Author Topic: Becoming an American for the favourable tax purposes  (Read 177 times)

JoeMSmith

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Becoming an American for the favourable tax purposes
« on: August 11, 2020, 06:14:24 AM »
Hi all,

Canadian citizen here living in the US. I have the option to naturalize and want to get the community's opinion on if I should from a FIRE financial perspective. Please note that I don't really plan on spending any more time in the US, I want to be a US citizen for the tax benefits. My spouse is in the same situation. Most of our wealth has been generated in the US.

Margin account: 1.35M
401K: 470k
Roth IRA 150k
RRSP: 140k

These amounts are combined for the two of us. Planned WR 3% of initial portfolio. No kids and won't have them.

Next year when we FIRE, we want to move abroad and live around the world. Sometimes for 6 months, sometimes for 3 years in a place. Sometimes for just 3 weeks and we will travel often.

I understand the US tax reporting can be complicated and cumbersome, but hear me out.

When we don't have a permanent home, we will claim US tax residency and only pay capital gains + dividend tax to the US. If we didn't claim US citizenship, we'd have to pay tax to Canada. US gets 80k capital gains and dividends for a married couple tax free, and we can continue to rollover our IRA into Roth accounts. In Canada, the same tax estimate on our withdrawals would be about 4k total per year. So we'd save 4k a year by claiming US tax residency.

As well, if we do have a permanent home abroad, being an American is still advantageous. Yes, we will have to file taxes in two countries and that will be annoying. Yes we'd have trouble opening bank accounts and FBAR is a pain. And we won't get the same capital gains benefits. However, we'd be transitioning from US tax residency to foreign country tax residency, which isn't costly. In Canada, if you exit Canadian tax residency, you incur all of your capital gains in one go. They pretend you sold it and bought back at the same price. This is very penalizing, in the realm of hundreds of thousands of dollars just because we want to live 3 years in Spain (as an example). I ran an excel file that estimates my cumulative capital gains. There is exit tax potential to be 150k-200k, depending on when we do it.

The way the tax code works is that anytime we don't have a permanent home, if we were only Canadian we'd have Canadian tax status. If we were Canadian and US, I can argue we want US tax status because we have all of our financial ties to the US. We would keep all of our assets in the US forever.

Another benefit is that our 401k would be taxed more favourably on withdrawal. If you are a Canadian tax resident, you pay Canadian taxes on your 401k. If I am a US tax resident, I pay US taxes, which are much lower. Withdrawing 70k usd per year right now means 10k tax in the US and 14k in Canada.

Another benefit is that we'd continue to be able to rollover IRA into our Roth. This is only if we aren't also say, a Spanish tax resident. This is better than the Canadian version of the equivalent, which only lets me do 6k CDN per person per year. I can rollover like 12k per person per year into a Roth tax free.

The long term downside is that we will eventually retire to a non-US country with free healthcare. Particularly Canada is the most likely option. Being an American citizen while old and in Canada would be penalizing. However this is probably 30 years away, and in theory we could renounce US citizenship at that point if it was financially not working out. US citizenship renouncing is costly if your NW is worth more than 2M (as an individual). If we have a NW of 4M combined, we are probably ok and don't need to worry too much about taxes at that point.

Thoughts?
« Last Edit: August 11, 2020, 08:25:16 AM by JoeMSmith »

gocurrycracker

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Re: Becoming an American for the favourable tax purposes
« Reply #1 on: August 12, 2020, 07:56:07 PM »
So... I know zero about Canadian taxes. (But, this statement is new to me: "The way the tax code works is that anytime we don't have a permanent home, if we were only Canadian we'd have Canadian tax status.")

A lot of this plan seems dependent on US tax law remaining unchanged. What if the tax rate on capital gains / dividends is non-zero?

Is $4k savings worth the effort?
What is your time worth in filing taxes every year? Or what would you pay for somebody to file them for you?

PS: Joe Smith is a very American name if you do go that route

JoeMSmith

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Re: Becoming an American for the favourable tax purposes
« Reply #2 on: August 13, 2020, 04:37:13 AM »
Thanks for the thoughts! Appreciate you reading the giant wall of text. Joe Smith is also a very fake name :)

Basically the way non-US tax (US is the only country that taxes on citizenship, the rest are based on residency) law works is that you always have to pay tax somewhere. Without any home or residence it defaults to your place with socio economic ties. Barring no ties, it defaults to your citizenship. Check out these fire bloggers - https://www.millennial-revolution.com/ they pay Canadian tax despite almost never being in Canada. If they were to establish residency in Spain, they would actually still pay Canadian tax and Spanish tax. This is because their assets are located in Canada, and  Canada will always tax you on Canadian sourced income. I have been trying to find a US Canadian tax residency expert to confirm. My case is certainly an edge case.

For the savings, I'd pay someone to do my taxes. I'd just need to make sure I harvested the right capital gains amount.

The piece bigger than the 4k per year is the damn Canadian exit tax. That has the potential to be 200k or more. I don't want to be restricted in my life decisions because I can't go to move to Spain for 3 years because of exit tax. I know myself. Even if I'm rich and my portfolio has grown, that 200k will haunt me.

The last piece I've thought through is that I can always renounce if the US changes their rules. This isn't a permanent problem, as long as I'm 2M USD NW or less, per person. I can move my US based ETFs into a Canadian based brokerage, tax free, without incurring capital gains

One more question to you: Do you find being an American cumbersome to live around the world? Does it affect anything that you want to do? I've heard it can make opening bank accounts hard and that the financial reporting is a pain. What are your personal experiences?
« Last Edit: August 13, 2020, 04:40:36 AM by JoeMSmith »

gocurrycracker

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Re: Becoming an American for the favourable tax purposes
« Reply #3 on: August 14, 2020, 12:32:23 AM »
Joe Smith is also a very fake name :)
I figured :)

One more question to you: Do you find being an American cumbersome to live around the world? Does it affect anything that you want to do? I've heard it can make opening bank accounts hard and that the financial reporting is a pain. What are your personal experiences?
I haven't wanted to open bank accounts - I just leave everything in the US. I pay for everything with US credit cards or cash from the ATM.

So no, no negative experiences.


There are some downsides (and upsides) of keeping funds in the US if you are not a US citizen (or tax resident.)

A positive is zero tax on capital gains. At all. There is a lot of potential here...
A downside is withholding and taxes on dividends.
(A company like Berkshire Hathaway with zero dividend / 100% cap gains is an interesting option for NRAs.)

https://www.bogleheads.org/wiki/Nonresident_alien_taxation (didn't read in full, but they are usually great.)


JoeMSmith

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Re: Becoming an American for the favourable tax purposes
« Reply #4 on: August 14, 2020, 05:01:23 AM »
Thanks, yeah that sounds nice. No capital gains. But then I have to establish tax residency somewhere else. Just sounds like a hassle. I want to be flexible in my life choices. I might not want to establish a new tax residency.

Appreciate your thoughts. I have a $450/hour meeting coming up with a Canadian US tax residency lawyer to go through my plan.

gocurrycracker

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Re: Becoming an American for the favourable tax purposes
« Reply #5 on: August 14, 2020, 06:02:58 PM »
Good luck! Let us know what you find out if you can

JoeMSmith

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Re: Becoming an American for the favourable tax purposes
« Reply #6 on: August 24, 2020, 06:29:25 AM »
Tax lawyer was useless. He was clearly milking time and wasting my time talking about things I already knew. Pretty disappointing experience. I just want to pay someone to answer my questions goddamnit.

gocurrycracker

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Re: Becoming an American for the favourable tax purposes
« Reply #7 on: August 24, 2020, 07:28:56 PM »
That has been my experience as well... hard to find people who are both knowledgable and helpful.