Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join me on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:
You are invited to submit your questions in advance. In fact, PLEASE submit questions. This is an opportunity to engage with Homelanders in general and the U.S. tax compliance community in particular.
Thanks to Professor Zelinsky for his willingness to engage in this discussion. Thanks to Kat Jennings of Tax Connections for hosting this discussion. Thanks to Professor William Byrnes for his willingness to moderate this discussion.
Tax Connections has also published a number of posts written by Professor Zelinsky (who apparently takes a contrary view).
This is the fourth of a series of four posts that reflect views and experiences of Americans abroad who are experiencing the reality of actually living as an American abroad in an FBAR and FATCA world. (The first post is here.) The second post is here. The third post is here. I think it’s important to hear from people who are actually impacted by this and who have the courage to speak out. The “reality on the ground” is quite different from the theory.
I hope that this series of posts will give you ideas for questions and concerns that you would like to have addressed in the May 17, 2019 Tax Connections – Citizenship Taxation discussion.
I am grateful to Laura Snyder for contributing her thoughts, writing and research to the discussion.
Now over to Ms. Snyder …
“It Hurts My Heart:”
The Case for Fairer Taxation of Non-Resident US Citizens
by Laura Snyder
Post 4 of 4
This is the last of a series of four posts to make the case for fairer taxation of non-resident US citizens and green card holders. The first post was a Case Study in the Marginalization of Americans Living Overseas. The second post recounted the origins of the situation, unique to the United States. The third post described the destabilizing effects of recent US banking regulations and explained how the 2017 Tax Cuts and Jobs Act turned an already difficult situation for entrepreneurs and small business owners into an impossible one. This fourth post exposes continuing prejudices, misconceptions and misunderstandings and how they serve to perpetuate and aggravate the situation for so many US citizens who seek simply to lead normal lives in the places where they live.
Continued Misconceptions and Misunderstandings
When Americans living overseas speak about the problems they face as a result of US banking and taxation policies, they often receive responses along the lines of:
A. You’re exaggerating: The foreign-earned income exclusion and foreign tax credits mean that in most cases you don’t need to file US tax returns and, if you do, they mean that your tax liability is low, if indeed you owe anything at all. So, what’s the problem?
A) US citizenship is a privilege and it confers on you certain benefits. It is normal that you must pay for them. You should pay your fair share.
B) If you live overseas then you must be wealthy because only wealthy people can afford to travel overseas. And since you are wealthy, you must have moved overseas in order to avoid US taxes.
C) No one is forcing you to live overseas. If you are unhappy then you should either move back to the United States or renounce your US citizenship.
It is easy to hear in these responses century-old echoes of Senator Collamer, as described in the second post:
If a man draws his income from our public debt, or from property here, and resides in Paris, skulking away from contributing his personal support to the Government in this day of its extremity, he ought to pay a higher income tax.
And of Senator Hoar, as also described in the second post:
[The point of citizenship-based taxation is so that] if an American citizen went abroad and carried the protection of his country, of his citizenship with him, he did not escape its burdens… There are a great many people, I am sorry to say, who go abroad for that very purpose…
These responses show, at best, lack of knowledge and, at worst, callous indifference regarding Americans who live outside the borders of the United States.
Addressing each response, in turn:
A. You’re exaggerating: The foreign-earned income exclusion and foreign tax credits mean that in most cases you don’t need to file US tax returns and, if you do, they mean that your tax liability is low, if indeed you owe anything at all. So, what’s the problem?
To begin, the foreign-earned income exclusion is not related to the minimum filing requirements for a US federal tax return:
The foreign-earned income exclusion is an amount that is adjusted most tax years. For fiscal year 2017, it was US$102,100. For fiscal year 2018 it is US$104,100. This is the maximum amount of wages or self-employment income earned for services performed outside the United States that a US taxpayer living overseas can exclude from their US taxable income. Of course, this income exclusion relates only to the taxpayer’s taxable income with respect to the United States. It is entirely unrelated to the taxpayer’s taxable income and consequent tax liability in his/her country of residence, where the taxpayer is subject to income tax in the same manner as all other residents of that country.
Minimum filing requirements are the lowest gross income amounts that trigger the requirement to file a federal income tax return. These amounts vary depending upon age and filing status (single, married filing jointly or filing separately, etc.). For 2018 the minimum income for taxpayers under the age of 65 is US$12,000 (single), US$24,000 (married filing jointly) and US$18,000 (head of household). In the event of self-employment filing is required if earnings total just US$400.
The most remarkable threshold is the one for married filing separately. For 2017 this amount was already low at just US$4,050. For 2018 it has been reduced to US$5. This basically means that if you are married but not filing jointly with your spouse then you must file a tax return regardless of your income, and even if you have basically no income besides, for example, interest earned on a bank account. This change has a disproportionate effect on overseas taxpayers given that they file under this status at a much higher rate as compared to all US individual tax returns (17.64% as compared to 2.09% in 2016). This change to minimum filing requirements will have the biggest impact on US citizens living overseas, principally but not only women, who are supported by their non-resident non-citizen spouses (who are not required to file or pay US income tax) while they perform unpaid domestic duties (such as child rearing). This impact is far from benign when you take into account the length, complexity and very high cost of preparing the typical non-resident’s tax return (typically anywhere from US$500 to US$3,000, as discussed below).
These minimum filing thresholds take into account all sources of the taxpayer’s income. In contrast, the foreign-earned income exclusion applies only with respect to the taxpayer’s earned income. This means that it does not apply to any income that does not qualify as earned, such as capital gains, insurance proceeds, unemployment compensation, or pension proceeds. To the extent the income in question is not earned income, a US citizen living overseas cannot benefit from the foreign-earned income exclusion.
Which raises the question of foreign tax credits. The theory is that a taxpayer should not have to pay tax twice with respect to the same income, so to the extent a non-US resident pays tax in his/her country of residence with respect to certain income then the tax he/she owes to the United States with respect to the same income should be reduced accordingly. However, while the theory itself is not objectionable, the practical application leaves much to be desired:
To begin, the formulas applied to calculate a taxpayer’s foreign tax credit are highly complex and they often fail to produce an amount that is actual dollar-per-dollar of the tax paid.
In addition, a foreign tax credit applies only to the extent that the foreign tax paid is equal to or greater than the taxes otherwise owed to the US with respect to the same income. So, if the non-US resident taxpayer lives in a country that applies lower rates of taxation than the United States, the non-resident taxpayer will end up paying in tax not the amount owed by others who live in the same country, but instead a higher amount: the amount owed under US tax rules, of which one part will be paid to the taxpayer’s country of residence and the balance to the United States.
This effect is especially insidious when it occurs as a result of tax policies that the US citizen’s country of residence has purposefully adopted in order, for example, to encourage certain actions or to increase the financial resources available to certain types of people. In this manner that country might apply reduced rates of taxation or entirely exempt certain types of income from taxation. Common examples are the exclusion of capital gains tax on the sale of a home by a surviving spouse, or the exclusion of income tax on contributions to pension plans, on pension proceeds upon retirement, on life insurance proceeds or unemployment benefits. A number of countries have taken purposeful policy decisions either to not tax these kinds of income or to tax them at a reduced rate in order that all of the residents of that country may plan their finances (including, most notably, their retirements) on the basis of those policies and in order that the economies of these countries may benefit from their residents having access to these additional resources. The limitations on the availability of US foreign tax credits means (1) it is very difficult for US citizens living overseas to plan their finances and investments generally, and their retirements specifically, without incurring punitive US taxes, sometimes so high as to eliminate much of the value of the investment, and (2) the policies of the country where the US citizen resides are superseded by US tax law with the result that resources those policies intended to make available for its residents—notably so they can avoid financial distress—are instead being removed from that country in order to be paid in taxes to the United States.
Finally, the tax returns of most US citizens living overseas are lengthy and exceptionally complex (often 40 to 50+ pages). Few have the specialized knowledge and skills required to complete them correctly. For this reason, many US citizens living overseas have no choice but to rely upon a professional tax preparer. They typically charge fees averaging $US500 to US$3,000 per year. These fees are incurred regardless of whether any tax is ultimately owed and, in many cases, no tax is ultimately owed (about 55% of tax returns filed from outside the United States show zero tax owed).
In sum, the foreign-earned income exclusion and foreign tax credits can often result in a US citizen owing little to no US tax, but this is by no means always the case. Further, regardless of whether any tax is owed, US citizens living overseas incur very high fees—often several thousands of dollars—for the preparation of their tax returns, and they incur these fees on an annual basis regardless of whether any tax is owed. This includes those with very low incomes—in the case of those who are married, filing separately, such fees are incurred based on an income as low as US$5.
B. US citizenship is a privilege and it confers on you certain benefits. It is normal that you must pay for them. You should pay your fair share.
What is “fair?” And what benefits?
Does this response refer to public services such as police and fire fighting, schools, roads and other infrastructure? US citizens living overseas pay for these services when they pay taxes in the countries where they live. They benefit from these services in the United States only to the extent they visit the United States, in much the same way that non-citizens who visit also benefit from them. Both kinds of visitors, when they travel to the United States, pay a range of tourism (occupancy, car rental and airline) taxes which are used to fund infrastructure as well as local services. The United States does not seek to tax the income of non-citizen visitors in order to fund these services, just as other countries do not seek to tax the income of US residents who visit those other countries.
Does this response refer to the right to return to the United States to live and work? Does it mean the ability to pass US citizenship onto children? All other countries (except Eritrea) accord these benefits to their citizens without requiring them to pay a tax in return. Further, these benefits are accorded to US citizens who reside in the United States, regardless of the amount they pay in taxes and including those US citizen residents who pay no taxes at all. Further, as discussed below, Article 13 of the Universal Declaration of Human Rights provides that “Everyone has the right to leave any country, including his own, and to return to his country.” This human right is not conditioned upon the payment of any kind.
Does this response refer to the right to vote? Again, all other countries accord this benefit to their citizens without requiring them to pay a tax in return. In addition, the 24th Amendment makes it unconstitutional to condition the right to vote in a federal election upon the payment of any tax.
Does this response refer to the right to have a US passport? Again, all other countries accord this benefit to their citizens without requiring them to pay a tax in return. Further, in terms of visa-free travel throughout the world, a US passport is not all that special: the passports of 16 other countries offer visa-free access to at least as many if not more countries.
Does this response refer to the right to access consular services? Again, all other countries except Eritrea accord this benefit to their citizens without requiring them to pay taxes in return. In addition, US consular services have been severely restricted over the past decade—most now provide little more than basic services. As for the services they do offer, most require the payment of fees that are far higher than those charged for comparable services in the United States and it is these fees—not proceeds from taxation—that nearly entirely fund consular services.
Does this response refer to protection of some kind by the United States of its citizens overseas? US citizens cannot count on the availability of evacuation services, and, on those occasions when they are available, those being evacuated are obliged to sign a form promising to repay the costs. Further, the United States has asserted the right to target and kill US citizens overseas, without the need to accord them any due process.
Finally, just who are non-resident US citizens paying? Most of the returns filed by US citizens living overseas show they owe no tax and, accordingly, no tax is paid. On the other hand, those same US citizens living overseas often pay hundreds if not thousands of dollars each year for the preparation of their lengthy and highly complex US tax returns. In fact, the principal beneficiary of the claim that non-resident US citizens should “pay their fair share” is not the US Treasury—it is the professional tax compliance industry.
In sum, in claiming that US citizens living overseas should “pay their fair share” in US income tax, it is unclear just what those citizens are paying for. At the same time, it is clear that for the most part what they pay benefits the tax compliance industry rather than the US Treasury.
C. If you live overseas then you must be wealthy because only wealthy people can afford to travel overseas. And since you are wealthy, you must have moved overseas in order to avoid US taxes.
Unfortunately, there is little detailed demographic information about US citizens who live overseas. Neither the US government nor any other organization keeps track of them in any meaningful way. That being said, there is some information:
According to a 2013 study by Amanda Klekowski von Koppenfels, Americans leave the United States most commonly for marriage or partnership, for study or research, or for employment. Many intend to live outside the United States for a limited period but they prolong their stay when they meet and decide to remain with a partner or to pursue unexpected work opportunities. Further, a number of US citizens have never lived in the United States (they were born to at least one US citizen parent) and, as mentioned above, many are “Accidental Americans” who were born in the United States but left with their families when they were very small children.
Nearly one-fifth of the subjects of von Koppenfels’s study worked in education; in most of those cases they were teaching English on a freelance basis. Another one-fifth worked in IT or communications. Of the remainder, many were veterans of the US armed forces who remained overseas after retirement or the end of a tour of duty, and many were retirees, typically living in low-cost locations like Mexico or rural Portugal.
Finally, while US citizens live in at least 100 countries, the large majority of them live in high-tax countries such as the United Kingdom, Canada, Germany, Australia and France. Indeed, of the top ten countries hosting US citizens, only one—Mexico—has a lower total tax burden as a percentage of GDP as compared to the United States.
There is nothing in the information above to support the preconceptions either that US citizens living overseas are generally wealthy or that they left the United States in order to avoid US taxes. To the contrary, many if not most are of modest means (freelance English teachers, veterans and retirees), many if not most left the United States for marriage or to pursue work opportunities, and many live in countries where their tax burden is greater than it would be if they lived in the United States. Further, a significant number of US citizens living outside the United States either have never lived in the United States or they left when they were small children.
In sum, the evidence available indicates both that at most only a small percentage of US citizens living overseas are wealthy and that very few US citizens leave the United States for the purpose of avoiding US taxes.
D. No one is forcing you to live overseas. If you are unhappy then you should either move back to the United States or renounce your US citizenship
Contained in this response is the implicit acknowledgement of the burdens that US banking and taxation policies impose upon US citizens: Burdens that make it very difficult if not impossible to live a normal life outside of the United States, forcing many US citizens to choose between either returning to the United States or renouncing US citizenship.
This response raises a number of issues:
Practically speaking, few US citizens living overseas are in a position to simply move to the United States. US citizens live overseas for valid and enduring reasons, such as in order to share their life with a spouse or partner and other family members or in order to pursue professional opportunities. These reasons have led them to build lives in their countries of residence: raising families, pursuing careers, creating businesses, etc. The suggestion that they simply “move back to the United States” is a suggestion that they break up their families and turn their backs on their livelihoods.
Further, this response assumes that all US citizens have previously lived in the United States. This is not the case: a number of US citizens either have never lived in the United States or they left the country when they were children.
In sum, simply “moving back” to the United States is not a real choice for many if not most US citizens who live outside the country. To the contrary, it is an action that would result in devastating consequences.
Renouncing US citizenship presents its own formidable obstacles:
To begin, the process is complex and, especially, very expensive. Officially documenting loss of citizenship requires a Certificate of Loss of Nationality (CLN), which costs US$ 2,350 (the highest renunciation fee in the world). Further, the renunciation process normally involves the submission of a complex form detailing the individual’s income and assets in order to determine if the individual is a “covered expatriate” (Form 8854). One criterion that would establish covered expatriate status is the failure to certify compliance with US tax law during the five years prior to renunciation. Another criterion of covered expatriate status is if the individual’s net worth at the time of renunciation exceeds US$2 million. As an example, if the individual owns a modest home in a place where real estate values are high, the market value of his/her home, alone or together with other assets, such as a retirement fund, could result in a total net worth of US$2 million or more, thereby qualifying the individual as a covered expatriate.
Covered expatriates are subject to an “exit tax.” This tax is based upon the total value of the individual’s assets. The individual will be liable for applicable capital gains as well as any other taxes based upon the deemed disposition of the assets at the time of renunciation, in a manner akin to an estate tax.
In her article “Investing with One Hand Tied Behind Your Back,” Karen Alpert estimates that for a family with two US citizen parents and two young adult US citizen offspring, renouncing US citizenship and fulfilling any obligations as a covered expatriate would require, in addition to any exit tax owed, the payment of: (1) administrative fees of US$ 9,400, (2) the cost of travel to the nearest consulate, (3) the cost of ensuring tax compliance for the preceding five years, (4) the cost of preparing four final US tax returns including Form 8854, and (5) the cost of the legal advice needed to navigate the complex process.
In sum, the cost to renounce US citizenship is daunting. While certainly some can afford it and do pay it (indeed, the chart below demonstrates that the number of renunciations has shot up considerably since the implementation of FATCA), understandably it is out of reach for many.
Source: Andrew Mitchel and Forbes.
The second obstacle to renouncing US citizenship is the problem of statelessness. While, as discussed above, a significant number of US citizens living overseas are also citizens of one or more other countries, many are not. This is notably (but by no means exclusively) the case of US citizens who reside in countries where it is an especially difficult, or at least an especially lengthy process, to become a naturalized citizen—countries such as Austria, Germany, Switzerland, Qatar, United Arab Emirates, Japan, and China. US citizens who renounce their citizenship without being a citizen of at least one other country become stateless.
Statelessness means that no country in the world considers you to be a citizen of that country. Stateless persons are highly vulnerable: considered a foreigner by every country in the world, they may lose the right to work, to vote, to hold public office, or even to live in any country. Statelessness may also mean losing rights to attend school, to have a bank account, to own real estate, to access healthcare, to get married. Statelessness is such a serious condition that it is considered to be a human rights violation; the right to a nationality is a fundamental human right. In this context, the suggestion that someone who is not a citizen of any other country should renounce their US citizenship is, at best, unhelpful.
The third obstacle to renouncing US citizenship is psychological. For many people, citizenship is an integral part of their identity. Suggesting they give it up is akin to suggesting they give up a limb. Those who have renounced, in many cases because they felt they had no choice, describe the experience as “hit me in the gut,” and “it hurts my heart.” Understandably, not everyone has the immense emotional fortitude required to take what is an irreversible step.
Further, many US citizens living overseas have close family members living in the United States. Those family members often include aging parents and/or others who are unable to undertake international travel. Renunciation of US citizenship incurs the risk of not being able to enter the United States even on a temporary visit, let alone on a long term basis in order to care for or visit a family member, because only current US citizens have the right to enter the United States. For many US citizens living overseas, incurring this risk is unthinkable.
Indeed, placing US citizens living overseas in the position where they must choose between either moving (back) to the United States or renouncing their US citizenship violates Article 13 of the Universal Declaration of Human Rights which provides: “Everyone has the right to leave any country, including his own, and to return to his country.”
In sum, for most US citizens living overseas, there are huge if not insurmountable barriers to moving “back” to the United States as well as to renouncing US citizenship. Suggesting these highly consequential—indeed, drastic—actions as solutions to the problems created by FATCA and non-resident taxation both: (1) acknowledges the severe hardships these policies create, and (2) exposes the fundamental injustice of the policies. Contained in the suggestion is the acceptance that US citizens, in violation of Article 13 of the Universal Declaration of Human Rights, are not fully free to live outside the United States. The suggestion makes a mockery of the American values of freedom and self-determination.
* Laura Snyder was raised in the United States and has lived in Europe (mostly in France) since 1995. She holds a JD from the University of Illinois, a DEA in droit privé from the University of Paris 1 (Panthéon-Sorbonne) and she completed the TRIUM Executive MBA program (an alliance of New York University, London School of Economics and HEC School of Management). She is a doctoral candidate at the University of Westminster. She is the author of the books Democratizing Legal Services: Obstacles and Opportunities and Modernizing Legal Services in Common Law Countries: Will the US Be Left Behind? She is a member of the bars of New, York, Illinois and Paris.
Note: The original version of Ms. Snyde’rs post contains a number of footnotes that provide a rich source of further research and discussion. She has graciously allowed me to include the following pdf of this post that contains those footnotes. Here it is:
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10 comments on “It Hurts My Heart: The Case for Fairer Taxation of Non-Resident US Citizens (Part 4 of 4)”
The US government does a good job in establishing alliances to set the stage for their goals. For instance, scholars, CPAs, lawyers, NGOs, etc., play their water carrying role without flinching ensuring international tax filers are shut out from discussions on tax fairness. They “talk over” expats so their voices are unheard. We’re outgunned.
Another insidious development is some government “water carriers” insist if expats want change they should take it up with Congress, knowing full well there is zero dialogue about the well-being of Americans abroad. These same unconscionable people and organizations have some level of access to Congress, but choose to side with power and control.
Lastly, as is always the case with the US government outcomes they always pick the winners and losers. Think of it as a reward system. ‘Do a good job for me, I will do a good job you.”
Expats are hit with exorbitant filing costs and lawyer fees to try to comply with impossible international tax laws. It is no wonder so many are allied with the government position because their Lamborghini car payment rides on rent-seeking from Americans abroad.
Taxes pay for local services, water and sewage systems, roads, schools, police, the fire department, infrastructure projects, government administrative services, etc. Decisions about how to spend tax revenue are local, because the people confronting local issues are best placed to make those decisions.
US citizens resident outside of America pay local taxes to the community, state and country they live in, and receive local services in exchange for the taxes paid. The United States does not participate in funding any of these services – not one. The US does not help fund the maintenance of my local roads or schools, my local police and fire services. It contributed not one penny when our local water system needed to be replaced. Nor does it help fund any of my local government administrative services, the local military and civil protection service, none of the research funded here. Not one penny. When I pay tax into the US revenue system, I receive no local services in return. People living in America receive those services. And have no voice in how that tax revenue is spent. Americans living overseas are not represented in Congress.
I often read or hear this trope, that the American military will rescue American citizens from anywhere in the world. That’s the service we are paying for as expats. Well, how many times have French troops parachuted onto US soil to rescue a French citizen in distress? Has any military worldwide carried out such a rescue mission on US soil? Does that seem likely?
The vast majority of Americans overseas live in much safer countries than the United States. We don’t need rescuing. If we are required to pay US taxes as expats, the only service we need from the United States is clear instructions how to complete our horribly complex tax forms – and the US doesn’t even provide that to us!
No Marines. No Navy Seals with helicopters and guns and night vision goggles. None of that. Just clear step by step instructions instead of the treacherous minefield of entrapment we face year after year of multiple exorbitant fines and prison sentences. Clear, understandable tax compliance instructions instead of requiring us, by default, to pay international tax specialists, who also struggle to understand US expat tax requirements. Clear instructions instead of placing us under an avalanche of legal compliance risk year after year.
Is that too much to ask?
I was on the phone with an IRS legal advisor yesterday, specialized in international taxation. I’ve found it impossible so far to understand how to file the section 965 requirements on 2017 return despite many months of effort. I was asking him what type of information is legally permissible and defensible from the IRS’s point of view. The instructions are woefully incomplete and horribly complex.
He told me that his entire international section at the IRS does not yet really understand the section 965 requirements for 2017, so they are not in a position to provide any advice. The normal due date for 2018 returns is already past, and I’m still struggling to resolve my 2017 return. You may think “Wow, section 965 sounds exotic. You must be really rich!” Nope. The section 965 requirement for 2017 is related to the fact that I have a small one person business.
So what services are the United States providing to its citizens living overseas for the taxes we are required to pay? No local services whatsoever. I have to pay for those separately. Military rescue is out of the question, unless the US military can rescue me from the IRS. The United States has pulled out of the Paris accords and defunded its own climate research, so it does not even fund services related to climate change. No useful administrative services in regards to my US tax obligations are provided.
When a country loses track of the underlying reason for taxation, something is fundamentally wrong. Instead of providing useful services to its citizens, the US has embarked on a destructive campaign to enforce its supposed right to tax not only its overseas citizens, no matter where they live, but also deprive them of banking services, and aggressively tax their businesses domiciled in other countries. Since the US has no jurisdiction over these companies, it instead miraculously transfers foreign company income to US citizens’ tax returns, in the absence of any transaction or exchange of value, and taxes this non-existent income as a means to indirectly tax a foreign company through its US person owner.
That’s what the section 965 requirement is about.
What services do these foreign companies receive from the United States in exchange for the taxes their US person owners pay on their behalf, often under very significant financial stress?
Absolutely none whatsoever.
I was born in the USA in 1972. My parents are Scandinavian, and as soon as I was born they decided to move back to Norway, to raise me with the larger Scandinavian family. I grew up as any Norwegian boy. My dad is Norwegian, my mom is Swedish. I have blond hair and blue eyes. I have a Norwegian name. My grand parents are Scandinavian. My grand grand parents are. A few years later I was joined by a sister, born in Norway (lucky for her). I started learning English in School around age 9. The funny thing is that I wasn’t even good at it. I was told I was born in the USA. I thought it was cool. I never returned to the US. It was my parents choice to live there for a while. It was never mine. All my life has been outside of the US. I don’t have friends or family in the US. In the age of 45 years old, I received my first fatca letter. I ignored it. Then I got another one, and another. My banks told me I had to fill them out. I was surprised and shocked. I started reading up. Realizing I have 4 alternatives. Move to the USA, and start a new life. Or be screwed by the 3 other alternatives. Renounce will cost me a lot of money, not filing will expose me to insane fines, or start paying taxes to the US. A country I have never lived in. I can say Fatca has been a life changer. It’s not one day where I don’t think about it. It’s a constant worry hanging over me. I have not been able to buy insurance for the last 3 years, and I am not sure what to do. The US doesn’t care, and my government (Norway), is too scared of the US to care. I never dreamt I would end up in a situation like this in a modern western country. This is seriously destroying lives
My spouse & I were introduced by mutual friends after years together & the birth of our son we finally married and started a new life in his home country. While he didn’t earn a huge salary it was enough if we lived frugally. We planned on having one more child (ended up with two more), once in school full time I would either start my own business or find work.
What we didn’t plan for is having two children on the autism spectrum which required me to become a full time housewife as the taxes here and trying to comply with US tax code would have made a difficult situation impossible. We would have been worse off.
So we then planned that I would take citizenship here, renounce my US citizenship so I could open our own family business. Then came FATCA and renunciation fees – the fee was more than our monthly income. Being shut out of financial services meant we are trapped in a nightmare. Our goal is to see our children free of their US citizenship which means more sacrifice but at least they will be able to have a future free of government overreach from the US. Our son is now free but still have two to go. If time allows & we can afford it I will then follow but our children come first.
It hurts me heart also. But not because I am an American subjected to CBT. Rather it hurts because I am a Canadian living in Canada, yet the Canadian government seems to agree that I am owned by the USA. People who have left USA physically but not necessarily emotionally, complain that the government and society that they now live in (and are often citizens of) don’t care about the US FATCA/CBT attack they are facing. Maybe that has something to do with the fact that they describe and consider themselves to be “Americans living abroad” rather than loyal citizens and residents of the countries they actually live in. It is hard to be both. One or the other has to give. Americans are seen by the world as a priviliged group. Victims are not Americans (often thought of us taking advantage of Canada), according to the perspective of many whether we like it or not. Victims are Canadians, Australians, etc, , living in Canada, Australia, etc, , who are claimed as being owned by the USA. Until people stop thinking and describing themselves as “Americans Abroad”, expect to be treated as such and with no empathy for your perceived special status. Don’t look to the governent and society you actually live in to care or protect you if you identify as American – a priviliged foreigner. And don’t look to the country you left – USA – to care either.
When you have most fellow citizens that do not care, at all, about right of groups of people like expats, then the experiment of America has failed. It has become a zero-sum game; fighting for only an individuals own rights at the cost of another group of people. Most Americans have no understanding for Americans who have left the country, no matter the reasoning. This is a level of stupidity that didn’t even exist in the days of Benjamin Franklin. It breaks my heart to see this level of blind arrogance that has developed from our home country. But we cannot seem to get press or politicians to pay attention, and the popular belief is that we should be punished. In my opinion, expats should take steps in securing another nationality and renounce before the situation even gets worse. At this point, there only seems to be one Congressman that supports us, and the rest ignore the issue or provide only lip service.
I will NEVER understand what US government and citizenry believe they gain from decimating their citizens living abroad.
The current situation is destroying so many values the US purports to adhere to, especially the universally ingrained belief that the world hates them in envy of their freedoms. They simply will not believe, have no room to even entertain the concept, that they are NOT free to leave and financially survive. Comfort is found in labelling all expats as wealthy, unpatriotic whiners unwilling to pay their fair share to the greatest nation on this planet; your choice to leave so suffer.
Freedom, ability to compete in global economy, value of soft-power good will, gaining experience of the world outside US obviously pale in comparison to the few pennies they hope to garner by catching these traitors in IRS filing errors on their working class incomes.
Terrifying that in so many arenas US is administered by short sighted fools.
I moved to Canada to join my Canadian husband. The first thing the bank representative will suggest you sign up for after a checking account as a new resident is a Tax-Free Savings Account, but the IRS doesn’t recognize those the same way as Canada Revenue, so it’s not really tax-free if you’re American! I can also expect to be double-taxed on retirement account distributions – is this really fair if I don’t use US government services?
Small correction: Japan does not belong on the list of countries where the process of naturalization is especially arduous. The requirement is basically five years’ residence (less if you married a local) plus learning enough Japanese to communicate (waived for the elderly). The big reason why more people don’t do it is that one is required to renounce other citizenships (after naturalizing, not before). Website with more information: https://www.turning-japanese.info/
The U.S. tax and financial system is structured under the assumption that a US Citizen lives in the U.S.A. but, this system is, under Citizenship Based Taxation (CBT) applied to US Citizens living abroad with disastrous and very unfair effect. Besides the obvious issues and complications of imposing and overlaying the U.S. tax law literally on top of the tax laws and obligations of the nation where the U.S. Citizen lives creating double taxation issues and many times inconsistent obligations, FATCA results in literally banks refusing to provide services, and other crazy Catch 22 issues arise (for example, inability to buy a non US mutual fund without being subject to very onerous PFIC tax penalties but yet also not allowed as a non US resident able to buy US mutual funds). Similarly, by overlaying US law on local law benefits provided by the local nation’s laws are nullified, for example: capital gains taxes for the sale of a property are due to the US even if the local nation has less or no capital gains, interest income from a local account is taxed by the US even if the local nation does not tax income income, an income tax holiday from local taxes results simply in more US tax being due so the citizen abroad sees no benefit from the holiday. Having a local company formed under the local nation’s laws means the US Citizen must comply with all local tax and corporate laws AND overlaid US laws – including US law treating such local company as a foreign company owned by a US Person requiring expensive disclosures filed each year with US tax forms.
The fact that the US Citizen holds dual citizenship of the nation where he/she lives does not assist because US tax law ignores the existence of such dual citizenship and FATCA IGA’s compel the nation where the dual citizen lives to treat that dual citizen as a US Citizen (thereby compelling positive discrimination against its own citizen in that country).
The list of issues goes on and on – but fundamentally the problem is CBT. Every other nation taxes based on residence. You pay taxes where you live, but the US taxes on citizenship. At the end of the day, no other nation treats its citizens living overseas as poorly as the USA from a tax and financial perspective.
By effectively penalizing a US Citizen living overseas and denying that person the ability live a normal financial life in the country where they live, the US is forcing US Citizens to make a choice no one should be forced to have to make – to renounce US Citizenship to be able to reclaim their lives financially. Tax obligations are separate from citizenship – one can be a French citizen living in Thailand pay Thai taxes and not French income tax and still be a French citizen. However, unlike the rest of the world US law couples citizenship and tax at the hip with disastrous effect on the overseas US Citizen.
The solution is simple – Congress can easily bring the US in line with the rest of the world by moving to either residence or territorial based tax (not CBT). Congress can fix this wholly unfair situation that is damaging US Citizen families abroad. 9 million US citizens will be forever grateful to be able to live a normal life overseas –
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