fees directly to the US consulate.
In addition to any financial planning/ tax owing.
The good news is that the US issued covid 19 stimulus checks of $1,200, $600 and $1,400.
Those who didn’t receive it can claim it on their 2020 & 2021 tax returns.
They can claim the refundable credit of $1,800 in 2020 & $1,400 in 2021, provided that their income for those years was less than $75,000.
The deadline to claim a refund on the 2020 tax return is June 15, 2024.
As such, these refunds, totaling $3,200, can offset some of the costs incurred in rounding US citizenship.
Kat Jennings:How Does A Person Renounce U.S. Citizenship?
Olivier Wagner: They would need to appear before a US consulate to renounce. That is the immigration aspect of it.
If they are ‘covered expatriates’, they would be subject to the exit tax. In many cases it’s easier said than done, with wait times in excess of a year in Canada.
But the cores is planning: they would file a final tax return for the year in which they renounce and we would need to ensure that either they can avoid covered expatriate status or are comfortable with the exit tax owing.
Kat Jennings: Is An Expatriate Entitled To A Tax Refund When Living Abroad?
Olivier Wagner: Typically, in countries where the tax rate is higher than the US (which includes Canada and most of Western Europe), they wouldn’t owe anything but also wouldn’t be entitled to a refund.
They do get refunds, mostly for 2 reasons: the covid 19 stimulus checks on 2020 & 2021 tax returns and 2) the additional child tax credits – those living overseas would still have the older amount of $1,500 per child per year.
Kat Jennings: What Is Form 1116 Foreign Tax Credit And How Do I File It?
Olivier Wagner: Form 1116 is used to claim the foreign tax credit. Taxpayer would get a dollar-for-dollar credit for taxes paid to a foreign country.
It is non-refundable but the unused portion can be carried forward for up to 10 years.
The credit is broken down between several baskets. The main 3 are general income, passive income and resourced by treaty.
The credit in once basket can not offset the tax liability arising from the income in another basket.
Kat Jennings: Is There any U.S. Canadian Treaty Relief From Double Taxation?
Olivier Wagner: Yes, but when it comes to US citizens using it, they should be mindful of the savings clause, found in article XXIX, paragraph 2 which prevents them from using it. A list of articles that survive the savings clause and therefore can still be used by US citizens can be found in article XXIX, paragraph 3.
Kat Jennings: What Is Form W-8BEN And Why Is It So Important?
Olivier Wagner: When dealing with a payor, you would identify yourself as a US citizen (W-9), foreigner (W-8BEN) or a foreign entity (W-8BEN-E). This will drive the kind of tax withholding and the tax slips that the IRS will use to match the income reported on the tax return.
A non-resident alien with the appropriate amount of FDAP tax withheld at source doesn’t have to file a tax return, which is another reason to have a proper form W-8BEN on file with the payor.
Kat Jennings:What Should Expatriates know About Dividend Taxes?
Olivier Wagner: Tax treaties can be used to have foreign dividends classified as qualified dividends and therefore subject to long-term capital gains rates.
The sourcing is based on where the payor is incorporated. As such, if the payor is a foreign company, the taxpayer can use the foreign tax credit to offset the US tax liability.
Kat Jennings: What Should Expatriates Who Are U.S. Shareholders Of A Passive Foreign Investment Company Be Aware Of?
Olivier Wagner: A PFIC is a foreign corporation that meets certain criteria related to its income and asset composition. It includes many non-U.S. mutual funds, some foreign insurance policies, and other foreign investment vehicles. It’s essential to determine if the foreign investment you hold qualifies as a PFIC.
Kat Jennings:What Can You Tell Me About A Passive Foreign Investment Corporation And Form 8621?
Olivier Wagner: U.S. shareholders of PFICs have specific reporting obligations. They must file Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund,” with their annual tax return. This form requires detailed reporting of the PFIC’s income, gains, and distributions.
Earnings from a PFIC can be taxed using one of several ‘regime’:
Qualified Electing Fund (QEF) Election: It is the most favorable one but it requires the PFIC to issue a QEF statement.
Mark-to-Market Election: Under this regime, you would report the change in fair market value as income. It does require a timely election
Excess Distribution regime: This is the default regime and also the most punitive one.
Kat Jennings:What Is A Bona Fide Residence Test For U.S. Expatriates?
Olivier Wagner: The Bona Fide Residence Test is one of two tests used to qualify for the Foreign Earned Income Exclusion (FEIE), which allows taxpayers to exclude up to 120,000 USD of foreign earned income.
To qualify for the Bona Fide Residence Test, a U.S. expatriate must meet the following conditions:
Bona Fide Residence: The individual must also establish that they have a bona fide residence in the foreign country. This means they have a genuine, regular, and continuous residence in that country. Factors such as the length of stay, family ties, employment, and other ties in the foreign country are taken into account to determine if the individual’s residence is bona fide
(the other test is the physical presence test:)
Physical Presence: The individual must be physically present in a foreign country for at least 330 full days during a consecutive 12-month period. The 330 days do not need to be continuous; they can be scattered throughout the year.
Kat Jennings: Can You Tell Me If Expatriates Are Getting Audited Frequently? If So, What Trips Up An Audit For Expatriate Clients Today?
Olivier Wagner: To be honest, I don’t experience many serious audits. Most are correspondence audits questioning a single line item.
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