Alice and Bob are non-US citizens not living in the US -- that is, non- resident aliens. They have a son Charles, who is a US citizen since he was born while Alice and Bob were living in the US. Charles is three years old, and has a savings account in his (non-US) home country, on which he receives interest. Aside from Charles' citizenship the family has no other US connection.
What are Charles' US tax and reporting obligations? Can the "kiddie tax" still apply where Alice and Bob have no US filing requirement? Does Charles have potential FBAR problems? FATCA? Child trust fund issues? Does anything change as Charles gets older, increases savings, opens locally tax efficient saving schemes, and cuts neighborhood lawns, gets a paper route and so on to supplement pocket money? What if Charles inherits from a parent or grandparent?
What should Alice, Bob and Charles do to minimize US tax complexity and intrusion?
Here is where to go to obtain answers: Charles's tax reporting and kiddie tax: Pub 501. FBAR: See instructions for the form that has to be filed. FATCA: See Journal of Accountancy, August 2010 Getting older and increasing income: Pub 54, 501, 505, 514, 535, 583,
Without doing any research, it seems to me that there are two choices: either accept whatever complexity arises from having a son who is a citizen or find a way to renounce the child's US citizenship, thereby severing any tax connection to the US. If they want their child to enjoy the benefits of US citizenship, they will have to endure whatever obligations that citizenship imposes.
I think our colleague Alan has hit the nail on the head with this one! It is May and this certainly sounds like a homework assignment at the very least .
I do applaud the OP for being resourceful and perhaps getting help here is no different that looking up the answers in a book. With that caveat I think Alan has done the OP a GREAT FAVOR by pointing them to a good starting point. If this is a homework or test question the OP needs to know HOW to find the answer and be able to cite it to support his position. As much as I respect Alan professional, for his posts here, the OP needs to know that he won't get very far in an audit by saying "Alan (or Gene or Dick or anyone else) on the newsgroup said this is how its done."
To the OP, this is a convoluted situation at best. U. S. Citizens are required to report and pay tax on their world wide income, so not being the in the U. S. doesn't exempt one from paying tax to the U. S. This means Charles needs to convert ALL his income, even from his overseas holdings, into U. S. dollars for U. S. tax purposes and include them on his return if he's required to file. However, there are income triggers. If one's income is below a certain point then a return is not required regardless of where they are. Lastly, age has nothing to do with it. I have personally prepared tax returns for children as young as six (6) MONTHS of age.
But you are wrong. I only wish it were an academic question. It is not. Alice, Bob and Charles are very real individuals, though these are not their true names. They are living normal, ordinary lives outside the US, and wish only to go on doing so without having to structure practically every financial undertaking around the byzantine, shifting and impenetrable laws of what is to them a foreign nation.
Unfortunately for them, Alice and Bob are not able to unilaterally renounce Charles' citizenship. Only he can do that, and not for at least another eleven years or so. In the meantime, the entire family must either pay handsomely for annual professional US tax preparation or spend countless hours themselves trying to comply with an ever increasing and highly complex US filing and reporting obligation. All in exchange for ... what?
In all honesty, a pretty sad reflection on the current state of US tax laws.
Why? Let's say Charles's US citizenship is just an unwanted coincidence of bad parental travel scheduling or premature birth. Unless Charles is some sort of prodigy who will generate a lot of income before he reaches the age when he can renounce, the family is not going to have to pay a whit of attention to US tax law.
Are you sure there is no legal process for making this happen, even for a minor? I was under the impression that "adult" decisions were made on behalf of minors all the time, under the legal system.
In the meantime, the entire family
You haven't told us exactly what about Charle's situation is "ever increasing and highly complex"? He probably either has no filing requirement, or maybe just a 1040-EZ at best, if he is typical of most minors subject to US tax law.
Few will take you seriously if you claim that this situation, which affects an infinitesimal number of taxpayers, is at the forefront of making the tax laws look sad.
Charles could have investment income. The previous question about "kiddie tax" implies that might be a factor. Since the parents are not required to file their own returns, the following provision in the Form
8615 instructions might help:
"Incomplete Information for Parent or Other Children If the parent?s taxable income, filing status, or the net investment income of the parent?s other children is not known by the due date of the child?s return, reasonable estimates can be used."
I would file with estimates (indicated as such on the return) and move on.
My interpretation of the law is that as the child is not the qualifying child nor the qualifying relative of a US taxpayer, the child is not the dependent of any US taxpayer. Therefore, the normal rules for who has to file and pay are in effect for the child.
Parents cannot renounce U.S. citizenship on behalf of their minor children. Before an oath of renunciation will be administered under Section 349(a)(5) of the INA, a person under the age of eighteen must convince a U.S. diplomatic or consular officer that he/she fully understands the nature and consequences of the oath of renunciation, is not subject to duress or undue influence, and is voluntarily seeking to renounce his/her U.S. citizenship.
END QUOTE
If I were a judge, I'd be skeptical even if a 6 year old tried to convince me of this. But you'd have to look at actual cases to see how young the kid would have to be.
The original comment said that the tax laws of the US are complicated, not that the kid's situation is. We know nothing of how much money the original person has. If the parents deposited $1,000,000 into their child's account, form 3520 to report foreign gift must be filed, TDF 90-22.1if it is a foreign account, form 1040 to report interest + dividends + capital gains, foreign currency conversions, foreign tax credit. Soon there will be 3.8% tax on investment income over $200,000 even if you live abroad.
I disagree. I think the kid just files form 1040 as an adult. No idea how they would sign though, maybe they can just draw something or put a fingerprint.
BEGIN QUOTE section 1(g) of the IRC
(g) Certain unearned income of children taxed as if parent?s income (1) In general In the case of any child to whom this subsection applies, the tax imposed by this section shall be equal to the greater of? (A) the tax imposed by this section without regard to this subsection, or (B) the sum of? (i) the tax which would be imposed by this section if the taxable income of such child for the taxable year were reduced by the net unearned income of such child, plus (ii) such child?s share of the allocable parental tax.
END QUOTE
(B)(i) is the part that gives the child a $950 exemption on unearned income. And (B)(ii) is zero as the parents don't file.
What sort of amounts are we talking about? Charles' interest income up to $950 is exempt from federal income tax. He must have a lot of money in his savings account to earn that much in interest, and in this case he could afford to pay for proper tax advice.
Are there any benefits to having so much savings in his name if it really causes so much complications with US taxes? Are there sufficient tax or other advantages in their country of residence to justify this instead of having the savings in the parents' names?
Unless we are really talking about several thousands of dollars of interest income, it should be easy to fill in a tax return.
The right to live and work in the US if he wishes.
Well, let's see. Charles lives in the UK, and is not a prodigy, just an average three year old. His parents are median earners, but put a little aside for him in the most common and popular UK saving scheme for children, the Child Trust Fund:
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This is Charles' only financial asset. The account may be classed as an offshore trust as far as the US is concerned, requiring Form 3520 or 3520-A annually. Or at minimum investigate if such a return is needed. Not exactly simple. The Child Trust Fund can hold and trade shares, and Alice and Bob, being sensible folk, buy and occasionally sell index ETFs. This could require them to file Form 8621 for PFICs, horribly complex. After three or four years the amount in the account is over $10,000 after currency conversion. A TDF 90-22.1 is now required annually. After a further three or four years the investments have done reasonably well and the balance exceeds $50,000. Now Alice and Bob have to add an annual Form 8938 for FATCA.
And this is just for one common account type of entirely ordinary size. Add in a "Junior ISA", "Junior Bond", or "Child SIPP" (it's a pension-like item for children) and the nightmares multiply. To add further to the problems, the family must also keep abreast of each and every of the plethora of US tax law changes that occur each year, in order to ensure that they do not miss any new reporting obligations that Congress might have dreamed up.
There is however one possible relief to all of this. A number of non- US financial institutions are now refusing to open accounts for US citizens, even those living in the country in which the institution is based. If Alice and Bob simply cannot open financial accounts for Charles it will cost them considerably in lost tax relief and investment opportunity in their home country, but will at least save them from having to deal with some of the problems of US tax reporting.
Yes, the child may have a full standard-deduction-plus-exemption threshold for filing requirements (not the more limited dependent deduction and zero exemption). This makes the filing requirement even less likely to be met.
Taking also removeps-groups' comment into account, I don't think the application of the "kiddie tax" includes a dependency test. All children, dependents or otherwise, under the age limit who meet the other tests have to apply the kiddie tax, unless I'm missing something really basic.
Wow, I didn't know about form 8938. Seems new for 2011. I have no idea why they need it as it a sort of duplicate of TDF, except 8938 applies if you own any assets including real estate.
I agree that there is going to be no net kiddie tax imposed in this case. As a technicality, I think the calculation would still apply to the parents, perhaps yielding a non-zero marginal tax rate.
As I interpret the statute, it states to use the tax which WOULD BE IMPOSED if the parents income INCLUDED THE NET UNEARNED INCOME of the child[ren]. [emphasis added]. I will refer to this as the "would be...if" scenario.
After including the child's US-taxable income in the "would be...if" scenario, you then calculate the parent's marginal rate on this US-taxable income for kiddie tax purposes. I assume this would always be less than or equal to the child's own rate, but not necessarily zero, since
1) the parents are probably going to use MFJ status in the "would be...if" scenario (the child uses single non-dependent status), and
2) their only US-taxable income in the "would be...if" scenario is exactly the child's unearned income.
Since the MFJ rate will always be less than the single rate, the net kiddie tax will always be zero.
I might be misinterpreting the statute, and am definitely arguing a mere technicality that has no net effect on the actual tax.
from TITLE 26, Subtitle A, CHAPTER 1, Subchapter A, PART I, Sec. 1.(g)
"(3) Allocable parental tax For purposes of this subsection -
(A) In general The term "allocable parental tax" means the excess of -
(i) the tax which would be imposed by this section on the parent's taxable income if such income included the net unearned income of all children of the parent to whom this subsection applies, over (ii) the tax imposed by this section on the parent without regard to this subsection. For purposes of clause (i), net unearned income of all children of the parent shall not be taken into account in computing any exclusion, deduction, or credit of the parent. "
You are technically correct, that Sec. 1(g) applies to nonresident aliens. However, unless the parents decide to invest some part of the child's "portfolio" in property located in the US (rents, royalties, US business), the child's unearned income would not be taxable on an NRA tax return (my zero marginal rate). If there was US source income that would have to be included on the parents' what-if return, you are correct that the marginal rate may not be zero, but it would not be higher than the child's rate. As such, the parents can disregard the kiddie tax.
Checking the treaty is a great suggestion, as well as other UK laws related to citizenship and parentage. It's also important to note that many if not all US states will not recognize federal treaties, but since no one in this example is a resident of any US state nor does anyone have US-based source income, it does not apply.
Out of idle curiosity, does the child have a US passport or SSN? Is the only evidence of US citizenship a birth certificate? It's fashionable in some circles these days to question the validity of US state-issued birth certificates (sorry, couldn't resist).
From the legal side, under US tax law can (or would, in court) a minor be held liable for penalties and interest, if any, due to negligence of non-resident alien custodial parents?
The US/UK tax treaty, as with most other US tax treaties, contains a "saving clause". Unfortunately this often means that the treaty gives no relief from US taxes for US citizens living in the UK, so it may not help in this case.
In any case, reporting rather than actual tax is the thornier issue here. US tax law demands assorted "informational" returns for various international situations even if no tax would be due, and often even if no tax filing would otherwise be needed.
Under the current OVDI the IRS is certainly trying to apply penalties to a person who did not know and had no way of knowing that she might be subject to US tax laws (though they've "generously" set it at a mere 5% of total net worth). Whether they can successfully do so may be another matter, but from ODVI FAQs
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"Under what circumstances would a taxpayer making a voluntary disclosure under this initiative qualify for a reduced 5 percent offshore penalty?
...Taxpayers who are foreign residents and who were unaware they were U.S. citizens.
...Example 1: The taxpayer was born in the U.S. to parents of foreign citizenship. She grew up in a foreign jurisdiction, unaware that she had been born in the U.S. She has a $60,000 account in the foreign jurisdiction. She has never filed U.S. returns or FBARs. She became aware she was a U.S. citizen when she had to get a birth certificate in order to obtain a passport from the foreign jurisdiction where she resides. She is entitled to the reduced 5% offshore penalty."
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