FOR LIVE PROGRAM ONLY Form 8854 Exit Tax Calculations and Reporting: Minimizing the IRC 877A Expatriation Tax THURSDAY , OCTOBER 26, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. • To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Form 8854 Exit Tax Calculations and Reporting Oct. 26, 2017 Philip D. W. Hodgen Hodgen Law, Pasadena, Calif. phil@hodgen.com Ann M. Seller Kohnen & Patton, Cincinnati aseller@kplaw.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
I. Exit Tax Provisions of Section 877A A Quick Overview of the Income Tax Rules 26 Oct 2017 5
Personal Status: Citizen or “Long -Term Resident” Paperwork Paperwork Start Plus Tax Citizen or Expatriation Covered Long-Term Expatriate Three Tests Event Expatriate Resident IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1) 26 Oct 2017 6
Something Happens: That Personal Status Ends Paperwork Paperwork Start Plus Tax Citizen or Expatriation Covered Long-Term Expatriate Three Tests Event Expatriate Resident IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1) 26 Oct 2017 7
Result: You are an Expatriate Paperwork Paperwork Start Plus Tax Citizen or Expatriation Covered Long-Term Expatriate Three Tests Event Expatriate Resident IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1) 26 Oct 2017 8
And If You Are Rich (Unless Exempt) or Bad . . . Paperwork Paperwork Start Plus Tax Citizen or Expatriation Covered Long-Term Expatriate Three Tests Event Expatriate Resident IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1) 26 Oct 2017 9
You Are a Covered Expatriate Paperwork Paperwork Start Plus Tax Citizen or Expatriation Covered Long-Term Expatriate Three Tests Event Expatriate Resident IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877A(g)(2) IRC § 877(a)(2) IRC § 877A(g)(1) 26 Oct 2017 10
Income Tax at Exit: Three Special Rules • Specified Tax-Deferred Accounts - (IRAs, for example). Deemed distribution (no early distribution penalty). IRC §877A(e). • Deferred Compensation - “ineligible” taxed as a deemed present value lump sum distribution; “eligible” has 30% withheld from distributions. IRC §877A(d). • Trust Distributions - 30% withholding on the taxable portion of the trust distributions when paid. IRC §877A(f). 26 Oct 2017 11
Income Tax at Exit: Everything Else • Everything Else - deemed sale; gain/loss recognized. IRC §877A(a)(1). • The first $699,000 of capital gain is exempted from taxation (2017 expatriations). IRC §877A(a)(3), Rev. Proc. 2016-55, §3.33. Indexed for inflation. 26 Oct 2017 12
II. COVERED EXPATRIATES Ann M. Seller Kohnen & Patton LLP aseller@kplaw.com 513-381-0656
Covered Expatriate: How do you become one? Who can become one? 1. U.S. Citizens and certain Green Card Holders a. Green Card for 8 of the previous 15 years i. Dual Resident Rule Objective Test: three prongs 1. Compliancy Test: Must be able to certify compliance with all requirements under the Internal Revenue Code for the past five years (Title 26) 2. Average Income Tax Liability over the previous 5 years : $162,000 (2017) 3. Net Worth Test: $2,000,000 Objective Test: Exceptions to the application of the financial prongs 1. Dual citizens at birth 2. Minors (age 18½) 14
Covered Expatriate: Net Worth Test Net Worth Test: $2,000,000 I. Only guidance available is Notice 97-19 1. Use gift tax valuation rule under IRC 2512 to value assets 2. Valuation of Beneficial Interest in Trusts a. Two Steps: i. First, allocate all interest in trust property to the beneficiaries 1. Facts and Circumstances 2. Intestacy rules under the Uniform Probate Code, as amended ii. Second, value the allocated interest under IRC 2512 b. Example: B’s father established a Trust for the benefit of B and C. Facts: Trust income and corpus may be distributed at the trustee's discretion to either B or C - All of the interests in property owned by Trust 2 must first be allocated to either B or C - If the facts and circumstances do not indicate how to allocate the trust's property, use the rules of intestate succession (determined by reference to B's father's intestacy) in the Uniform Probate Code (UPC) - If B's father died intestate, the UPC would allocate his property equally between B and C Conclusion: B will be treated as owning half of the interests in property owned by Trust 15
III. Components of Form 8854: Overview A Quick Overview of Form 8854 26 Oct 2017 16
Why Form 8854 Exists • Required by IRC §6039G • Different parts apply depending on your expatriation date. • Filing Form 8854 is not necessary to terminate U.S. tax status as a resident alien or U.S. citizen. 26 Oct 2017 17
III. Components of Form 8854: Part I Expatriating Acts (Line 5) 26 Oct 2017 18
Form 8854, Part I, Line 5: Expatriation Date 26 Oct 2017 19
Citizen: What Is Your Expatriation Date? 26 Oct 2017 20
Citizens: How to Relinquish Nationality • U.S. citizens have U.S. nationality. • An “expatriate” is a U.S. citizen who relinquishes U.S. nationality. IRC §877A(g)(2)(A). • “Relinquish” means doing one of six voluntary acts with the intention of relinquishing U.S. nationality. 8 U.S.C. §1481(a). • Most common: renunciation . 8 U.S.C. §1481(a)(5). 26 Oct 2017 21
Citizens: Expatriation Date (Renunciation) • “The date an individual relinquishes citizenship”. IRC §877A(g)(3)(A). • Expatriation date for relinquishment by renunciation is the earlier of: • The date of renunciation. IRC §877A(g)(4)(A). • The date the State Department issues a Certificate of Loss of Nationality. IRC §877A(g)(4)(C). 26 Oct 2017 22
Citizens: Expatriation Date (Other Relinquishment) • Earlier of: • The date the individual furnishes a signed statement of voluntary relinquishment of United States nationality under 8 U.S.C. §1481(a)(1)-(4). IRC §877A(g)(4)(B). • The date the State Department issues a Certificate of Loss of Nationality. IRC §877A(g)(4)(C). 26 Oct 2017 23
Retroactive Relinquishment is a Problem • Question : you file paperwork in 2017. The Certificate of Loss of Nationality is issued in 2017 and says “Your U.S. nationality terminated in 1978.” When did you expatriate? • Answer : I think your expatriation date is 1978. • Desirable : don’t have to worry about IRC §877A. • Logic : See prior IRC §7701(n) that explicitly said you remain a citizen until Form 8854 filed. Eliminated when IRC §877A replaced IRC §877. 26 Oct 2017 24
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