John Richardson: Hello this is John Richardson speaking with you from Toronto Canada. today is December the 14th 2021 and well 2021 is drawing to an end and there are some Americans abroad who have extensions I guess till December the 15th or whatever but the bottom line is that the U.S. tax filing year I guess for 2020. Even though it’s 2021 is also drawing to an end providing relief and a bit of a vacation for Americans before they start again in a couple of weeks worrying about this, but my guest today is CPA Olivier Wagner who I think is fairly well known in the community of Americans abroad because he runs 1040 Abroad for Americans abroad and we’re going to talk about various issues impacting Americans abroad including I guess the renunciation and that sort of stuff but welcome Olivier, how are you today?

Olivier Wagner: Thank you for having me. I’m doing well.

J: I bet you’re doing particularly well since the year is actually coming to an end what is the deadline for those who got an extension to file the 2020 return right down to the last minute. is it tomorrow exactly, December 15th.

O: Yes, while the regular deadline is June 15, you can find an extension to October 15 but since the two extensions are overlapping you can send them a letter to get an additional two months which brings us to December 15. There are a few special circumstances in which people might have an extension beyond that but that’s fairly rare. When it comes to renunciations, we are facing a large backlog for appointments which is a legacy of the consulate office closures from last year.

J: That that is absolutely incredible – the way I experienced the drop in covid 19 issues was around the third week of March 2020 it just sort of came to a standstill worldwide. Is that your impression of it as well?

O: Yes I think most U.S. consulates were closed for anything other than emergencies from March 2020 to August 2020 so I think they were still issuing emergency passports and that’s pretty much the only service they did.

J: There’s certainly a huge backlog of people waiting to renounce at least in Canada. It’s moving again and they do seem to be trying to aggressively clear the background.

O: We already had a backlog of over six months prior to this and now they’re cleaning up all of these appointments that were scheduled between March and August 2020 to get those out of the way so as to clear the way for people who would like a new appointment.

J: We got this problem and I don’t know if you’re seeing this but we’ve got this huge problem that you know the run-up in real estate prices since the covid 19 thing began and the inability to get appointments I mean I find that there are actually a reasonable number of people who are now covered expatriates based on the net worth who would not have been if they’d been able to have gone through with their renunciations in the normal course. do you find that as well?

O: There might be some of that. I have people who want to sell their real estate and wait until after they renounce because the seller from primary residence is not taxed in Canada – that’s a really significant problem at least in Canada there’s certainly people who want to get the principal gain residence exemption.  They’re waiting to no longer be a U.S. citizen to do it right?

J: Exactly and so they’ve been delaying the sale of their condo or house until such time that they can get that appointment at the U.S. consulate. Now let’s imagine that somebody I was talking to somebody yesterday, for example, I started working with him literally three years ago, yes this is incredible, but he finally has an appointment in the first half of January. Let’s imagine a situation where somebody is waiting to renounce before they sell their house. Oh, why don’t we talk about what’s the effective date of loss of U.S. citizenship for tax purposes? We should give a little bit of background in that there are two ways to give up U.S. citizenship.

O: Yes, with one being a relinquishment and the other one being a renunciation.
A relinquishment, for immigration purposes, takes place when an expatriating act, typically acquiring foreign citizenship, takes place. When that person goes to the consulate to recognize that relinquishment, they would issue a Certificate of Loss of Nationality backdated to the time of that expatriating act.
A renunciation, for immigration purposes, will take place as of the date of the appointment at the consulate. That person will lose U.S. citizenship as of the date of that appointment and the Certificate of Loss of Nationality will reflect that.

There are more nuances when it comes to stopping being a tax resident for tax purposes.

J: We’ve got two kinds of citizenship basically, for immigration purposes and tax purposes.

With a relinquishment, the loss of citizenship would take place at the time of the expatriating act for immigration purposes.

For tax purposes, if the expatriating act took place after 2009, that person would remain a taxpayer until the date of the appointment to the consulate.

With a renunciation, the effective date will be the date of the appointment for both immigration and tax purposes.

O: Yes, and most of my clients, who become covered expatriates, became covered expatriates by having a net wealth in excess of $2 million.

You can easily reach that the two million dollars of assets – it’s net worth, it accounts for your liabilities and there are some planning opportunities by gifting some of their assets typically to a spouse. For instance, they can change the title on their house from being joined to being owned by their spouse only. They can gift cash or security so that’s basically the principle of gifting your way to lower net worth.

J: That’s interesting because would you agree that gifting you need to be a little careful because you’re making gifts outside the U.S. you need to pay attention to the laws that might apply in your country of residence right, but it’s so I don’t know what the answer is particularly I mean it varies from country to country but that’s an interesting problem for sure. Can somebody just make a gift to a spouse without any taxes from a U.S. point of view without any tax consequences?

O: They can give about 11 million dollars during their lifetime before paying a gift tax but in the case of a spouse if the amount is more than 145 000 they would file a gift tax return and what that would do is deduct the amount of the gift from the 11 million they can give during their lifetime. Obviously, the 11 million mark can be can change over time as new laws get passed and a new administration gets in charge of politics in the U.S.

J: Let’s stay on that for one second because this is an area where I’ve noticed that there’s a great deal of confusion, under the current lifetime limitation any U.S. citizen can give up to 11 million dollars lifetime to anybody they want without paying a gift tax. And that would include a non-citizen spouse – what if you were to make an 11 million dollar gift for example to a U.S. citizen spouse?

O: There are no limits between two U.S. citizen spouses.

J: Do you find that to be fairly common? Are a lot of people sort of gifting away assets to get below that two million mark?

O: That’s the typical way under which they get under the two million-dollar threshold.

J: Okay. Am I right in saying that under the current exemptions that a U.S. citizen can give I think 159 000 US dollars annually to a non-citizen spouse without it being subject to the gift tax regime at all, right?

O: That’s correct.

J: That’s interesting. That amount would be 15 000 if that was not a spouse and 159,000 to a non-resident spouse. So in other words, if you wanted if you’re a U.S citizen who wanted to stay out of the whole gift tax issue altogether you can make any my understanding is you can make any number of gifts to any number of individuals up to 15 000 per individual is that correct?

O: Yes

[end of the transcript, please continue to listen to the podcast above, or feel free to contact us]

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