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Discussion Starter · #1 ·
If I renounce my US citizenship (am a dual UK/USA citizen living in the UK), will I still be able to receive my social security payments which are a few years away yet? Also what would be the consequences to my US IRA.
Any help would be appreciated. Thanks!
 

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If you renounce, you can still receive both US social security and withdrawals from your IRA. What changes, however, is that all payments made to you will be subject to a 30% automatic withholding. You should be able to file a NR (non-resident) return to get back the excess withholding but I would check the IRS publication on non-resident returns to get a better picture of how that would work.

If you have significant assets or a high level of income, you may be subject to the "expatriation" tax.
Cheers,
Bev
 

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What changes, however, is that all payments made to you will be subject to a 30% automatic withholding.
Some of the tax treaties the U.S. has signed with other countries reduce the automatic withholding percentage, but I don't know if the U.K. is one.

I think it gets at least more difficult to make additional contributions to an IRA after renunciation of U.S. citizenship. There are also possible estate tax issues, though I'm less familiar with those.

U.S. Medicare benefits are effectively lost because of the 90 day stay limitation in the U.S.
 

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Medicare is lost when you live overseas, not when you renounce. But as far as I know, if you're eligible for Medicare due to having made contributions, you can enroll (even for the paying portions). Living outside the US, however, there doesn't seem to be much point.

There is also the possibility that the US could invoke a couple of laws on the books - in 1996 they passed a law that gives the attorney general the ability to reject any visa (including the VWP) for someone who has renounced their US citizenship. To my knowledge, this law has never been used to deny someone entry to the US, however it's still there on the books and theoretically could be invoked if there is a change in government policy.

The withholding thing may or may not apply to US social security. I'm aware of the Italian treaty, which makes US social security not subject to reporting nor to taxes, but only for Italian citizens resident in Italy who are receiving benefits. (Evidently the benefits are taxed in Italy by the Italian tax authority.) To my knowledge, though, the 30% withholding applies to all non-social security retirement plans like IRAs and 401Ks. (At least the fund manager of the company that holds my IRA seems to think so...)
Cheers,
Bev
 

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Medicare is lost when you live overseas, not when you renounce.
I think that I was clear in context. Renunciation means never going back to the U.S. (except for non-guaranteed visa/visa waiver stays), so that means (effectively) no Medicare. To a U.K. resident on NHS that might not matter much, but it might matter to some. U.S. Medicare is an earned benefit.

There are a couple generalized treaty reductions in the withholding rate. I think Canada is one example.

I don't think people fully appreciate the costs of 30% withholding. Let's suppose you have a Traditional IRA distribution of $50,000 in June. If you're a U.S. citizen there's no withholding, though you might have to make estimated tax payments. Suppose your effective tax rate is 15%. Thus in July if you're a U.S. citizen you'd pay an estimated tax of $7,500 and you're done. Foreigners subject to withholding instead have to pay $15,000 immediately (in June) and then wait a year to get $7,500 back with no interest. If your next best investment return is 5% you've lost $375 compared to the U.S. citizen. Plus you still get to file plenty of tax returns with the IRS -- you haven't saved that.

It's even worse with the Roth IRA because qualified distributions from Roths are tax free for U.S. citizens (and residents) -- no estimated tax payment -- but subject to 30% withholding for almost everyone else. At a 5% time value cost of money, withholding (even if you can get it back) would typically cost you a 1.5% penalty (5% of 30%).

This gets even worse (if you can imagine) if you're rolling funds into new investments in the U.S. or if you're otherwise trying to do anything resembling moderate or higher velocity trading. Withholding kills you on that, because you can't roll over what has been withheld. And that's a problem when you consider that the U.S. has the most competitive, lowest cost investment vehicles in the world. It's really tough to beat Vanguard's expenses, for example. This situation could come up in an IRA scenario if, for example, you must take mandatory minimum distributions on an IRA or 401(k) and don't actually need the money for consumption. Thus you then have to park the excess somewhere, and that's either in another U.S. investment (subject to 30% withholding) or outside the U.S. in something that isn't as cost-efficient.

Anyway, suffice it to say that U.S. citizens and residents have privileged access to U.S. investment vehicles. Mandatory withholding isn't fun. Those costs should be forecast and considered within the overall picture.

The way we handle this in our own household is that yours truly saves in the U.S. -- wish we could save more! -- and my joint filing nonresident alien wife saves in PFIC-compliant/non-withholding ways (like foreign government bonds). That seems to be a good formula.
 

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Discussion Starter · #6 ·
Thank you both for the valuable information. It seems that I should stay a US citizen and just deal with the tax filing. My kids are in the US so I do have to visit frequently.
 
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