Implications of turning into Non Resident Alien for U.S. investment accounts

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Topic Author
henry.krappa
Posts: 4
Joined: Wed May 05, 2021 11:09 am

Implications of turning into Non Resident Alien for U.S. investment accounts

Post by henry.krappa »

Hello,

I moved out of the US a while back and back to Europe. I have a Green Card but I'm considering renouncing to it as plans have changes and I might decide not to move back to the US.

I have a few investment accounts (Vanguard, Robinhood, Coinbase, LendingClub). After renouncing to the Green Card, I shall reach out to these platforms and let them know that my status flipped to Non Resident Alien.

I'm not eligible for the Exit Tax and as far as I understand, if platforms support I should be legally allowed to maintain my US funds. There would be U.S. tax withholding for dividends but not for capital gains.

I wrote to Vanguard and this is their reply:
There is a potential for a mandatory withholding on income generated in the account if you claim to be a nonresident alien. You would be able to maintain your funds at no additional cost.
I assume that by mandatory withholding they are referring to income generated by dividends but any insight here would help.

More in general, I would like to know from you the following: what are the implications of turning into NRA with respect to my accounts and the funds I have in those accounts? Are there any tax surprises that I should be aware of?

Thanks!
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Implications of turning into Non Resident Alien for U.S. investment accounts

Post by TedSwippet »

Welcome.
henry.krappa wrote: Wed May 05, 2021 11:22 am I moved out of the US a while back and back to Europe. ... What are the implications of turning into NRA with respect to my accounts and the funds I have in those accounts? Are there any tax surprises that I should be aware of?
Which country?

If it has an income tax treaty with the US, that will determine how your dividends are taxed; most treaties have a 15% US tax rate. Otherwise, the standard US rate for NRAs is 30%. If it has an estate tax treaty with the US, you should be relatively safe. If not, your US estate tax exemption becomes a measly $60k and you risk a lot of US estate tax.

US income tax treaties and US estate tax treaties are two separate things. The US maintains a decent number of income tax treaties, but only a small handful of estate tax treaties.

There may be other local-country tax surprises. For example, some countries have punitive taxes for what are (to them) 'offshore' funds, and this could include US domiciled funds and ETFs.

There is some information on this in the wiki. Perhaps start here:

US tax pitfalls for a non-US person moving to the US - Permanently leaving the US
Topic Author
henry.krappa
Posts: 4
Joined: Wed May 05, 2021 11:09 am

Re: Implications of turning into Non Resident Alien for U.S. investment accounts

Post by henry.krappa »

Thanks for your reply and for all the information.

The country is Germany. As far as I could tell there are income and estate treaties in place so it should be relatively safe.
TedSwippet
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Location: UK

Re: Implications of turning into Non Resident Alien for U.S. investment accounts

Post by TedSwippet »

henry.krappa wrote: Wed May 05, 2021 3:49 pm The country is Germany. As far as I could tell there are income and estate treaties in place so it should be relatively safe.
Yes. Germany should be fine.

After you ditch the green card and then file a W-8BEN, Vanguard will start withholding 15% US tax on dividends. This will not be recoverable from the US, but you should be able to claim up to that amount against any German tax liability you have on these dividends. No other US tax issues with capital gains or interest for example, and if withholding matches US tax liability -- and perhaps except for the first year, it should -- no need to file any 1040-NR tax return either.

As far as the other accounts you currently hold goes, you may find that some do not handle W-8BEN forms (for example, this report regarding Robinhood). In these cases, it is may be simplest just to cash in, transfer the money to Germany, and reinvest in similar assets in a local account.

In practice, it would probably be simplest to do this with all your accounts, but other complexities -- tax, out-of-market, forex and so on -- can then become factors. Maybe see how things go, with a view to perhaps transitioning to all local over time?
Topic Author
henry.krappa
Posts: 4
Joined: Wed May 05, 2021 11:09 am

Re: Implications of turning into Non Resident Alien for U.S. investment accounts

Post by henry.krappa »

Thanks Ted, your suggestion makes perfect sense to me.

Let's take RobinHood's example. If I end up selling and closing my account *after* switching to NRA status, will I still end up having to pay capital gains/etc to the IRS or will I be able to file everything with the German tax authorities?
crre
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Joined: Fri Apr 12, 2019 8:07 pm

Re: Implications of turning into Non Resident Alien for U.S. investment accounts

Post by crre »

an important implication is that your estate will be subject to 40% estate tax upon your death, with an exemption of only $60,000.

https://www.taxesforexpats.com/articles ... tates.html
TedSwippet
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Location: UK

Re: Implications of turning into Non Resident Alien for U.S. investment accounts

Post by TedSwippet »

henry.krappa wrote: Thu May 06, 2021 4:24 am Let's take RobinHood's example. If I end up selling and closing my account *after* switching to NRA status, will I still end up having to pay capital gains/etc to the IRS or will I be able to file everything with the German tax authorities?
Once you have filed your I-407 and rid yourself of the green card, everything financial you do after that is no concern of the US. So if you sell up and close accounts after the I-407, you then only have to deal with German tax on gains, later dividends, and so on.

Maybe take a look at how your very last tax return as a US taxable person is constructed:

Taxation of Dual-Status Aliens | Internal Revenue Service

If you choose 'split year', it will actually be a 1040-NR, with an attached 1040 'statement' showing things that occurred before you ditched the green card.

The rather open question is, how will this all work out when taking into account Robinhood's unwillingness to handle W-8BEN? For NRAs, US payers are supposed to withhold at appropriate NRA or treaty rates. If Robinhood does not, but pays out dividends gross, then you would have to fill out a 1040-NR and pay the US 15% of the dividends yourself. Or, if Robinhood pays out with 30% tax withheld (perhaps a 'default' case for paying to a foreign address with no treaty details on file), then you would need to fill out a 1040-NR to reclaim half of this, to get the correct 15% treaty rate. Perhaps annually, in either case.

Worth noting however that absolutely nothing about your non-US financial activities ever appears on a 1040-NR, so in practice filing this form is perhaps much easier than you might imagine.
crre wrote: Thu May 06, 2021 6:46 am An important implication is that your estate will be subject to 40% estate tax upon your death, with an exemption of only $60,000.

https://www.taxesforexpats.com/articles ... tates.html
It is indeed important for many former US residents and citizens. However, in the topic author's case, the country in question is Germany, and Germany has a good estate tax treaty with the US:

Germany-U.S. Estate and Gift Tax Treaty

On my (very cursory) reading, article 9 entirely exempts the topic author's holding from US estate tax, and even if it did not, article 10 paragraph 5 provides an exemption for up to $11mm of worldwide assets.
StoneFeeler
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Joined: Wed Feb 20, 2019 3:23 am

Re: Implications of turning into Non Resident Alien for U.S. investment accounts

Post by StoneFeeler »

following.
"Crossing the steam by feeling the stones"
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