Might there be a mess for my estate and non-U.S. spouse if I were to die suddenly before or between renouncing and filing Form 8854?

There are 2 sets of rules for income tax. One set of rules says that the United States will extract income tax from U.S. citizens and "resident aliens" on their worldwide income. It does not matter where the citizen or resident alien lives. The other set of rules says that the United States will extract income tax from "nonresident aliens". These people only pay income tax to the United States on income that comes from sources within the US. The critical thing for the taxpayer is to know what he is. If he is a citizen or resident alien, he is taxed on everything, everywhere. If he is neither a citizen nor a resident (hence, he is a nonresident alien), then he is taxed on income earned in the United States.

Tax Return Filing Deadline

When he renounces his citizenship in early 2015, he will no longer be a citizen, of course. For that short period of time (from January 1 until the day before he renounces his U.S. citizenship), he will be a U.S. citizen and will be required to pay income tax to the United States and file an income tax return in the United States.

The filing deadline for the that tax return for the 2015 year (even though it is a part of the year only) will be June 15, 2016. It can be further extended as far out as December 15, 2016.

Income Tax Returns and Executors

The taxpayer wonders what happens if he dies after expatriation but before filing his tax return for the expatriation year. No problems. An executor can file and sign the expatriation year income tax return.

The IRS has pretty good procedures for this. Look at Publication 559 to see how the tax return is filed and signed after the taxpayer dies.

Estate Tax Return

The United States has 2 sets of estate tax rules.

One set of rules applies to citizens and to noncitizen who live in the United States. (The rules for non-citizens require that the person be "domiciled" in the United States, actually.) The heirs of these deceased people are privileged to pay U.S. estate tax on their assets, no matter where on the planet the deceased person's assets were actually located.

The other set of rules applies only to noncitizen who are not "domiciled" in the United States. Here, the U.S. estate tax will only apply if the deceased person owned assets physically located in the United States.

Let's take our example. The taxpayer lives in the U.K., renounces his U.S. citizenship, then dies.

• The U.S. estate tax cannot be imposed on the taxpayers worldwide assets on the basis of citizenship--at the moment of death he was not a U.S. citizenship.
  
• The U.S. estate tax cannot be imposed on the taxpayers worldwide assets because he is not domiciled in the United States. In reality his true home is the U.K. and has been seemingly forever. He is domiciled in the U.K.
• The U.S. estate tax can therefore only be imposed on the taxpayers U.S. assets, if he has any. He is a noncitizen who is not domiciled in the United States.

Even if the taxpayer has assets in the United States when he dies, all is not lost. There may still be no U.S. estate tax imposed.

The estate tax treaty between the United States and the U.K. might prevent the U.S. from imposing the estate tax. And if the treaty does not work, his estate in the U.K. will almost certainly claim a tax credit against the IHT (aka the U.K. edition of the estate tax) for the amount of U.S. estate tax paid.

Conclusion

By renouncing his U.S. citizenship, the taxpayer freezes in place the last day of the year in which he is a U.S. taxpayer--of income tax. Death after that date just means someone else signs the tax returns. There is relatively little brain damage to the surviving spouse or executor.

By really, truly living in another country, the taxpayer cuts all possible U.S. estate tax on his assets located outside the United States.