US Taxation of US retirement account distributions to NRAs

In my last blog post I discussed how Australia taxes distributions from US retirement accounts. But that’s only half of the picture because the US may also tax these distributions. For US citizens, the US tax treatment is clear and well known. But, what if you’re not a US citizen (or green card holder) when you withdraw your US retirement savings?

These issues were the subject of a series of three podcasts I recorded with John Richardson last week (links below). The purpose of this post is to summarise the key points covered in those podcasts.

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How does Australia tax your US retirement account?

For those who have moved between the US and Australia, access to and tax treatment of retirement accounts is a common issue. We’ve covered the US taxation of superannuation in several posts, but the tax treatment by both countries of 401k and IRA accounts held in the US is also important. Today’s post will cover the Australian side of this equation. My next post will discuss what happens to your US retirement accounts when you renounce US citizenship (or for Australian expats returning from the US).

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FEIE vs FTC – The Basics

This morning I participated in two short podcasts hosted by John Richardson covering the basics of the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC). Keith Redmond, Laura Snyder and Suzanne Herman also participated.

We discussed persistent myth that these two US tax provisions “fix” the problems that arise due to the US practice of taxing the residents of other countries under the fiction that all US citizens are US tax residents.

Each of these podcasts is a short 15-minute introduction to the complexities surrounding US tax compliance for non-resident US citizens.

Edited to add:

Here’s the third podcast we recorded today – it discusses more of the interplay between US tax and your local tax system.

To renounce or retain US citizenship?

Several of us participated in a conversation today about the issues that must be considered when deciding how to deal with the extraterritorial impact of US citizenship based taxation. For those who are just realising that the US requires ALL citizens to comply with US tax obligations, we discussed the various considerations that come into play when deciding how (or whether) to comply. We also discussed the issues that must be considered when deciding whether it is time to renounce US citizenship. As with many momentous life decisions, there is no one-size-fits-all prescription – US citizenship and tax compliance are individual decisions that will depend on personal circumstances, country of residence, future plans, and personal temperament.

The conversation, hosted by John Richardson, included Keith Redmond, Laura Snyder, David Johnstone and Karen Alpert. It is available here:


There has been much speculation among American expat groups about how the recently passed US tax rebates / stimulus will impact Americans living outside of the United States. After all, the US claims the right to tax based on citizenship rather than residence – so shouldn’t the US provide tax rebates based on citizenship as well? As you will see in this post, the complexity introduced by taxing non-residents is not well understood, even by the tax writing committees in Congress. There appear to be some unintended consequences in this bill – though for once, some of these consequences benefit rather than harm non-resident US citizens.  All the more reason for US tax rules to stop at the border – like every other country, the US should tax on the basis of residence and source, not citizenship.

Many Americans abroad have non-American spouses. While most will file their US taxes as “Married Filing Separate”, many find it advantageous to take advantage of the election available under §6013 (g) to file a joint return with their nonresident alien spouse. Making this election means that the spouse agrees to be taxed by the US on their worldwide income. Certainly, that ought to be sufficient to qualify for the $1200 stimulus payment as a US taxpayer? But no, the §6013(g) election treats the spouse as a US tax resident for the purpose of computing tax, but not for the stimulus payment.

Another issue that I haven’t seen any analysis on is the interaction of this credit with the Foreign Earned Income Exclusion (FEIE). My take is that, since the FEIE reduces Adjusted Gross Income (AGI), and the CARES Act rebate is phased out at higher levels of AGI, taking the FEIE would increase the amount of CARES Act rebate. Someone earning more than US$75,000 can exclude foreign earned income, reducing AGI below US$75,0000. I haven’t seen any analysis of this, but if I am correct, then I’m sure this is an unintended consequence – but an example of an unintended consequence that actually favours expats.

US expats will also have to consider how this payment will be treated by the tax authorities where they live. This may vary country to country. Some countries may treat this as a tax credit, reducing any US tax available as a credit against local country income taxes, while others may treat it as taxable income. Best to consult a qualified tax adviser where you live.

The bottom line is that the US government should be taking care of the US economy – not the economies of the countries where US citizens happen to live. US tax rules should stop at the US border – for both tax liability and for tax benefits. And, for those who have been sitting on the fence, worrying about whether they should start complying with US tax law when they are a tax resident of another country, the stimulus payment will barely cover their compliance costs – and certainly won’t cover their losses going forward due to both compliance costs and the cost of opportunities lost.

From my earlier post on Facebook:

President Trump has now signed the CARES Act, and there is much speculation on how this impacts tax-compliant US expats.

I’ve had a quick read of the relevant portion of the legislation and here’s how it works in a nutshell:

The bill creates a new refundable credit for 2020 tax returns with an advance refund of that credit now (or as soon as the IRS can implement it). This means that eligible taxpayers will receive a refund now from the IRS, then on their 2020 tax return they show the credit reduced by the payment they receive now. The credit is available to US citizens and residents with social security numbers and does not appear to be contingent on having any taxable income.

The amount sent out now is based on the numbers in your 2019 tax return (or 2018 if 2019 hasn’t been filed). Those collecting Social Security who do not have a US tax filing obligation will also receive payments based on the amounts shown on Form SSA-1099.

If your income in 2020 qualifies you for a larger credit than what you receive this year, then you get the additional amount when you file the 2020 return. If your income in 2020 qualifies you for a smaller credit than what you receive now, then the net credit you show on the 2020 return is zero (not negative) – that is, you don’t have to pay back the excess.

So – if you’re not currently in the US tax system, what does this mean for you? The amount of the rebate may be just enough to pay for filing under the streamlined program – but once you file, you are in the system and continued compliance will add costs (not just compliance costs, but the opportunity costs of not being able to invest or save in the same ways as other Aussies). If you’re a temporary expat – planning on returning to the US in future – then this may present a good opportunity to come into compliance. If you’re a permanent expat, then you should be very wary of entering into the US tax system, even with the promised tax credit.

Revenue Neutrality

When the US Congress considers legislation, one of the standard criteria often applied is that the proposed bill should be revenue neutral – that is, any new costs must be offset by new revenue. But, should this be a consideration for proposals to move to a system of residence based taxation?

No other developed country taxes nonresidents solely on the basis of citizenship. Those who left the US as toddlers to return to their parents’ home country are (under US law) US citizens, but most do not identify as Americans and have few, if any, ties to the US. Taxing the residents of other countries who no longer have substantial ties with the United States is clearly over-reach. While there might be many opinions about exactly where to draw the line, a line must be drawn. It is a question of doing the right thing – and the revenue generated does not alter the immorality of taxing those who are clearly domiciled in other countries.

Furthermore, it is not clear how much revenue is actually generated by the taxation of nonresident citizens – or how much revenue might be generated by taxing nonresidents under the provisions currently applied to nonresident aliens. So any calculation of “revenue neutrality” is only a very rough approximation.

Last Friday, I joined John Richardson and Laura Snyder for a discussion of these issues prompted by a post on John’s website. Here is the resulting podcast:

Tax Fairness for Americans Abroad Act

HR 7358, introduced on 20 December 2018, represents a watershed moment for American citizens residing OUTSIDE of the US. You can read a bit about the bill over at Citizenship Solutions – where a draft has also been posted. The official bill should be posted on in a day or two.

This is a HUGE step forward! While the naysayers are already active on Facebook and Twitter complaining that this bill will never pass because there’s not enough time left in the current Congress, they fail to realise that any step forward is a victory. Enormous effort has gone into getting sufficient support in Congress to get this far. We need to acknowledge the significant time and effort that has been expended by people like Solomon Yue, Suzanne Herman, John Richardson, and Keith Redmond; and by organisations such as American Citizens Abroad, Republicans Overseas and Democrats Abroad. They have been working consistently over a period of years to get this far. Someone in Congress now recognises the problem – this is the first step in ultimately achieving a solution.

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Fixing the Transition Tax for Individual Shareholders

Individual shareholders of US Controlled Foreign Corporations face a difficult deadline on 15 December. That’s the last date to file a timely 2017 tax return (assuming all possible extensions have been granted). For those who feel they must comply with the §965 transition tax, this is the last date to make an election to spread the tax over eight years. We have been covering this tax provision at Fix The Tax Treaty since before the Tax Reform legislation was passed (list of posts). Comprehensive coverage of the transition tax is available in a series of posts by John Richardson over at For affected shareholders, the transition tax can destroy the nest egg they have built up over a long career. The purpose of this post is to consider how this injustice can be fixed.

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Explaining GILTI – Wrap-up

My last four posts were an attempt at a broad overview of the Global Intangible Low-Taxed Income (GILTI) provisions that were part of the US Tax Reform enacted in December 2017. I started with a discussion of a comment made on behalf of the Israeli Ministry of Finance. This comment is quite unusual because most countries refrain from commenting on domestic regulations in another country. Following on from that post, I explained the underlying rationale behind GILTI, the mechanics of GILTI for corporate US shareholders and how the rules differ for individual US shareholders. This post provides a high level summary to tie the series together. 

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Explaining GILTI – Individual Impact

In this series of blog posts I try to explain GILTI (Global Intangible Low Taxed Income) in simple terms. In the first post I discussed a public comment made on behalf of the Israeli Ministry of Finance on the recent proposed GILTI regulations. My second post explained the rationale behind GILTI. The third post talked about how GILTI was measured focusing on US domestic corporations, the target of these provisions in the first place. This post will look at how these rules, that were written for Apple and Google, play out for individuals owning small businesses in the “foreign” country where they live. For those who want to get into the detail, there’s a technical appendix on our wiki.

[This post has been updated on 16 March 2019]

So, what have we learnt so far? GILTI applies to US Shareholders of Controlled Foreign Corporations (CFCs). The aim was to tax globally mobile intangible income that multinationals can easily move to tax havens to minimise their worldwide tax bill. However, what is being measured is much broader, picking up much of the active business income of CFCs regardless of whether that income is being sheltered from US tax in a tax haven.

One takeaway is that GILTI doesn’t apply unless a business is organised as an entity that is treated as a corporation for US tax purposes. Under the “entity classification rules”, certain types of non-US businesses are required to be classified as a corporation for US tax purposes, while others can elect to be treated as either a corporation or a disregarded entity (essentially a sole proprietorship or partnership). In a post-GILTI world, classification as anything BUT a corporation may be optimal.

As we’ll find below, the rules that apply to individual US Shareholders of CFCs mean that they will be paying higher tax rates than corporate shareholders because:

  • The 50% deduction applies only to corporate shareholders, and
  • Without a special election (§962), individual shareholders cannot offset GILTI with foreign tax credits.

The result is that US tax will be owed on GILTI unless the foreign tax rate exceeds 26.25%, double the rate that applies to corporate shareholders.

Basic rules for individual shareholders

The rules we discussed in the prior post apply to US domestic corporations that own CFCs. While the calculation of GILTI is essentially the same  for individual shareholders (GILTI = CFC income not already taxed by the US less deemed tangible income), the tax computation is completely different.

Corporate shareholders are allowed a deduction of 50% of their gross GILTI, but this deduction is not available to individual shareholders. Furthermore, individual shareholders will be taxed using the individual tax rate schedule, with marginal tax rates rising as high as 37%, instead of the new corporate tax rate of 21%. [Update March 2019 – in the §250 proposed regulations issued on 4 March 2019, the IRS relented and amended the §962 regulations to allow the 50% deduction to individuals electing to be taxed as a corporation under §962]

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