Moving back to Europe from US - Thinking of selling everything next week

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rjm_cali
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Moving back to Europe from US - Thinking of selling everything next week

Post by rjm_cali »

The content is not quite as dramatic as the headline :-)

We are selling up in the 2022 and moving back to UK before heading to France in 2023. The house sale in the US will blow our MFJ CG allowance of $500K so I'm inclined to realise all the CG on the fund portfolio before the end of this year. I am right in thinking that the sale of a primary residence is not an extra $500K allowance ? Would be easier if it was.

The reason I don't plan on keeping my money invested in the US is because I'm giving up my LTGC and as I understand any sales of assets by a NRA will have a default withholding of 30% which I can then reclaim (or offset) . As I'm giving up my GC so I can sever all links to the IRS I'd really just rather pay it now and be done with it, resetting my cost base in the process. CG will be lower here than in France when the flat rate is applied there.

N.B I won't be moving to cash. I'll use any sale to rebalance and switch to ETFs
TedSwippet
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by TedSwippet »

rjm_cali wrote: Tue Dec 07, 2021 12:58 pm The house sale in the US will blow our MFJ CG allowance of $500K so I'm inclined to realise all the CG on the fund portfolio before the end of this year. I am right in thinking that the sale of a primary residence is not an extra $500K allowance ? Would be easier if it was.
I am not sure what you mean by your first sentence. My recollection is that the US has no capital gains "allowance" as such; rather, it has a 0% rate that you might (or might not) qualify for based on your total income. Is that wrong?

And on your second sentence, I believe you can exclude up to $250k ($500k if married filing jointly) from your taxable income if you meet the two-years-out-of-five property residency test. Note however that you lose this exclusion if you are caught by the US's vicious and spiteful 'exit tax'.
rjm_cali wrote: Tue Dec 07, 2021 12:58 pm The reason I don't plan on keeping my money invested in the US is because I'm giving up my LTGC and as I understand any sales of assets by a NRA will have a default withholding of 30% which I can then reclaim (or offset) . As I'm giving up my GC so I can sever all links to the IRS I'd really just rather pay it now and be done with it, resetting my cost base in the process. CG will be lower here than in France when the flat rate is applied there.
Both the UK and France have decent income tax and estate tax treaties with the US. The income tax treaties for both countries reduce the 30% default US withholding tax on dividends to 15%; this matches the rate paid internally by EU domiciled ETFs that hold US stocks.

In tandem with the above, and to the extent that you want/need to sell and reorganise your investments (and don't have to grapple with the US's barbaric 'exit tax'), have you considered not selling until after you leave the US, ditched the green card, and become a UK resident? To do this, when you move you would ideally want to hold either US or other stocks directly, or US domiciled ETFs that have UK reporting status.

You would face UK capital gains tax on the entire gain since purchase, but no US capital gains tax once free and clear of US tax tentacles. The UK has a decently sized annual capital gains allowance, £12,300, and capital gains tax rates of 10% lower rate and 20% higher rate; taken together, these could well mean you pay less in capital gains tax than you would if you sold up as a US resident (particularly if you live in California, which your username sort-of implies). Something similar may apply if you were to wait until a French resident. I don't know enough about how French tax works to say more on that, though.

Conversely, on the property, you would probably want to sell that before ditching the green card, to avoid falling foul of FIRPTA.

You can find a few more details on how best to divorce the US in this wiki page section:

US tax pitfalls for a non-US person moving to the US - Permanently leaving the US
Last edited by TedSwippet on Tue Dec 07, 2021 3:20 pm, edited 3 times in total.
random_walker_77
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by random_walker_77 »

The 500K capital gains exclusion for a married couple, on your primary residence, is only for your home, and in that respect it's "an extra 500K allowance." The excess gains beyond that is taxable LTCG (long term capital gains) and if your marginal tax rate for that extra gain is better by shifting some LTCG into this year, then yes, selling some of your stocks now might be good.

Or not. It depends on your other income. LTCG can be taxed at 0%, 15%, 20**%, plus an additional 3.8% NIIT tax. If you sell now, what tax rate are you looking at? If this income falls between 80K and 250K, then it's 15% LTCG w/ no NIIT. Above 250K, then it's 18.8% with NIIT. Above $501K, then it'd be at 23.8**%. So if you're moving early next year, you might not have that much other income. For example, if you had 550K of profit from the house, then the 50K of taxable LTCG plus whatever gains from selling your investments could conceivably be at 0% and 15%, making it better than selling this year.

**pending legislation, the BBB act, may increase the 20% bracket to 25%, retroactive to 9/13/2021. Noting it here since it changes the answer, but only if it becomes law. Further discussion of this pending legislation is disallowed, as per forum rules.

[seeing TedSwippet's post just now, definitely take a look at his suggestions -- maybe you can sidestep US taxation entirely]
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galeno
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by galeno »

If I've said it once I've said it a dozen times. ALWAYS pay heed to TedSwippet's posts.
KISS & STC.
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rjm_cali
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by rjm_cali »

TedSwippet wrote: Tue Dec 07, 2021 2:53 pm
Both the UK and France have decent income tax and estate tax treaties with the US. The income tax treaties for both countries reduce the 30% default US withholding tax on dividends to 15%; this matches the rate paid internally by EU domiciled ETFs that hold US stocks.

In tandem with the above, and to the extent that you want/need to sell and reorganise your investments (and don't have to grapple with the US's barbaric 'exit tax'), have you considered not selling until after you leave the US, ditched the green card, and become a UK resident? To do this, when you move you would ideally want to hold either US or other stocks directly, or US domiciled ETFs that have UK reporting status.

You would face UK capital gains tax on the entire gain since purchase, but no US capital gains tax once free and clear of US tax tentacles. The UK has a decently sized annual capital gains allowance, £12,300, and capital gains tax rates of 10% lower rate and 20% higher rate; taken together, these could well mean you pay less in capital gains tax than you would if you sold up as a US resident (particularly if you live in California, which your username sort-of implies). Something similar may apply if you were to wait until a French resident. I don't know enough about how French tax works to say more on that, though.
Noted the comments about the way CGT is applied. Being a Brit I'm stuck on the CGT allowance approach. My taxable income this year might actually bring me into the 0% tax bracket if we file MFS .

Also noted the sale of primary residence rules so CGT only payable on gains above $500K for MFJ which we would need to do next year for definite. Also aware that a covered expat does not get the $250/500K CGT allowance. Now that would be painful. House is in wife's name.

I will be surrendering my LTGC but am pretty sure I *personally* don't count as a covered expat due to not having assets of $2m and under the taxable income average requirements. So I am really hoping I don't get the exit tax. My wife is a naturalized USC so we're keeping assets strictly separate in the long and short term.

Interested in this idea of holding on until I'm tax resident in the UK. I thought that by default Vanguard would take a slice when I liquidate assets and whilst I presume I could claim it back - it apparently take a long time for the IRS to do so. Therefore I am interested in knowing if there is any mechanism by which Vanguard *don't automatically* take a slice for Uncle Sam
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rjm_cali
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by rjm_cali »

galeno wrote: Tue Dec 07, 2021 3:17 pm If I've said it once I've said it a dozen times. ALWAYS pay heed to TedSwippet's posts.
Oh I do and am very grateful for them
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rjm_cali
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by rjm_cali »

random_walker_77 wrote: Tue Dec 07, 2021 2:59 pm The 500K capital gains exclusion for a married couple, on your primary residence, is only for your home, and in that respect it's "an extra 500K allowance." The excess gains beyond that is taxable LTCG (long term capital gains) and if your marginal tax rate for that extra gain is better by shifting some LTCG into this year, then yes, selling some of your stocks now might be good.

Or not. It depends on your other income. LTCG can be taxed at 0%, 15%, 20**%, plus an additional 3.8% NIIT tax. If you sell now, what tax rate are you looking at? If this income falls between 80K and 250K, then it's 15% LTCG w/ no NIIT. Above 250K, then it's 18.8% with NIIT. Above $501K, then it'd be at 23.8**%. So if you're moving early next year, you might not have that much other income. For example, if you had 550K of profit from the house, then the 50K of taxable LTCG plus whatever gains from selling your investments could conceivably be at 0% and 15%, making it better than selling this year.
Yes - we're going to have excess CGT next year because of the house sale and we will definitely need the double house allowance and therefore will be filing jointly. My logic is that by selling now and probably switching to MFS just for this year I can really cut the CGT because I will have very little actual taxable income from employment. Ideally I'd like to do two different tax returns next year to see which works out best but that'll be too late so I'll probably load up the tax software now with last years tax data run a comparison to see which works out best.
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rjm_cali
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by rjm_cali »

TedSwippet wrote: Tue Dec 07, 2021 2:53 pm
In tandem with the above, and to the extent that you want/need to sell and reorganise your investments (and don't have to grapple with the US's barbaric 'exit tax'), have you considered not selling until after you leave the US, ditched the green card, and become a UK resident? To do this, when you move you would ideally want to hold either US or other stocks directly, or US domiciled ETFs that have UK reporting status.

You would face UK capital gains tax on the entire gain since purchase, but no US capital gains tax once free and clear of US tax tentacles. The UK has a decently sized annual capital gains allowance, £12,300, and capital gains tax rates of 10% lower rate and 20% higher rate; taken together, these could well mean you pay less in capital gains tax than you would if you sold up as a US resident (particularly if you live in California, which your username sort-of implies). Something similar may apply if you were to wait until a French resident. I don't know enough about how French tax works to say more on that, though.
Now you've got me thinking. I'm in index funds rather than ETFs but as I understand it I can convert a fund to an ETF at Vanguard without triggering a tax event and there seem to be direct reporting ETFs that I would hope to transfer to. And yes I am in California at the moment once again proving that you can't move without being taxed here. But come back to the question - if I am a NRA and I want to sell some of those ETFs won't I just get taxed via Vanguard as a default ?

I wish this was all a bit simpler :-)
TedSwippet
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by TedSwippet »

rjm_cali wrote: Tue Dec 07, 2021 3:47 pm Also noted the sale of primary residence rules so CGT only payable on gains above $500K for MFJ which we would need to do next year for definite. Also aware that a covered expat does not get the $250/500K CGT allowance. Now that would be painful. House is in wife's name.
Look closely at the rules for filing MFJ. You cannot if you take 'split year' treatment; this forces you into MFS. Alternatively, I think you can 'elect' into being a US taxable person, either through the 'substantial presence test' or by virtue of having your US citizen wife file MFJ.

But ... doing that means your entire worldwide income is subject to full US tax and reporting for every year in which it applies, which could cause issues with UK pension contributions, likely problems if you invest through a UK ISA, difficulties even opening accounts at some UK banks and financial institutions, and generally open you up to the entire miasma of repulsive US tax restrictions that go along with being a US taxable person living outside the US.

I think you'll want to consider the ins-and-outs very carefully here, then. Your wife, of course, remains yoked to the IRS anyway by virtue of her citizenship, and so will have to contend with all of this US citizenship-based taxation nonsense for the foreseeable. At least, unless and until she is in a position to, and wishes to, renounce her US citizenship.
rjm_cali wrote: Tue Dec 07, 2021 3:47 pm I will be surrendering my LTGC but am pretty sure I *personally* don't count as a covered expat due to not having assets of $2m and under the taxable income average requirements. So I am really hoping I don't get the exit tax. My wife is a naturalized USC so we're keeping assets strictly separate in the long and short term.
Don't hope. Check carefully. Then check again. You very much want to avoid 'covered expatriate'. The asset test is the easiest to fall foul of. The other is not an average income test, but rather an average tax liability test. Having assets of $2mm may be fairly achievable if you have a house and a 401k and are in your 40's say, but a US federal tax liability of $170k or so over five years is probably harder to reach for most.
rjm_cali wrote: Tue Dec 07, 2021 3:47 pm I thought that by default Vanguard would take a slice when I liquidate assets and whilst I presume I could claim it back - it apparently take a long time for the IRS to do so. Therefore I am interested in knowing if there is any mechanism by which Vanguard *don't automatically* take a slice for Uncle Sam
Once out from under the US tax system -- and provided you do not 'elect' back in, in order to file US tax as MFJ -- you can file a form W-8BEN with Vanguard. This overrides any prior W-9 completed as a US resident or other US 'taxable person'. On receipt of a W-8BEN, Vanguard should start applying UK (or wherever) tax treaty treatment to withholding. For the UK, this would be 15% on dividends, 0% on pension payments, and no US capital gains tax.

In general, US brokers are mostly okay on the first and the last of these, but sometimes screw up by overwithholding on pensions. In those overwithholding cases, or any others, you would have to reclaim the excess withheld using a 1040-NR (and probably also a loooong wait).
TedSwippet
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by TedSwippet »

rjm_cali wrote: Tue Dec 07, 2021 4:09 pm But come back to the question - if I am a NRA and I want to sell some of those ETFs won't I just get taxed via Vanguard as a default ?
Not in the way it looks like you may be thinking. As noted above, once you file a W-8BEN with Vanguard claiming UK treaty benefits, you face 15% flat and unrecoverable US withholding tax on dividends (this may or may not be something you can take a UK tax credit for), but no US capital gains tax liability.

If you move to the US while holding assets with a built-in and unrealised gain, the US will cheerfully tax any capital gains that you realise as a US resident, even though most or perhaps all of the gain accrued long before even setting foot in the US. The flip side though, is that (aside from the appalling 'exit tax', and except for US real estate), if you move from the US while holding assets with a built-in and unrealised gain and become a US nonresident alien, you can avoid US capital gains tax on any later sale. Doubly useful once you factor in also avoiding California state income tax on these same gains.
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rjm_cali
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by rjm_cali »

TedSwippet wrote: Tue Dec 07, 2021 5:28 pm
rjm_cali wrote: Tue Dec 07, 2021 4:09 pm But come back to the question - if I am a NRA and I want to sell some of those ETFs won't I just get taxed via Vanguard as a default ?
Not in the way it looks like you may be thinking. As noted above, once you file a W-8BEN with Vanguard claiming UK treaty benefits, you face 15% flat and unrecoverable US withholding tax on dividends (this may or may not be something you can take a UK tax credit for), but no US capital gains tax liability.

If you move to the US while holding assets with a built-in and unrealised gain, the US will cheerfully tax any capital gains that you realise as a US resident, even though most or perhaps all of the gain accrued long before even setting foot in the US. The flip side though, is that (aside from the appalling 'exit tax', and except for US real estate), if you move from the US while holding assets with a built-in and unrealised gain and become a US nonresident alien, you can avoid US capital gains tax on any later sale. Doubly useful once you factor in also avoiding California state income tax on these same gains.
I think I may owe you a pint Ted. I can live with the US taking any dividend tax especially as I'll sell up all US assets once I'm established as tax resident in the UK. If I can avoid US CGT in this way it makes sense for me to wait and take advantage of the UK CGT rates for the time I'm there. Especially when you factor in the California CGT. You have saved me a few pints.
TedSwippet
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by TedSwippet »

For reference, here are some applicable articles of the US/UK tax treaty:
  • Article 10 paragraphs 1 and 2. These allow the US to tax your US source dividends at 15%. You can claim credit for some or all of this against your UK tax on these same dividends.
  • Article 11 paragraph 1. Prevents the US taxing your US source interest. As a general rule, it does not tax interest paid to NRAs anyway.
  • Article 13 paragraph 5. Prevents the US taxing your US source capital gains on shares, ETFs, and so on. Same general rule as above.
  • Article 1 paragraphs 4 and 6. Allows the US to continue taxing former long-term permanent residents on US source income as if still US residents. The US no longer does this, but now uses its 'exit tax' instead (and arguably in contravention of the treaty, in particular with regard to IRAs). You very much want to avoid 'covered expat' status.
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by asteroidnix »

TedSwippet wrote: Wed Dec 08, 2021 2:53 am The US no longer does this, but now uses its 'exit tax' instead (and arguably in contravention of the treaty, in particular with regard to IRAs).[/list]
First I heard about this. Odd concept when you think about it; dormant/old non-used clauses in a treaty. Could you explain the IRA bit here?
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by TedSwippet »

asteroidnix wrote: Fri Dec 10, 2021 5:47 pm
TedSwippet wrote: Wed Dec 08, 2021 2:53 am The US no longer does this, but now uses its 'exit tax' instead (and arguably in contravention of the treaty, in particular with regard to IRAs).
First I heard about this. Odd concept when you think about it; dormant/old non-used clauses in a treaty. Could you explain the IRA bit here?
Old and unused treaty articles will not be that unusual. Tax treaties are negotiated about once or twice per generation, but the US changes its tax code around 300 times each year on average. In theory, treaties take precedence over domestic US tax laws. In practice, the US sometimes unilaterally reneges on treaty clauses.

This SSRN article outlines the treaty violation position: Expatriation Tax – Renouncing a Tax Treaty by Oz Halabi :: SSRN
Tax treaties are agreements negotiated and signed by countries in order to provide countries useful tools to avoid double taxation and prevent tax evasion. After such an agreement is signed, countries should respect and obey its rules. However, countries currently still use the Exit Tax tool although the tool might override a tax treaty they are bound to respect. By using the Exit Tax tool, countries violate not only the tax treaty between them and the new residence country but also treaties signed with third party countries that have no relation to the taxpayer change in residency. These third party countries were not the abandoned or the absorbed country and nonetheless they are affected by the Exit Tax regime of the abandoned country.
The US/UK treaty generally reserves taxing rights on pensions to the country of residence. So an IRA held by a UK resident is taxable only to the UK. However, the treaty saving clause allows the US to also tax an IRA held by a US citizen living in the UK. The UK is still prime however, and the US is bound by treaty to give a credit for any UK tax paid. The result is that the US citizen living in the UK pays the higher of the two countries' rates, but no more than that.

The US exit tax turns this on its head, but does so unilaterally. On expatriation, the US will tax the entire IRA balance as if withdrawn all in one year, even though it was not; that is, US tax on an imaginary event that nevertheless has to be paid with real money. This can push the tax to an extreme level. However, the UK is not bound by treaty to credit this potentially extreme "deemed" US tax against UK tax, and so does not; not least because there could be years or even decades between the "deemed" US tax and the UK tax liability that arises from actual IRA withdrawals. The result is pure double-tax on IRAs. The cause is the US reneging on a portion of its treaties.

To make matters worse, the direction of tax treaty travel suggests strongly that we can probably expect to see more of this in future. For example, Article 1 of the current US model treaty contains a clause that could extend US tax liability on all worldwide income for ex-US citizens and former long-term green card holders forever:
4. Except to the extent provided in paragraph 5 of this Article, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.
The current US/UK tax treaty, Article 1 paragraph 6, restricts this to ten years, to only US source actual (not "deemed") income, and also (probably) to just 'covered expatriates'. Its analogue in the 2016 model treaty, Article 1 paragraph 4, applies to everyone, 'covered expatriate' or not, has no time limit, and no restriction of this to only US source income or gains. Shocked by this? You should be. It remains to be seen if any country is dumb enough to sign up to this as it stands.

More discussion in this article: Kill-Switches in the New U.S. Model Tax Treaty by Allison Christians, Alexander Ezenagu :: SSRN
This Article analyzes the new kill-switch provisions and concludes that their introduction in the U.S. Model reflects the steady deterioration of tax treaties from essentially diplomatic documents premised on the good faith of the parties to detailed contracts drafted in anticipation of the opposite.
Topic Author
rjm_cali
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Re: Moving back to Europe from US - Thinking of selling everything next week

Post by rjm_cali »

TedSwippet wrote: Sat Dec 11, 2021 2:48 am [

To make matters worse, the direction of tax treaty travel suggests strongly that we can probably expect to see more of this in future. For example, Article 1 of the current US model treaty contains a clause that could extend US tax liability on all worldwide income for ex-US citizens and former long-term green card holders forever:
4. Except to the extent provided in paragraph 5 of this Article, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.
The current US/UK tax treaty, Article 1 paragraph 6, restricts this to ten years, to only US source actual (not "deemed") income, and also (probably) to just 'covered expatriates'. Its analogue in the 2016 model treaty, Article 1 paragraph 4, applies to everyone, 'covered expatriate' or not, has no time limit, and no restriction of this to only US source income or gains. Shocked by this? You should be. It remains to be seen if any country is dumb enough to sign up to this as it stands.

More discussion in this article: Kill-Switches in the New U.S. Model Tax Treaty by Allison Christians, Alexander Ezenagu :: SSRN
This Article analyzes the new kill-switch provisions and concludes that their introduction in the U.S. Model reflects the steady deterioration of tax treaties from essentially diplomatic documents premised on the good faith of the parties to detailed contracts drafted in anticipation of the opposite.
That's a big fat ouch from me. Ordinarily I would say this was lawyers (and the IRS) putting in what they know would get struck down but I wonder who is prepared to fight for ex-pats ? I suppose if population trends continue and countries start competing for immigrants they might but it's not something I'd er, bank on.
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