[Nononymous]

I guess it must have come down to some of my ISAs which were spread out in different mutual funds which had shares in US companies. Still, the amount of interest they accrued was and is very low, therefore not reaching a threshold - until the £5 came in

That would be your paperwork nightmare - ISAs with mutual funds. The US considers it a "foreign trust" with various complex reporting requirements, even if nothing is being earned. Far better not to report them, or call them ordinary savings s, or not file altogether.

 

[Ah2g]

Yes, I agree with you on that! I was advised to get rid of them altogether. I think I will look at this option - move them into something else entirely. I'm not talking about a lot of money here so not worth the pain of it

 

[Nononymous]

Non-compliance is your best friend.

 

[Bevdeforges]

I have to say that I concur with what Nononymous has told you.

If you decide you want to file, I would just report the ISAs as "bank" s. Declare the interest as bank interest and skip all the fancy forms and declarations. That way you have declared them and the related interest. If they have questions, they'll be in touch. But seriously, don't hold your breath to hear from them.

But you're highly unlikely to hear anything back as long as your filings show that you don't owe any tax to the US.

If you're planning on renouncing anyhow, you can just state on those forms (the ones for renouncing) that you believe you are compliant and again, you're unlikely to hear anything further on the subject.

A friend of mine renounced last year and that's how it went for her. She hadn't filed for many years - didn't owe any tax, but under a strict reading of the rules, I suspect she might have been subject to filing. It took several months to get her CLN (Certificate of Loss of Nationality) but it did show up.

 

[Nononymous]

Sadly, you fell into the clutches of tax advisors. Their advice was expensive, and not really in your best interests. I expect you can still safely decide to ignore the IRS even if some things have been filed in the past.

 

[byline]

The reason I'm posting now is that the rules recently changed and anyone earning anything over $5 will have to submit a 1040.

Actually, this is true only for someone in the "married, filing separately" category. For all the other categories the minimum threshold is much higher. Why in the world the "married, filing separately" group got singled out, I have no idea. Does anyone else know?

Before I found this out, I was relieved because, with the standard deduction being raised for the 2018 tax year, I thought I would no longer have to file a 1040. Alas, I am in the "married, filing separately" category, so thanks to that $5 minimum threshold I still had to file.

 

[Bevdeforges]

Actually, this is true only for someone in the "married, filing separately" category. For all the other categories the minimum threshold is much higher. Why in the world the "married, filing separately" group got singled out, I have no idea. Does anyone else know?.

Married, filing separately has a lower threshold and several other odd restrictions because of the fear that domestic couples could use separate filings to avoid taxes by shifting deductions to the spouse who would benefit the most by taking them. The big example they always mention in tax classes in business school is the requirement that for married people filing separately, both spouses MUST either itemize deductions or both spouses must take the standard deduction. It's one reason that they require you to give your spouse's name and SSN when you file separately - so they can match up the returns to make sure you play by the rules and aren't doing anything "tricky."

Obviously, this is not relevant to those of us married to non-resident aliens who don't have to file. But the system isn't set up for those of us living overseas.

 

[JustLurking]

Actually, this is true only for someone in the "married, filing separately" category. For all the other categories the minimum threshold is much higher. Why in the world the "married, filing separately" group got singled out, I have no idea. Does anyone else know?

My vote goes to the elimination of personal exemptions in the 2017 TCJA.

For 2017 and earlier, the MFS filing threshold matched the personal exemption, so $4,050 for 2017. Now that the personal exemption has gone, the lowest 10% tax bracket hits the first $1 of taxable income.

Why $5 rather than $0 as the new threshold, then? 10% of $5 is $0.50, which would round up to $1. 10% of less than $5 rounds down to zero. If you earned just $5, the IRS would like $1 of that. (The fact that it will cost them far more than $1 in processing costs to collect it doesn't seem to bother them at all.)

 

[underation]

My vote goes to the elimination of personal exemptions in the 2017 TCJA.

For 2017 and earlier, the MFS filing threshold matched the personal exemption, so $4,050 for 2017. Now that the personal exemption has gone, the lowest 10% tax bracket hits the first $1 of taxable income.

Why $5 rather than $0 as the new threshold, then? 10% of $5 is $0.50, which would round up to $1. 10% of less than $5 rounds down to zero.

Well spotted.

If you earned just $5, the IRS would like $1 of that. (The fact that it will cost them far more than $1 in processing costs to collect it doesn't seem to bother them at all.)

Does US law allow the IRS to set a zero threshold? Anyone with no taxable income has nothing to report on an income tax return.

 

[Bevdeforges]

My vote goes to the elimination of personal exemptions in the 2017 TCJA.

For 2017 and earlier, the MFS filing threshold matched the personal exemption, so $4,050 for 2017. Now that the personal exemption has gone, the lowest 10% tax bracket hits the first $1 of taxable income.

Why $5 rather than $0 as the new threshold, then? 10% of $5 is $0.50, which would round up to $1. 10% of less than $5 rounds down to zero. If you earned just $5, the IRS would like $1 of that. (The fact that it will cost them far more than $1 in processing costs to collect it doesn't seem to bother them at all.)

That may be true for MFS, however for the other filing statuses, the threshold was generally the personal exemption PLUS the standard deduction - so around $10,000 or so for Single and close to $20,000 for t filers.

The rationale with MFS has always been that they "need" to be able to check that both of a married couple are treating their deductions consistently (i.e. both take the standard deduction for their filing status, or both itemize deductions, even if that means one partner has deductions less than the standard deduction). What I never "got" was why they wouldn't just allow someone married to a NRA to file as "single."

 

[underation]

That may be true for MFS, however for the other filing statuses, the threshold was generally the personal exemption PLUS the standard deduction - so around $10,000 or so for Single and close to $20,000 for t filers.

The rationale with MFS has always been that they "need" to be able to check that both of a married couple are treating their deductions consistently (i.e. both take the standard deduction for their filing status, or both itemize deductions, even if that means one partner has deductions less than the standard deduction). What I never "got" was why they wouldn't just allow someone married to a NRA to file as "single."

Wouldn’t they have to create a new status of “Married to a NRA who is not required to file”?

Some NRAs do have a requirement to file US returns, if I understand correctly? If so, they would be itemising deductions so their spouse would not be entitled to claim the standard deduction.

If I understand correctly.

 

[Bevdeforges]

Wouldn’t they have to create a new status of “Married to a NRA who is not required to file”?

Some NRAs do have a requirement to file US returns, if I understand correctly? If so, they would be itemising deductions so their spouse would not be entitled to claim the standard deduction.

If I understand correctly.

If an NRA is filing a 1040NR then I think all bets are off. There is an option whereby the NRA spouse of a US citizen/taxpayer can elect to file tly with their US spouse - but it's usually not advantageous, since it calls all of the NRA's worldwide income into the equation. (Filing a 1040NR, one only needs to declare US source income.)

But I fail to see why they could just allow someone married to an NRA to file as single. There is no "proof" of marriage (or divorce) required when changing your filing status.

 

[underation]

If an NRA is filing a 1040NR then I think all bets are off. There is an option whereby the NRA spouse of a US citizen/taxpayer can elect to file tly with their US spouse - but it's usually not advantageous, since it calls all of the NRA's worldwide income into the equation. (Filing a 1040NR, one only needs to declare US source income.)

But presumably the USC spouse could be filing as single and claiming the standard deduction, while the NRA spouse was filing the 1040NR and reporting only US income. Which would mean the couple were being taxed more favourably than a US-resident couple with similar income. Effectively, they’d be gaming the system.

Perhaps that’s the kind of thing the MFS restrictions are meant to prevent.

 

[Bevdeforges]

But presumably the USC spouse could be filing as single and claiming the standard deduction, while the NRA spouse was filing the 1040NR and reporting only US income. Which would mean the couple were being taxed more favourably than a US-resident couple with similar income. Effectively, they’d be gaming the system.

Perhaps that’s the kind of thing the MFS restrictions are meant to prevent.

ittedly that is what they're trying to prevent - but I'm thinking of something like the Dutch tax system where everyone is taxed separately. A married couple can split the kids however they like (one partner takes all three, or they split them between themselves) - but that's not even relevant given that the personal exemptions are now a thing of the past in the US.

And if the NRA spouse has no US income, they have no filing obligation anyhow. It's actually only a function of the US "citizenship based taxation" thing that the US spouse has to file at all if living outside the US.

I file my MFS returns, excluding my NRA husband's income and reporting only my own. We also file French returns tly. How is that "more favorable" than a US-resident couple with similar income? The US is the only country (save Eritrea) that insists on taxing based on citizenship.

 

[underation]

ittedly that is what they're trying to prevent - but I'm thinking of something like the Dutch tax system where everyone is taxed separately. A married couple can split the kids however they like (one partner takes all three, or they split them between themselves) - but that's not even relevant given that the personal exemptions are now a thing of the past US.

Yes, it’s the same in the UK. The UK is also different from the US in that nobody needs to file unless they have income outside the UK withholding system (or have another reason for needing to file).

And if the NRA spouse has no US income, they have no filing obligation anyhow.

It might be to their advantage to file, though, if they do have US income.

It's actually only a function of the US "citizenship based taxation" thing that the US spouse has to file at all if living outside the US.

They don’t (have to file). And most don’t. But if they have US-source income it might be to their advantage to do so - for instance, to claim deductions (standard or itemized) and get a refund of tax already paid on US income via withholding.

I file my MFS returns, excluding my NRA husband's income and reporting only my own. We also file French returns tly. How is that "more favorable" than a US-resident couple with similar income?

That’s not what I said. If a USC was filing as single and claiming the standard deduction, while married to a NRA who was filing and claiming a refund on the basis of a treaty - that would (or could) result in the USC-NRA couple being taxed more favourably on their US income than a US-resident couple. That’s what I’m suggesting the MFS rules may be designed to prevent.

The US is the only country (save Eritrea) that insists on taxing based on citizenship.

Except that it can’t insist. It can and does refuse to provide USCs with a pathway to non-US-tax-residence. But it can only assess US tax on non-US income if (a) the USC reports the income as US-taxable and (b) the income hasn’t already been fully taxed by the residence country.

 

[Bevdeforges]

It depends on the nature of the US income whether or not it even makes a difference to the NRA spouse whether s/he files or not. An NRA spouse who is drawing a US pension (i.e. US social security) will have 30% of 85% of the payments withheld for taxes. That's precisely what they would owe if they chose to file an NR return - and yes, that is designed to eliminate the filing requirement. "Take the money and run."

But if they have US-source income it might be to their advantage to do so - for instance, to claim deductions (standard or itemized) and get a refund of tax already paid on US income via withholding.

Again, it depends on the source of the US income. Withholding isn't like in the UK or many other places where having the "right" amount withheld means you don't have to file at all. It's the taxpayer who indicates how much withholding should be taken - and it's the taxpayer who is penalized if withholding was inadequate (subject to certain "safe harbor" rules). In any event, you do have to file, regardless.

For any income that is reported by the source to the IRS, it's highly advisable to file, but in any event, you'll be entitled to take the standard deduction (or itemized deductions, though that's getting more rare with the recent tax law changes).

If a USC was filing as single and claiming the standard deduction, while married to a NRA who was filing and claiming a refund on the basis of a treaty - that would (or could) result in the USC-NRA couple being taxed more favourably on their US income than a US-resident couple. That’s what I’m suggesting the MFS rules may be designed to prevent.

Actually, what the MFS rules are designed to prevent is the situation where the spouse with the higher income takes ALL the deductions, exemptions and whatever is available, and the lower earning spouse has only nominal income. Basically, the MFS status is roughly the same as filing single, with a few choices and options eliminated - more based on domestic possibilities for cheating than on any consideration of the expat situation. The feeling in the halls of government seems to be that "expats" are all free-spending executives on expense s, swilling champagne and caviar.

 

[underation]

It depends on the nature of the US income whether or not it even makes a difference to the NRA spouse whether s/he files or not. An NRA spouse who is drawing a US pension (i.e. US social security) will have 30% of 85% of the payments withheld for taxes. That's precisely what they would owe if they chose to file an NR return - and yes, that is designed to eliminate the filing requirement. "Take the money and run."

True - in a treaty country, it depends on what the treaty says. Sticking with social security as an example, the -US treaty gives taxing rights to the source country, so the withholding agent (the SSA) withholds US tax. The UK-US treaty gives taxing rights to the residence country, so the SSA doesn't withhold tax. Either way, there's no need and no incentive for the NRA to file a 1040NR. Thanks for the correction.

Again, it depends on the source of the US income. Withholding isn't like in the UK or many other places where having the "right" amount withheld means you don't have to file at all. It's the taxpayer who indicates how much withholding should be taken - and it's the taxpayer who is penalized if withholding was inadequate (subject to certain "safe harbor" rules).

Yes, that's one of the carrots, for USCs with US-taxable income. The US system aims to tax first and then let the taxpayer reduce the tax by filing that all-important 1040 to claim the correct deductions - thus generating a refund and ending up, eventually, paying the correct tax.

Whereas the UK system aims to withhold the correct amount in the first place, making a return unnecessary, for most taxpayers.

In any event, you do have to file, regardless.

Or, as I would say, if you're receiving US-source income it may be advantageous for you to file.

For any income that is reported by the source to the IRS, it's highly advisable to file, but in any event, you'll be entitled to take the standard deduction (or itemized deductions, though that's getting more rare with the recent tax law changes).

I would say, for any income for which the US has the taxing rights, the USC should file a return in order to pay the correct US tax.

Same as here in the UK, where I nowadays file a return in order to report my US social security income to the UK and pay the UK tax due. To do otherwise would be tax evasion.

Actually, what the MFS rules are designed to prevent is the situation where the spouse with the higher income takes ALL the deductions, exemptions and whatever is available, and the lower earning spouse has only nominal income. Basically, the MFS status is roughly the same as filing single, with a few choices and options eliminated - more based on domestic possibilities for cheating than on any consideration of the expat situation.

Yes - I was misunderstanding the NRA / 1040NR situation. Thanks for the correction.

The feeling in the halls of government seems to be that "expats" are all free-spending executives on expense s, swilling champagne and caviar.

I think it's more just an endlessly self-perpetuating cock-up rather than being caused by legislators' views on expats. I don't suppose most representatives give a thought to the problems of people who can't or are unlikely to vote or send serious donations.

It's a shame that some US tax advisers have scared some USC expats into being so terified of the US that they feel scared not to file unnecessry returns and in some cases pay unnecessary tax on income for which the US doesn't have taxing rights.

 

[Bevdeforges]

Or, as I would say, if you're receiving US-source income it may be advantageous for you to file.

I would say, for any income for which the US has the taxing rights, the USC should file a return in order to pay the correct US tax.

One tiny quibble here - for a US citizen/taxpayer, you do have the ability to receive your US SS (and most other forms of US source income - other than wages and salary) completely un-withheld. There's a reasonable chance that you would have to do quarterly "estimated payments" but that's a game you can play if you like.

I think it's more just an endlessly self-perpetuating cock-up rather than being caused by legislators' views on expats. I don't suppose most representatives give a thought to the problems of people who can't or are unlikely to vote or send serious donations.

IMHO it's more a matter of how things were set up in the beginning, with no consideration of any "real American" who would be living outside the US on anything but a temporary basis. Heck, some of the US expat groups who periodically lobby of Congress back there find that there are plenty of senators and reps who have no idea that citizens living overseas even have to pay taxes.

It's a shame that some US tax advisers have scared some USC expats into being so terified of the US that they feel scared not to file unnecessry returns and in some cases pay unnecessary tax on income for which the US doesn't have taxing rights.

That's how the IRS works. Even when it comes to USC living in the US. They don't have the resources to control and enforce the regulations they've got - so they use the "shock and awe" approach to scare taxpayers into paying up, and sometimes paying more than they actually owe.

 

[underation]

IMHO it's more a matter of how things were set up in the beginning, with no consideration of any "real American" who would be living outside the US on anything but a temporary basis. Heck, some of the US expat groups who periodically lobby of Congress back there find that there are plenty of senators and reps who have no idea that citizens living overseas even have to pay taxes.

Understandably. I certainly had no idea that US citizens living outside the US and receiving no US income were theoretically expected by the US to file US tax returns.

There was no way I could have known, and the IRS never bothered to mention it. It simply didn’t matter, if you had no US income.

That changed at some point in the 80s, after the Reagan tax reforms were brought in. That’s when a little notice appeared in the US port notifying port holders that they were required to continue filing.

Not seen by me, until FATCA occurred and I went back through my old ports and found it.

I think now, that it changed because of the Subpart F legislation and the deferral of US corporation tax on foreign earnings. Taxing the expat USC became the key (in some cases) to treating those earnings as if they were US-source; and when the law changed and the transition tax was created, some badly-advised expats got hit very badly.

That's how the IRS works. Even when it comes to USC living in the US. They don't have the resources to control and enforce the regulations they've got - so they use the "shock and awe" approach to scare taxpayers into paying up, and sometimes paying more than they actually owe.

The IRS never made any attempt to scare me. Scared USC expats did (thinking they were being helpful), after I started asking questions; and no doubt if I’d sought advice from a US tax advisor, s/he would have tried to scare me, but the IRS simply didn’t. That might well have been different, if I’d started filing US returns rather than renouncing. The IRS seems to me to understand very well what it can and cannot do beyond US borders.

 

[JustLurking]

Basically, the MFS status is roughly the same as filing single, ...

Strictly, MFS is roughly the same as half of MFJ. However, half of MFJ is often worse than filing single, thanks to the persistence of the marriage tax penalty:

The marriage penalty in the United States refers to the higher taxes required from some married couples with both partners earning income that would not be required by two otherwise identical single people with exactly the same incomes.
...
The marriage penalty can be even worse in cases where one spouse is not a citizen or resident of the United States[citation needed]. Although that spouse cannot be required by US law to pay US taxes, since the US person is still required by law to file taxes on worldwide income, two choices are left. The US person may either file as 'Married Filing Separately' (or 'Head of Household' if they have at least one qualifying person who is not their spouse) or try to convince their spouse to voluntarily pay US income taxes on their income by filing a t return. The former requires using the 'Married Filing Separately' or 'Head of Household' tax brackets, which are less beneficial than 'Married Filing tly'. The latter allows that person to use the more favorable 'Married Filing tly' tax brackets but requires paying tax on the non-US person's income, which would not be required for two otherwise identical single people.

This also hits nonresident aliens. For 1040NR filers, MFJ and HOH are not options at all. The only choices are single, or if married then MFS which is less beneficial than single.