TaxConnections

 
 

Access Leading Tax Experts And Technology
In Our Global Digital Marketplace

Please enter your input in search


Does The United States Provide Americans Abroad Any Benefits?



americans abroad benefits: taxconnections

This question was presented in May 2020 on Quora with some interesting comments from Americans Abroad. This post is about the question “Does the United States provide Americans Abroad any benefits? This post presents the questions, answers and my answer to the question. If you are an American Abroad reading this post your comments and experiences are most appreciated.

As a defender of American “freedom”, how do you justify the fact that US citizens have to pay taxes to the US even if they live and work abroad (even if they have never been to the US but got their citizenship through their parents)?

I along with others attempted to answer the question. What follows is the readers question and my answer.

Some of the most interesting analysis comes from the comments to the answers. See the following answer and comment. I have turned David Johnstone’s comment into a post.

One of the answers to the question included the suggestion that:

If someone lives and works abroad as an American citizen, he or she must be enjoying SOME benefits or they would logically renounce their US citizenship instead of paying US taxes. That would be a good solution for anyone facing this question. Just go!

David Johnstone responds to this answer with the following comment:

1) enjoying one’s citizenship is a human right: see Universal Declaration of Human Rights articles 13 and 15.

2) the US has a law called the Jackson-Vanik Act of 1974 that imposes sanctions on countries that impose unreasonable restrictions (exit taxes) on the rights of their citizens to emigrate to other countries.

3) the renunciation fee which used to be free was raised to $450 and then $2,350, along with an exit tax for assets over $2 million (the amount was the same as the estate tax threshold when it was enacted in 2004, but has never been updated).

4) the US thus violates the Jackson-Vanik Act that it applies only to other countries.

5) since a very large number of US citizens abroad are poor and middle class (think of all the citizens in Mexico of Mexican origin for example), contrary to popular belief, the $2,350 renunciation fee, which doesn’t include accountants fees for the tax filings or the cost of travel to and from the nearest consulate, presents a real hardship, which some decide to go through with anyway in order to maintain their local bank accounts.

6) one must have another citizenship before one can renounce.

7) not everyone with another citizenship is even allowed to renounce (e.g., conserved individuals).

8) by law, the State Department must charge cost, but no more than cost, for its services. So none of the “services” available to citizens abroad are free, with the exception of voting (and even then, Americans born abroad are not eligible to vote in many states). As an aside, the renunciation fee of $2,350 violates this law, because according to the State Department, the cost to process a renunciation amounts to $21 or so.

9) if a citizen is repatriated, as recently happened to some citizens abroad during the coronavirus pandemic in progress, they must pay the US government back for the cost of the repatriation.

10) points 8) and 9) show that there are no “services” that the citizen receives for citizenship, with the exception of the possibility to vote (which right is not universal for citizens abroad).

11) there is this assumption that Americans living abroad only live abroad for a short period of time. However, according to the Federal Voting Assistance Program’s Overseas Population Analysis, of the 6 million or so US citizens living abroad, the average time elapsed since those citizens last lived abroad was 14 years ago. In that time, they will be as likely as stateside Americans or immigrants to receive local unemployment, disability, retirement, or welfare benefits, all of which are punitively taxed by the US. If the percentage of US citizens abroad receiving foreign social security or equivalent benefits is similar to the percentage of US residents receiving US social security income, then at least 1 million of the 6 million US citizens abroad receive income that is punitively taxed by the US solely due to the foreign residence of the taxpayer. When one factors in exchange rate fluctuations, taxation of phantom gains, and discrepancies in the date at which an income is taxed by one’s country of residence and the US, one can easily be subject to double, triple, or quadruple taxation (when paying in, when the savings or other income accrues, including currency fluctuations, then when it is taken out).

12) aside from being taxed at a higher rate than US residents with US-source income on almost all categories of foreign income that is not earned during the current period (unemployment, disability, retirement, welfare income, etc.), the US actively discriminates against its own citizens living abroad compared to resident citizens by effectively disallowing or penalizing anyone who opens a small foreign business (think your French baker), making it too costly for foreign (via FATCA) and US banks (via the Patriot Act) to provide banking, mortgage, and investment services to Americans abroad, while waiving or reducing money laundering rules for foreigners investing in the US, especially in real estate.

13) the US even tries to impose its laws on anyone merely associated with Americans abroad: spouses and business partners see that their accounts and finances must be declared to the US, even if they have never lived there.

14) the amount of banking and financial information required to be reported by US persons abroad, or by their banks, would be unconstitutional if required for US accounts.

15) the US does not reciprocate on its FATCA obligations, thus becoming the fastest growing tax haven in the world for foreigners’ money, while effectively shutting out non-resident US citizens from the same accounts.

I could go on and on about how the US not only doesn’t provide services to its citizens living abroad but actively discriminates against them for doing so, violates the laws it imposes on other nations, and violates the human rights declarations and treaties that it has ratified.

The assertion that one can just renounce if one is not happy is not only wrong, but it shows how little the person making such a statement must value his or her own citizenship. It is akin to asking someone whose candidate lost or proposition failed why they don’t just renounce or move away if they are unhappy with the outcome of the election, rather than lobbying for the best or a different outcome in the future.

Finally, how would you respond or how would you feel if Greece, China, India, Israel, or the UK just started taxing US residents with descent from those countries because they are considered to be citizens or have a right to return to live in those countries? Alternatively, how would you react if the US decided to carry out the logic of citizenship based taxation to its logical conclusion, and simply decide that since Canada, Mexico, or any of the other countries I just listed may tax their citizens living and working in the US, it would stop taxing US residents without US citizenship (ie, Canadians living and working in the US would only pay taxes to Canada, but not to the US)?

Some of the answers to this question appear to assume that taxation is part of citizenship. In other words: If you are a US citizen then you should by definition be required to pay taxes AND that this obligation to pay US taxes follows you around the world even if you don’t live in the United States.

It’s fairly obvious that as a general principle, citizenship does not imply taxation. After all, ONLY the United States and Eritrea impose worldwide taxation on their citizens who live outside the country. Canadian citizens are not subject to Canadian worldwide taxation if they move from Canada. Citizenship per se, does NOT imply taxation.

Therefore, the question is this: Is taxation an incident/requirement of US (United States) citizenship? In other words, is there something unique about US citizenship, that dictates that US citizens not living in the United States, should be subject to US tax rules as though they do live in the United States (even when they are tax residents of other countries)? Is US citizenship just different from other citizenships? Is taxation a special attribute of US citizenship? Is US citizenship a kind of taxation based citizenship? Are US citizens simply “Permanent US Taxpayers No Matter Where They Live In The World?”

Let’s start with the 14th amendment to the constitution. It says that anybody born or naturalized in the United States IS a US citizen. The 14th amendment doesn’t say “is a US citizen and taxable on worldwide income even if they don’t live in the United States).

In the 1967 decision of Afroyim v. Rusk, the US Supreme Court made it clear that Congress CANNOT enact laws that result in the forcible destruction of citizenship. It’s also important to note that, for those born or naturalized in the United States, the right to maintain US citizenship is a constitutional right. It is not a right that is somehow subject to government control.

I can tell you that there are many Americans abroad who are constructively forced to renounce US citizenship because of complications in the Internal Revenue Code. People can’t be subject to worldwide taxation, according to US tax rules and worldwide taxation and according to the rules of another country at the same time. Being subject to two different tax codes creates significant practical difficulties that (depending on the country of residence and the specific tax rules), often result in: double taxation and/or diminish the opportunity to engage in the responsible financial/retirement planning that is required of all citizens. This is why many people are forced to renounce.

The endless comments that suggest that somehow the problems of double taxation are solved by the FEIE and foreign tax credit rules are simply wrong. It’s a myth. As John F. Kennedy said in his 1962 Commencement address at Yale – the problem is often not the lie. The problem is often the myth. The myth that there are no problems because of the FEIE and foreign tax credits lives on. Those who haven’t lived these problems have no way of understanding this.

Is this a “human rights” issue? Different people have different views of what is meant by “human rights”. For citizens of countries with more modern constitutions, “human rights” has a meaning that is more expansive than how Americans view “human rights”. US culture and law tends to equate “human rights” with US constitutional rights. US constitutional rights are (by definition) restricted by the limits of the US constitution which are somewhat more limited than what “human rights” are understood to mean in other parts of the world. Furthermore, the US constitution is probably the oldest constitution in the world. Make no mistake – it is out of date. It has allowed for the creation of tyranny of laws and bureaucracy that threaten the liberty/freedom of every American everywhere. (But, that is a somewhat different topic.) Remember that the Bill of Rights was NOT part of the original constitution. Many US constitutional rights are the result of courageous battles fought by individuals and NOT by the grace of government.

But, back to the citizenship-based taxation issue …

What citizenship-based taxation means is (and there can really be no room for argument on this):

The United States is imposing the requirements of the Internal Revenue Code (taxation on worldwide income, reporting and penalties) on individuals who: 1. Do not live in the United States and 2. are tax residents of other countries and 3. have NO US source income.

The scope of people targeted by this include: 1. American expatriates (people who move abroad and intend to return to the USA) 2. Accidental Americans (people born in the USA and left the USA as children) and 3. Those who emigrate from the United States, who do NOT intend to return to the USA and have lives that are fully integrated into the tax systems of other countries.

Most of the commenters in support of citizenship-based taxation assume the ONLY people impacted are short term American expatriates. Wrong, wrong and wrong. Because all individuals born in the United States are US citizens, there are many people in the world, who are US citizens with little or no connection to the USA. Because anybody born to two US citizens outside the US is a US citizen, there are many people who are US citizens who have NEVER lived in the USA. There are people who don’t speak English who are subject to these rules. That’s the reality. Imagine somebody living in say Bolivia, with only Bolivian source income, who may not even speak English, who is taxed by Bolivia. Is this person seriously expected to pay tax on his Bolivian income to the United States? Should he be penalized for not filing a form?

There is another aspect to this problem. It’s how the Internal Revenue Code is written. S. 1 says this: Any person except a nonresident alien is subject to US worldwide taxation, on his income, no matter where he lives in the world. S. 61 defines income to be the receipt of basically anything that is not a gift. The effect of this is that the USA is imposing US taxation on welfare benefits received by people in other countries. Welfare benefits are not generally taxable in those other countries. To put it another way: The USA is stealing the welfare benefits of low income people who don’t live in the United States, but are somehow US citizens. And no, (to those who reflexively claim that these people don’t pay US tax) these kind of payments are NOT subject to the FEIE (not earned income) and are not subject to the foreign tax credit rules (not subject to tax). So, when Mike Breen uses the language of theft, he’s right. (Unless you think imposing US tax on the welfare benefits received by people in other countries isn’t theft). There are many other examples. I am using the welfare benefit example because it’s simple enough for anybody to understand.

It is possible to disagree on whether this is appropriate. But, it is NOT possible to disagree on what it actually means.

The US tax policy of citizenship-based taxation is morally wrong. But, the immorality is hidden in the complexity of the rules. Those who haven’t experienced it or file their tax returns incorrectly (a lot of people), don’t understand what US citizenship-based taxation really means, how it really works and to whom it really applies.

A supporter of this sorry state of affairs is somebody who is vaguely aware of citizenship-base taxation (and probably hasn’t lived it and imagines the problems are solved by the FEIE and FTC rules). An opponent of citizenship-based taxation is somebody who actually understands how it works.

Here Is My Answer:

As a defender of American “freedom”, how do you justify the fact that US citizens have to pay taxes to the US even if they live and work abroad (even if they have never been to the US but got their citizenship through their parents)?

Some of the answers to this question appear to assume that taxation is part of citizenship. In other words: If you are a US citizen then you should by definition be required to pay taxes AND that this obligation to pay US taxes follows you around the world even if you don’t live in the United States.

It’s fairly obvious that as a general principle, citizenship does not imply taxation. After all, ONLY the United States and Eritrea impose worldwide taxation on their citizens who live outside the country. Canadian citizens are not subject to Canadian worldwide taxation if they move from Canada. Citizenship per se, does NOT imply taxation.

Therefore, the question is this: Is taxation an incident/requirement of US (United States) citizenship? In other words, is there something unique about US citizenship, that dictates that US citizens not living in the United States, should be subject to US tax rules as though they do live in the United States (even when they are tax residents of other countries)? Is US citizenship just different from other citizenships? Is taxation a special attribute of US citizenship? Is US citizenship a kind of taxation based citizenship? Are US citizens simply “Permanent US Taxpayers No Matter Where They Live In The World?”

Let’s start with the 14th amendment to the constitution. It says that anybody born or naturalized in the United States IS a US citizen. The 14th amendment doesn’t say “is a US citizen and taxable on worldwide income even if they don’t live in the United States).

In the 1967 decision of Afroyim v. Rusk, the US Supreme Court made it clear that Congress CANNOT enact laws that result in the forcible destruction of citizenship. It’s also important to note that, for those born or naturalized in the United States, the right to maintain US citizenship is a constitutional right. It is not a right that is somehow subject to government control.

I can tell you that there are many Americans abroad who are constructively forced to renounce US citizenship because of complications in the Internal Revenue Code. People can’t be subject to worldwide taxation, according to US tax rules and worldwide taxation and according to the rules of another country at the same time. Being subject to two different tax codes creates significant practical difficulties that (depending on the country of residence and the specific tax rules), often result in: double taxation and/or diminish the opportunity to engage in the responsible financial/retirement planning that is required of all citizens. This is why many people are forced to renounce.

The endless comments that suggest that somehow the problems of double taxation are solved by the FEIE and foreign tax credit rules are simply wrong. It’s a myth. As John F. Kennedy said in his 1962 Commencement address at Yale – the problem is often not the lie. The problem is often the myth. The myth that there are no problems because of the FEIE and foreign tax credits lives on. Those who haven’t lived these problems have no way of understanding this.

Is this a “human rights” issue? Different people have different views of what is meant by “human rights”. For citizens of countries with more modern constitutions, “human rights” has a meaning that is more expansive than how Americans view “human rights”. US culture and law tends to equate “human rights” with US constitutional rights. US constitutional rights are (by definition) restricted by the limits of the US constitution which are somewhat more limited than what “human rights” are understood to mean in other parts of the world. Furthermore, the US constitution is probably the oldest constitution in the world. Make no mistake – it is out of date. It has allowed for the creation of tyranny of laws and bureaucracy that threaten the liberty/freedom of every American everywhere. (But, that is a somewhat different topic.) Remember that the Bill of Rights was NOT part of the original constitution. Many US constitutional rights are the result of courageous battles fought by individuals and NOT by the grace of government.

But, back to the citizenship-based taxation issue …

What citizenship-based taxation means is (and there can really be no room for argument on this):

The United States is imposing the requirements of the Internal Revenue Code (taxation on worldwide income, reporting and penalties) on individuals who: 1. Do not live in the United States and 2. are tax residents of other countries and 3. have NO US source income.

The scope of people targeted by this include: 1. American expatriates (people who move abroad and intend to return to the USA) 2. Accidental Americans (people born in the USA and left the USA as children) and 3. Those who emigrate from the United States, who do NOT intend to return to the USA and have lives that are fully integrated into the tax systems of other countries.

Most of the commenters in support of citizenship-based taxation assume the ONLY people impacted are short term American expatriates. Wrong, wrong and wrong. Because all individuals born in the United States are US citizens, there are many people in the world, who are US citizens with little or no connection to the USA. Because anybody born to two US citizens outside the US is a US citizen, there are many people who are US citizens who have NEVER lived in the USA. There are people who don’t speak English who are subject to these rules. That’s the reality. Imagine somebody living in say Bolivia, with only Bolivian source income, who may not even speak English, who is taxed by Bolivia. Is this person seriously expected to pay tax on his Bolivian income to the United States? Should he be penalized for not filing a form?

There is another aspect to this problem. It’s how the Internal Revenue Code is written. S. 1 says this: Any person except a nonresident alien is subject to US worldwide taxation, on his income, no matter where he lives in the world. S. 61 defines income to be the receipt of basically anything that is not a gift. The effect of this is that the USA is imposing US taxation on welfare benefits received by people in other countries. Welfare benefits are not generally taxable in those other countries. To put it another way: The USA is stealing the welfare benefits of low income people who don’t live in the United States, but are somehow US citizens. And no, (to those who reflexively claim that these people don’t pay US tax) these kind of payments are NOT subject to the FEIE (not earned income) and are not subject to the foreign tax credit rules (not subject to tax). So, when Mike Breen uses the language of theft, he’s right. (Unless you think imposing US tax on the welfare benefits received by people in other countries isn’t theft). There are many other examples. I am using the welfare benefit example because it’s simple enough for anybody to understand.

It is possible to disagree on whether this is appropriate. But, it is NOT possible to disagree on what it actually means.

The US tax policy of citizenship-based taxation is morally wrong. But, the immorality is hidden in the complexity of the rules. Those who haven’t experienced it or file their tax returns incorrectly (a lot of people), don’t understand what US citizenship-based taxation really means, how it really works and to whom it really applies.

A supporter of this sorry state of affairs is somebody who is vaguely aware of citizenship-base taxation (and probably hasn’t lived it and imagines the problems are solved by the FEIE and FTC rules). An opponent of citizenship-based taxation is somebody who actually understands how it works.

Your questions and comments are most welcome. John Richardson

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

Twitter 

Subscribe to TaxConnections Blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.