The purpose of this post is to continue the discussion generated by the “Open Letter To Democrats Abroad” (discussing the notion that “revenue neutrality” should be part of the “citizenship taxation” debate) and the “13 Reasons Why” (describing why Americans abroad are being forced to renounce U.S. citizenship.
Neither of those posts really described that fact that as ridiculous and unfair as “citizenship-based taxation” is, Americans abroad are “in effect” subject to a separate tax system than are Homeland Americans. A more extensive version of this post appeared at Tax Connections on March 13, 2019.
There are many instances where a U.S. citizen living abroad who earns his salary abroad, owns his assets abroad, has his pension abroad and is married to a non-U.S. spouse will pay higher U.S. taxes on income that is local to him than a comparable Homeland American would pay on income that is local to him.
Furthermore, as has been demonstrated by the recent Form 3520A penalty fundraiser (well documented by Gary Carter), Americans abroad are subject to a Form and Penalty regime that Homeland Americans are not subject to.Yup, incredibly some Americans abroad have been subjected to $10,000 USD penalties for “reporting violations” with respect to things that are not (under any rational definition) foreign trusts. (This is a failure on the part of the both Congress and Treasury).
Assuming Americans abroad should be taxed on their “non-U.S. income at all”, one must ask:
What is the justification for subjecting them to a separate and more punitive tax system than Homeland Americans? Is this a modern day example of the “Separate but equal” doctrine?
Bottom line: The United States is imposing a more punitive tax system on U.S. citizens who live outside the United States than it imposes on U.S. citizens who live in the United States.
Equality Of Discrimination? – Twelve Examples – The Dirty Dozen
Although there are many examples, I have decided to describe only 12 examples. I refer to the 12 examples as “The Dirty Dozen” (named after an old movie I like).
As you read these examples, please understand that the United States (where the person does not live) is imposing more punitive taxation on income earned by a person in a country where he does live. For example: A dual U.S./Canada citizen living in Canada might say:
If I lived in the U.S. and earned my income in the U.S. I would be taxed less heavily on the income I am earning in Canada while living in Canada.
Here we go – Twelve FATCAoids:
12 examples (in addition to the “transition tax”) which U.S. residents can “laugh about” and U.S./Canada dual citizens resident in Canada can/should “rage about”:
1. Templeton Mutual Fund bought in the U.S. by a U.S. resident is NOT subject to PFIC confiscation. The same mutual fund (with exactly the same securities) bought in Canada by a Canadian resident is subject to PFIC confiscation. Furthermore, the Canadian resident is required to report his ownership in his Canadian mutual fund on Form 8621.
2. A U.S. resident who invests in a ROTH IRA has automatic “tax deferral” and is not subject to U.S. taxation. A Canadian resident who invests in an equivalent Canadian TFSA (in Canada) does not have “tax deferral” and is subject to U.S taxation on the income on TFSA in the United States even though he is not subject to taxation on the income in Canada.
3. A U.S. resident who invests in an ABLE plan (Achieving a Better Life Experience Act) has automatic tax deferral. A Canadian resident who invests in an RDSP (equivalent “special needs plan”) is subject to U.S. taxation on that income. Furthermore, the Canadian resident is required to report his ownership of his RDSP on Form 3520.
4. A U.S. resident who invests in a S. 529 “education plan” has automatic tax deferral. A Canadian resident who invests in an RESP (equivalent “education plan”) does not have “tax deferral” and is subject to U.S. taxation on that income. Furthermore, the Canadian resident is required to report his ownership in his RESP on Form 3520. (See also this discussion from Virginia La Torre Jeker who describes the difficulties Americans abroad may experience should they try to make use of a Section 529 plan.)
5. A U.S. resident who receives distributions from a 401K plan is not subject to the 3.8% Obamacare surtax. A Canadian resident who takes a distribution from an (equivalent) Canadian RRSP is subject to the 3.8% Obamacare surtax. Furthermore, the Canadian resident is required to report his Obamacare surtax on Form 8960.
6. A U.S. resident is not required to report his local U.S. bank accounts to U.S. Financial Crimes. A Canadian resident is required to report his Canadian bank accounts to U.S. Financial Crimes. This is a very special category of “form crime” -see information about Mr. FBAR.
7. A U.S. resident is not required to report his U.S. financial assets annually to the IRS on Form 8938. A Canadian resident may be required to report his Canadian financial assets annually to the IRS on Form 8938. Form 8938 is an extremely intrusive, time consuming form.
8. A U.S. resident is NOT required to treat his business activities in the USA as foreign and subject to penalties and reporting. Certain Canadian residents are required to treat their business activities in Canada as foreign and subject to penalties and reporting. Check out Form 5471 and Form 8865.
9. A U.S. resident married to a U.S. citizen spouse is allowed to make unlimited gifts to his spouse. A Canadian resident married to a Canadian citizen spouse is NOT allowed to make unlimited gifts to his spouse. Furthermore, the Canadian resident is required to report certain gifts to his spouse on Form 709. Furthermore, the Canadian resident is required to report certain gifts from his spouse on Form 3520. The U.S. imposes numerous forms of punitive taxation on U.S. citizens who marry non-citizens.
10. A U.S. resident who renounces U.S. citizenship will not have his U.S. pension plan subject to confiscation because of the Section 877A Exit Tax. A Canadian resident who renounces U.S. citizenship would have his Canadian pension plan subject to confiscation because of the S. 877A Exit Tax. It’s because it the pension is NOT a “U.S. pension”, but is a “Canadian pension”.
11. The TCJA includes a provision that allows U.S. residents to deduct property taxes on their U.S. principal residences, but specifically does NOT allow a Canadian living in Canadian to deduct property taxes on his Canadian principal residence.
12. As explained by Virginia La Torre Jeker, The TCJA provided allows a deduction of up to 20% of pass through income for specified service business owners with income under $157,500 (twice that for married filing jointly) for certain income effectively connected with the conduct of the trade or business within the US. A U.S. resident operating a U.S. business is entitled to the deduction. A Canadian resident carrying on a small unincorporated business in Canada is NOT entitled to the 20% reduction.
The United States and Eritrea are the only two countries that impose worldwide taxation on their citizens who live abroad. But, there is a huge difference between HOW the two countries impose worldwide taxation on their citizens abroad. Eritrea imposes only an excise tax that is based on the percentage of tax paid to the other country. The United States is imposing (in effect) a different set of tax rules for how taxable income earned in the other country is calculated. Taxable earned in that other country is “foreign” to the United States. The “foreign” source of the income (particularly in the area of investment and pension income) sets the stage for punitive U.S. taxation. Americans abroad are subjected to U.S. taxation that is far more punitive than domestic income earned by Homeland Americans. This punitive taxation often means that Americans abroad will first pay tax to their country of residence and second pay more tax to the United States. In fact, Americans abroad are subject to the highest level of taxation in their country of residence. Put it another way: Americans abroad will be the highest taxed people in the country with the highest tax rates in the world.
To put it in people talk: Americans abroad are the most highly taxed people in the world. It’s the simple FATCA of the matter!
Written by John Richardson
Your commentary is most welcome!