On February 28, 2019 TaxConnections kindly posted my first post comparing the way that 19th Century Britain and 21st Century America Treated Its Citizens/Subjects. The post received a great deal of interest resulting in more than 120 comments (largely reflecting the frustration of Americans abroad and accidental Americans).
The purpose of that post focused largely on citizenship and the fact that the United States imposes worldwide taxation on U.S. citizens who are tax residents of other countries and do NOT live in the United States. What that post did NOT do was to focus on HOW the Internal Revenue Code applies to U.S. citizens who do NOT live in the United States.
The Bottom Line Is:
The United States is in effect imposing a separate and more punitive tax system on its citizens abroad. Strange but true. The purpose of this post is to explain how that works and to provide specific examples.
Do you recognise yourself?
You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent TaxConnections Post reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.
The Internal Revenue Code: You Can’t Leave Home Without It!
The problem of Americans abroad is beginning to attract attention. The first legislative initiative – The Fair Taxation Of Americans Abroad Act – was introduced by Congressman George Holding in December 2018. (Congressman Holding plans to reintroduce the bill in the new Congress. Along with Republicans Overseas President Solomon Yue, Congressman Holding will be hosting a “town hall” meeting on April 24, 2019 in London, UK._ ACA “American Citizens Abroad” has been relentless in its advocacy for change. I am writing this post the day after the Democrats Abroad released the results of its 2019 Survey of Americans Abroad. I highly recommend their report (although the survey sample may be skewed in favour of those who file U.S. taxes). The report describes much of the pain suffered by – the “every day people” who compose the group of Americans abroad. It describes some of the many injustices inflicted on Americans abroad – making it an important read.
The truth is far worse than the various advocacy groups describe
The truth is far worse than the Democrats Abroad report implies. When one reads the report one is left with the impression that the injustice is limited to the fact that the United States imposes worldwide taxation on Americans abroad. But, this in only part of the problem (and I would argue the less significant part). Yes, the United States is imposing worldwide taxation on Americans who are residents of other countries. But, it’s imposing a separate and more punitive tax system on those Americans who are residents of those other countries. Some of these Americans are “accidental Americans” – meaning they do not have (other than an accident of birth) and have never had any connection to the United States.
(Furthermore the group of Americans abroad are not even treated equally. Their U.S. tax treatment depends largely on what country they reside in. The reason is that the United States has different tax treaties with different countries. But there is no doubt that Americans abroad, as a group, are living under a different tax system than those individuals who are residents of the United States.)
Americans Abroad Are Subjected To At Least Three Forms Of Discrimination
First Form Of Discrimination: The same laws do not apply to ALL Americans abroad who live outside the United States. Different groups are treated differently depending on their country of residence. This is because different countries have different kinds of tax treaties with the United States. For example, Americans in Canada have the benefit of a Social Security totalization agreement. Americans in Israel do not. Americans living in Canada benefit from a tax treaty that exempts their Canadian pensions from U.S. taxation until they are paid out. Americans in Australia have to deal with the uncertainty of how their Australian Superannuations are treated (if at all) under the U.S. Australia tax treaty.
Second form of discrimination: Americans living outside the United States are taxed far more punitively on their foreign income than Homeland Americans are taxed on their income earned in the United States. This is because the Internal Revenue Code is designed (1) to treat foreign investment income far more punitively than U.S. investment income and (2) All foreign assets (which are local to Americans abroad) are subject to particularly penalty laden reporting requirements. Remember also that Americans abroad are generally also subject to taxation in the countries where they live.
Third form of discrimination: To be a U.S. citizen includes being a member of the world’s premier “Tax, Form and Penalty Club”. But, membership is administratively costly. On the one hand the compliance costs are unreasonably (and in some cases prohibitively) high. On the other hand, the penalties for noncompliance are extremely punitive. To put it simply: the returns can be so complicated and expensive to file that some people simply cannot afford to comply. Think of it: (as this comment suggests) people are forced to renounce U.S. citizenship because they can’t afford the compliance!
In the 2017 Meadows FATCA hearing, Republicans Overseas lawyer Jim Bopp put it simply. He said:
“Americans abroad have a right to be taxed in a way that meets constitutional standards”.
If people can’t understand what is expected of them, can’t afford the costs of compliance and are (in some cases) renouncing U.S. citizenship for these reasons, one might ask:
Is the U.S. tax treatment of Americans abroad constitutional?
But, just hold on: Is this real equality or is this real discrimination?
Some people (for example Judge Rose in the FATCA Legal Action lawsuit) would say:
All U.S. citizens are subject to exactly the same rules and therefore there cannot be discrimination.
Others (for example the late Justice Brian Dickson of the Supreme Court of Canada) might say:
“The true interests of equality may require differentiation in treatment.”
The point is that Americans abroad live outside the United States and are subject to the tax system where they reside. They are also subject to the U.S. tax system. But, they are subject to a U.S. tax system that treats their income and assets to be foreign (look out) when that same income and assets are local to the individual.
As a general principle, Americans abroad are potentially subject to:
1. Double taxation not relieved by tax treaties (For example the Obama 3.8% Net Investment Income Tax)
2. Taxation on income by the United States that is not subject to taxation in their country of residence (For example, the U.S. taxation of capital gains generated by the sale of a principal residence)
3. Taxation on phantom gains that are caused by nothing but exchanges in the U.S. dollar exchange rate (discharge of a mortgage denominated in non-U.S.currency).
4. Taxation based on “fake income” caused by legislated fictitious tax events which operates to impose U.S. taxation prior to a taxable event in the country of residence (Section 965 Transition tax, GILTI, Sec. 877A Exit Tax.
The IRS seems to recognize the difference between Americans abroad and Homeland Americans
The IRS (to its credit) recognises this principle in having two kinds of Streamlined Compliance Programs – Domestic (for Homeland Americans) and Offshore (for Americans abroad).
Congress (at least so far) does NOT recognize the difference between Americans abroad and Homeland Americans
Congress would deny that Americans abroad have one set of rules applied to them and Homelanders have another set of rules applied to them. In fact, Congress might say: ALL AMERICANS are subject to EXACTLY the same rules. Perhaps, but it’s also true (as we said in 17th Century France) that:
“The law in its majestic equality prohibits both the rich and the poor from sleeping on the park bench”.
Americans abroad are subject to higher taxation than Homeland Americans: If you were to ask your friends the following question:
Q. Do you think that the United States would impose more punitive taxation and compliance requirements on: (1) U.S. citizens living in the United States or (2) dual U.S./Canada citizens living in Canada?
A. The probable answer would be: Don’t be absurd. Of course the United States imposes more punitive taxation on U.S.citizens living in the United States than on dual U.S./Canada citizens living in Canada.
Wrong! Wrong! Wrong!
To put it simply: The Internal Revenue Code of the United States imposes taxes, sanctions and penalties on certain Canadian residents that are not imposed on Homeland Americans at all. The point is that U.S. citizen “non-residents” are subjected to a harsher set of U.S. tax rules than are U.S. residents.
One answer to the question includes …
I know the answer to this question. I filed one year using TurboTax (and a host of paper filings since TurboTax falls way short of being sophisticated enough for a foreign return) and it had a helpful function at the end where you could compare your US tax liability against others in a similar income band. My US tax liability was 2.5x the average bill in the same income band. That’s not 2.5% but 2.5x. My “fair share” was more than twice as much for the same level of income as the homelander “fair share”.
Thankfully, the out of pocket cost was limited by the taxes I had already paid in the UK. But, it shows the cost of not living a life optimised for the rules of the US tax system can be enormous. If you live in the US, there are tax no brainers. If you live in the UK, there are tax no brainers. But if you’re subject to both systems at the same time, you can’t benefit from the tax no brainers since, by and large, the other country takes what the other giveth.
As I’ve said before, the US tax system includes on the basis of citizenship but excludes on the basis of physical location since participation in the tax no brainers is limited by things like US source earned income which you can, generally, only get when you live in the US.
In “people talk” this means that 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.
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:
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.
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41 comments on “The United States Imposes A Separate And Much More Punitive Tax On U.S. Citizens Who Are Residents Of Other Countries”
I just received a penalty notice for $10000 because the IRS was unhappy about how I reported my retirement pension in my country of residence. The reasons remain opaque given the IRS’ quality of communication, but suffice to say that as a “foreign trust”, this retirement fund lends itself to complex reporting and high potential penalties. It’s quite a dystopian system when the IRS can confiscate money from someone’s retirement fund in their country of residence, and treat them under rules designed for US-based taxpayers hiding money in foreign trusts. THIS HAS TO END
In addition to the incredibly punitive taxation Americans abroad have the uncertainty of not knowing what is expected of them in terms of the tax filings. You could ask two different CPAs the same question and get five different answers.
I agree with you when you say THIS HAS TO END. Of course, you could (depending on your circumstances) BRING IT TO AN END BY RENOUNCING U.S. CITIZENSHIP. Your comment also reinforces a very important point, which is that:
There are two kinds of Americans abroad who are likely to have problems.
1. Those who don’t file U.S. taxes.
2. Those who do file U.S. taxes.
Yes, the harder you try the worse it seems to get!
As a US citizen living in Greece I am already subject to some of the highest taxes in the world on income (~55% taxes on income overall). Since I am a minority shareholder in a greek company with a US corporation majority shareholder I get swallowed by the transition tax and GILTI and other good stuff and end up paying an ADDITIONAL 10% to the USA!
as well as over $10,000 to accountants in the US to get my form submitted correctly (I hope) so I don’t end up on the wrong end of the stick…
AND I cannot even dream of starting investments or other financial vehicles to prepare for retirement as it would be more expensive to do the paperwork than anything I could hope to get from them. Besides the fact that financial institution refuse to work with me when they find out I am a US citizen…
I have an honest question though. Is there really any hope for change?
Or is renouncing the only option we have?
Sypros – thanks for sharing your experience. You appear to be one of the most highly taxed people on the planet.
To attempt to answer your question(s):
I do believe that there is hope for change. Representative George Holding of North Carolina introduced a bill in December of 2018 – The Fair Taxation For Americans Abroad Act. You can find information on this online. The plan is to reintroduce the bill this year. 1/2
On the other hand, because you are U.S. tax compliant and because you have CFC issues, it will be difficult for you to remain an American citizen in the long run (I think). But, we will see. If you can renounce without being subject to the Sec. 877A Exit Tax – you may want to consider it regardless. 2/2
I can renounce. I am a Greek citizen by birth and tax compliant. I just don’t want to. My brother and various other extended family members live in the US and I would like to keep the passport.
Do you really think that holdings law may pass? would it help me?
PS I am going to frame “one of the most highly taxed individuals on the planet” 🙂
You should keep track of the progress with the Holding bill. I believe that it should exempt non-US income from US taxation (which should solve your problem). Also you say:
PS I am going to frame “one of the most highly taxed individuals on the planet”
Go further! Make up some T shirts to distribute everywhere. Perhaps put on one side the “I am American” other side “I am subject to US taxation wherever I live”
If compliance is not checked then how is this article wrong?
Delinquent U.S. Taxpayers, IRS is after you!
The clock is ticking … and hiding from the Internal Revenue Service (IRS) continues to be more complicated than ever. Delinquent U.S. taxpayers are being flagged by the Department of Homeland Security (DHS) when crossing the U.S. border and face potential detention, questioning, embarrassment, and other follow-up actions from the IRS. The IRS has been exchanging information on taxpayers with outstanding U.S. tax liabilities with the DHS. Until recently, such information exchange practice appeared to be more or less sporadic. At the time of this article, however, the DHS appears to have caught up with the information that the IRS has been providing over the years and started to successfully put the information exchange practice in action. Note that U.S. citizens and Green card holders are not the only persons affected by these IRS and DHS practices, any taxpayer who owes U.S. tax and is delinquent may be affected.
As a person of color the way the USG lays-out the definition of who is a “taxpayer” is easy to recognize as common fodder for class and racism. The US simply cannot escape its capacity to subjugate its vulnerable citizens to a different regime of laws. It built its immense wealth on exploitation and shows no sign of slowing down. So it is with the overseas “taxpayer.”. Its about exploitation. The term itself, taxpayer, sounds progressive, but it really constitutes a symbolic idea of “otherness” to make the theft easier to swallow. Every expat who lives under the US “taxpayer” umbrella know this term has mo other meaning except to get ripped off by the USG and by the exploitation of the compliance industry. The term FATCA is another punitive overtdescription the USG links to
‘othering” with a tinge of criminality. Expats also realize the tax being paid has no link to rights or getting something tangible in return. What is also remarkable is the rest of world fully understand ithe US “taxpayer” is a deceptive term and pretend FATCA is about taxation. Its about theft from those who have little means to fight back.
One man’s terrorist is another man’s freedom fighter. What the USA calls citizenship-based taxation is actually the taxation of people who are tax residents of other countries who do not live in the USA. If we then add the fact that, these tax residents of of other countries are subjected to a more punitive tax regime than are Homeland Americans, we see this particular tax policy for what it truly is: the theft of capital from politically powerless individuals. Furthermore this is a direct attack on the tax base and sovereignty of other nations.
It is my hope that other countries will wake up to what the USA is actually doing and refuse to renegotiate any tax treaty that includes the “saving clause” (the clause where other countries agree that that the USA cam impose direct worldwide taxation on the tax residents of that other country).
I was born in the US to Dutch parents, who decided to return to the Netherlands when I was 7 years old (after their marriage in 1958 in Holland they emigrated to Toronto, Canada (my older sister was born there, lucky her!) and in1962 my family moved to the US because of my Dad’s work). My parents were never informed of CBT, I certainly never was, why should I pay tax in the US, having never worked there? Furthermore, I pay plenty of tax right here in Holland. Had I known about US CBT I would have renounced decades ago. I’m now 56 years old and the Dutch banks are hunting us down, eager to comply with FATCA to avoid penalties. We are being denied bankingservices, after having been clients for years, unbelievable! It reminds me of what happened during WW2. We have become 2nd class citizens. The Dutch government hides behind its tax treaty with the US, leaving their Dutch AA’s in the lurch. This is what makes us so angry, we are Dutch citizens, they should protect us from the injustice imposed on AA’s by the US and they need to offer a solution asap. We Dutch AA’s are pushing Dutch politicians and the ministry of Finance to do so, but as always with major political issues movement is slow. It’s nerve wrecking!
Interesting that you use the language “hunted down”. Yes you are correct: the specific language of the FATCA IGAs is “Review, Identify and Report” on “U.S. Persons”. But, it’s actually worse. The FATCA IGAs give the USA total control over who is or is not a U.S. person/citizen for the purposes of FATCA. The most unfair application of FATCA is to accidental Americans who are citizens of the country where they reside. The Governments of Canada, Britain, Holland, etc. have simply taken the position that “dual citizens” are really just American citizens who just happen to be living in the country. (You should have heard Canada’s lawyers in the FATCA Canada lawsuit describe Canadian citizens as U.S. citizens … for the purpose of FATCA and U.S. taxation.) For the purposes of FATCA, dual citizens are no longer citizens of Canada, Britain, Holland, etc. (they have been effectively stripped of their citizenship. All dual citizens can run. Some can hide and some can’t. Good luck!
Thanks! Will continue to follow you and grateful for your knowledge and work. We Dutch AA’s haven’t given up the fight yet
Why would you give up? You are on the right side of the moral issue. Remember, this saying (I think from the U.S. Marines):
“The difficult we do today. The impossible takes a bit longer.”
The Difficult we do Immediately, The impossible takes a bit longer! Anthony Quinn in ZORBA the Greek.
It takes me approximately 15 minutes to file my local tax return online. Having absolutely zero comprehension of US convoluted tax code required hiring expensive accountants supposedly knowledgeable in US citizens abroad tax issues. Well, they were NOT and I was NOT capable of judging they were NOT and guess who was in a HUGE MESS, NOT them.
It is completely impossible for the average person to grasp PFIC, retirement account conflicts, how to invest, how to position oneself without expensive guidance (can’t even judge if it is knowledgeable guidance), stay current (who ever even heard of FBAR?). Damn, it seems I could not even sell my non US home, live a life resembling anything close to normal under these ridiculous burdens.
There is no valid reason on this planet that the IRS should be interested in me nor me them. To relieve myself of this unethical, immoral, unending stress and terror I felt forced to renounce my US citizenship. I will NEVER EVER forgive the US government, I feel personally betrayed.
Good points Laura and that’s why for tax compliant expats: “All Roads Lead To Renunciation”
Very few people can even understand what is required of them from a compliance perspective. I would add that very few tax professionals are competent in this area.
Basically the victims of the the USA imposing worldwide taxation on the tax residents of other countries include: individuals, sovereign nations and (I believe) the IRS itself. (Would you like to the job of figuring out the Internal Revenue Code applies across the world? I think not.
In life, parasites take only enough to sustain themselves in order not to kill the host. In comparison to what expats are experiencing the United States government tax policy has created something on a magnitude much more devastating, deadly. Tax compliance folks want more victims to feed their own existence. The result is they don’t give a hoot if the host dies or comes out badly mangled because they expect more hosts to come though the pipeline thanks to the efforts of so many pallbearers. Very symbiotic relationships.
What you call the “compliance-industrial complex” does play a role in the ecosystem of “U.S. Taxation Abroad”. They play the vitally important role of ensuring that the U.S. Treasury eventually gets its money. They know how to complete the forms that allow individuals to speak to the IRS. But, for accidentals and those experiencing their Oh My God moment, they are (at least initially), the wrong answer to the right question.
The right question is how to respond to the realisation that the USA is imposing worldwide taxation on people who don’t live in the USA. Tax compliance is about filing tax returns. Tax compliance people are not (at least initially) the right people to assist with understanding how the U.S. tax code impacts Americans abroad in general and your situation in particular. One contacts a compliance person after undertaking some self-education and when one is when is ready to file a tax return(s).
Its tough just to keep up with paying local taxes (where one lives). I am in the process of filing for the Netherlands and Spain. The worst of the two is the Netherlands. In addition to paying taxes on your income, they are one of the few countries with a wealth tax. This particular tax strips you blindly of any sense of fairness because the income is taxed twice. Spain has an easy filing structure but what is allowed for tax deductions has to coincide with income. Then comes US tax filing. The US overseas tax filing regime is something designed to be harmful for expats under the false pretense there is a social good. Yes, it is about hate of the expat to make the asset stripping justified.
There is no doubt that U.S. worldwide taxation of the tax residents of other countries results in the confiscation of assets located in those other countries. Look at the taxes that are part of the “fictitious taxable event club”: transition tax, GILTI, Sec. 877A Exit Tax, phantom gains, PFIC and more … The goal appears to create a fictitious tax event before the asset/income is subject to tax in the other country.
Actually anybody and everybody who is : 1. A U.S. person 2 A former U.S. person 3. Accused of being a U.S. person 4. Married to a U.S. person 5. Employer of a U.S. person (in certain circumstances) 6. Born to a U.S. person has some kind of problem. Whether they file taxes or don’t file taxes will impact the acuteness of the problem (one way or the other).
In 1997 James Dale Davidson wrote an amazing book called the Sovereign Individual. This was largely a book about what it could mean to be a U.S. citizen in the global world of the 21st century. He predicted most of what is happening today. An amazingly prescient book.
13) US Tax code (or at least usable information to it) is available in these languages: spanish, chineese, vietnamese, russian!, korean. No info in german, french, italien, dutch, greek, portugese… this is highly discriminative.
This is clearly more evidence of discrimination against different groups of Americans abroad. Hey if the USA believes it can impose tax on tax residents of every country in the world then IRS instructions should be translated into the official language of every country in the world
I can’t even find a accountant (that won’t cost me $10K) to explain to me how to get out of my TFSA, RESP, PFIC mess. I can’t afford to go to KPMG for this, and the average CPA/tax preparer is not knowledgable enough. Right now we pay $3k to file taxes because despite being a highly educated person who is reasonably good with numbers, I can’t do it myself. I regret I got naturalization papers for my 3 kids and now they are in the system. I will save the money to help them renounce at 18. In the meantime, I can’t save for retirement either in the US or Canada, I can’t save for my kids education, I can’t sell my home…
Tara – the big 4 accounting firms are not your best source of tax help for Americans abroad. There are a number of mid-level accounting firms with expertise in how the US tax rules impact Canadian residents. It seems to me that are either going to have to figure out how to make adjustments so that you can (to use your words) “get out of my TFSA, RESP, PFIC mess” and/or renounce U.S. citizenship. The reason that the problem exists is because the U.S. Internal Revenue Code is based on two assumptions:
1. A hatred of everything “foreign”; and
2. A hatred of tax deferral.
TFSA, RESP and PFIC are Canadian (foreign) instruments of tax deferral.
If you have a reco of mid tier accounting firms who could help me optimize my tax situation I’d appreciate it. My tax preparer is not capable of doing this. I don’t want to renounce.
I knew about citizenship based taxation before I married and moved abroad with my foreign national spouse. The US embassy here when I asked them about it gave me the very wrong information that I would not have to file a US tax return so long as I didn’t exceed the tax treaty threshold. They are still telling US citizens here that opening those citizens up to fines, penalties and potential prosecution. The limited services they provide are not cheap, must be done through an appointment and often the people working there are often rude and unhelpful.
Thankfully I was a stay at home mom so did not go into employment. Later circumstances would see me too disabled to work so never had an income of my own to file. My foreign national spouse has been our sole source of income. I shudder to think had I listened to the embassy the mess we would be in now 20 years later.
Things changed when FATCA was enacted, suddenly the bank we had accounts with for years became almost hostile. I was informed to keep our basic account and half paid mortgage I had to fill out some forms – they weren’t really explained to me just told they were necessary. We didn’t know that all our information would be turned over to the IRS including my spouses although he’s not or ever been a US citizen/green card holder. We couldn’t open interest bearing savings accounts for our children – their classmates had them including duals of other countries just not my US dual children. They would allow us to open a basic account that charged bank fees that would eat anything deposited into it.
When our home was damaged in a freak storm we were denied a loan although we had good credit and met all the other criteria. For years we struggled doing repairs as we could to make our home liveable thinking it was the financial crisis behind the denial of the loan. It wasn’t until years later when a friend that is a bank manager for another bank explained that there was only one reason – my US citizenship. He told me “off the record” that banks were trying to shed customers with US connections as FATCA compliance was very expensive especially for the small banks – of which our local bank was one. The best thing I could do for my family was to renounce my US citizenship.
Imagine my surprise that the service that had been free and simple suddenly had a price tag of $2350 plus tax compliance incorporated.The embassy here demands that one submit their “exit” tax forms at the time of renunciation. The financial crisis meant my spouses income had been frozen so we were living on the same income we had before the crash – the fee was more than our monthly income. It wasn’t easy between having a family of five, cost of living and trying to cope with diy repairs to our home so we had no savings. Knowing we couldn’t afford it I asked if there wasn’t some exemption or help available for citizens like me – firmly told no and that I would have to pay any taxes owed before I could renounce, the fee was non-refundable so any mistake could prevent the State Department from approving it.
Each time I hear the words “tax reform” I feel dread, I used to hope that the problems and hardships Washington put on their emigrant citizens would be fixed but instead they’ve become worse. Our children are now coming of age to renounce, over the next 3 1/2 years we will struggle but we will see them freed. My oldest has just renounced, he was treated like dirt and informed that he would never be able to travel to the US among other threats during his process.
My renunciation has been complicated by the fact I didn’t have an income, my spouse is a foreign national not subject to US tax and the fact we own a home. I’ve been told to get him a TIN, which I refuse to do and that I would have to “prove” how I financially survived which I can’t without bringing him into the nightmare of the US system. I’m disabled and could receive government benefits provided by the government here but due to differences in systems the US may consider them taxable causing even more stress – so I don’t. I paid in 20 years worth of social security before ever coming here but will never see a dime (our embassy doesn’t handle social security matters). My spouse has paid our full share of taxes here which is much higher than in the US.
I tried reaching out to senators and representatives, other than sending me various “newsletters” and to solicit campaign donations never received a proper response. It’s clear to me they would rather embrace the false narrative of the wealthy fatcat expat tax cheat than the reality that we far from wealthy and face just as many challenges as those in the homeland, more when you add it the legislation and practices the US imposes on those that no longer live in the US.
Even the plight of accidental americans doesn’t reach their stone hearts. How can one of the wealthiest countries in the world justify robbing the poor, disabled and elderly that have never called the US home or benefited in any form from the US? What an abuse of power this nation uses to extort every last cent they can from these people that never asked for or wanted US citizenship.
I have ancestors that fought in the revolutionary war of independence to create this nation – to free it from tyranny and injustice. One has to wonder what they would think of what that nation has become and what it does to honest law abiding citizens. Perhaps if they could see it today they would have stayed under King George.
Dear TaxConnections Visitor,
Thank you for the extraordinary comment you wrote. It took time and courage to write and we appreciate all your effort in telling this heartfelt situation for you and your entire family. Thanks to the determination of Tax Lawyers like John Richardson of Citizenship Solutions in Toronto, Canada more of these stories are coming out every day. The more people who follow what John Richardson has been writing about for years, the more educated people become about these issues. People need to come out and talk about it as so many lives are affected like your own family. We appreciate you taking the time to explain the impact of US tax legislation for those who do not even reside in the United States. Our goal here at TaxConnections is to educate as many people as possible of the impact of tax legislation.
Kat Jennings, TaxConnections CEO
Thank you for your comment – some comments on your comment:
1. You write: “I paid in 20 years worth of social security before ever coming here but will never see a dime (our embassy doesn’t handle social security matters).”
Renunciation does not (in general) end any entitlement so U.S. Social Security. Please visit the Social Security site.
2. Although there are tax consequences to renouncing U.S. citizenship if you are not filing U.S. taxes, you are free to renounce. The State Department (which handles renunciations) does not and is not qualified to give advice about tax. So, don’t look to them for that.
3. You have a lot of bad information – perhaps look for a better source?
SMDW – It would be useful to know which consulate has told you that you cannot renounce without proving tax compliance. This is completely wrong, and presumably contravenes State Department regulations. You’ve been given quite a lot of bad information, unfortunately.
Thanks to FATCA and US citizen based taxation, I have been denied loans and investment services by banks. When I tried to start a business in Hong Kong, not a single venture capital company would get involved, solely because I’m American. One guy even cursed me for not informing him in advance of my citizenship and thus wasting his time. I don’t blame him. So…scratch one US business abroad.
When my daughter’s junior football (I mean real football, not the American kind) team needed parent officers, I had to decline, since I’d share signature authority over the bank account, thus making a Hong Kong children’s football league subject to US taxation issue.
US lawmakers’ cavalier response to US expatriate issues has transformed me from an unofficial ambassador for the USA into a bitter and outspoken critic of that arrogant country.
Yes, sooner or later the USA will pay a huge price for alienating (actually it would be better if the USA treated them as aliens) its citizens abroad. Its a tragic situation that has destroyed the lives of millions. Actually it’s destroying a “civilization”.
Unfortunately: you lost the birth lottery.
Thank you for this article. It really describes the issues well, and I hope plenty of people will read it.
The vast majority of people living abroad are not tax evaders. Many don’t even earn a high income but moved abroad for love or work or to learn a language. All we want to do are ordinary things like save for retirement and support our families. While filing U.S. taxes from abroad is complex and either expensive (often over $2000 even if you owe nothing) or time-consuming, that’s not what ultimately keeps me awake at night. My problem is saving for retirement. I cannot use the local equivalents of IRAs because the U.S. doesn’t recognize them. I cannot save in the U.S. because banks there won’t give me an account since I don’t have a U.S. address. I cannot buy a mutual fund to invest on my own (even without any retirement tax breaks) because no brokerage in the U.S. or where I live will touch me as a customer. If I would retire, which I don’t think I will ever be able to do, my meager local pension would count as unearned income and would be taxed by two countries. If my non-American husband were ever incapacitated, I could not obtain power of attorney over my husband’s bank accounts because the local financial institutions won’t deal with me, meaning I’d need a state-appointed guardian to make decisions about my own children!
Since I still have elderly relatives in the U.S., I am reluctant to renounce while they are alive in case they someday need me to fly over on short notice or be there to help them for longer than a tourist visa would permit me to stay.
I want to comply with the laws of both countries, but I also don’t want to end my days in penury. I cannot see why I should be punished merely for choosing to live in a country other than where I was born.
Susan: I am not sure where you live. But, it’s likely that compliance with the laws of both countries is your ticket to poverty. Remember that the US tax system is based on three principles: (1) Hatred of all things foreign (2) Hatred of non-U.S. deferral (3) Hatred of leakage of U.S. assets outside the U.S. tax system (explains the hatred of the foreign spouse.
As you can see to be compliant with U.S. tax laws is at odds with your life in your country of residence. This is because your whole life in your country of residence is foreign to the USA. You better pray that Representative Holding’s bill is successful!
Many thanks for writing this article. I’m an American living abroad. Like many of us living abroad my work involves helping American companies enter into the market of my country of residence. It ironic that the US government punishes us for this. I run a small consulting firm, I make less than when I worked as an employee. Part of the reason I am self-employed is, thanks to FATCA, many companies (especially from the US) refuse to hire American citizens for senior positions overseas that may require having signature authority of bank accounts. Within about 2 years of FATCA, asking about whether you have American citizenship became a frequent question in hiring interviews, in some cases, asking it in indirect ways (“your English is really great, were you born in the US?”).
It’s very expensive and time consuming to try and stay in compliance with US taxes if you live overseas, especially if you have a company. Tax compliance firms often have no idea how to reconcile another country’s taxes with the US tax code and make serious mistakes. Ask 10 firms how to reconcile your taxes and you may get 25 different answers 21 of which are obviously bad advice. But one thing in common is all 10 firms will charge you dearly for this advice.
This is even more punitive for those of us living in developing countries where the local tax laws are complex, open to different interpretations and change frequently. It can be a challenge just to stay in compliance with local tax law. Comparing notes with other Americans, everyone who is trying to stay in compliance is taking a beating. Strangely, the harder you try to stay in compliance, the harder the IRS seems to come down on you. We all know many Americans who have made no efforts to be compliant who the IRS is largely leaving alone. The result is many are giving up and becoming non-compliant.
Many American citizens who live abroad have, over decades long careers each been personally responsible for US companies making hundreds of millions or billions of dollars in these countries. The reward for this is:
– Many of us have had the IRS repeatedly freeze our US bank accounts and confiscate funds, even if we did nothing wrong. It can take years, hundreds of hours of time and many tens of thousands of dollars in accountant and lawyer fees to get this money back (without interest or inflation adjustment).
– Many of us who are non-compliant (and a few who are trying to be compliant but having disputes with the IRS) have received notices that the State Department will no longer provide us with new or replacement passports and some wording that may be interpreted as saying our valid passports may be confiscated upon entry to the US. Which means many of us will eventually be unable to visit the US companies we are helping (periodically our help requires meeting them at their offices in the US). Anecdotally, we are hearing that Americans who have renounced (at least here in Latin America) are being refused visas.
– We are hearing anecdotally that growing number of Americans living abroad with businesses who are non-compliant or having disputes with the IRS are being placed on a kind of financial institution black list where US banks are refusing to execute international funds transfers from US companies to these individuals or their companies as if we were Russian arms dealers. Especially with new customers this makes it next to impossible to receive payment from the US companies we are helping.
Thank you for sharing your story Julio. We are working to bring more stories to light so people understand the impact to so many. We would like to hear thousands of these stories so House of US Representatives can see the impact.
Thanks for taking the time to comment. Your comment makes it clear that:
The United States should not be imposing worldwide taxation on people who are tax residents of other countries and do not live in the United States!
Julio – A question and point of clarification. When you say that non-compliant persons are receiving warnings about passport renewal, or having difficulty being paid from the US, are you referring to individuals who were in the US tax system but have essentially given up on being compliant and have stopped filing (i.e. they were known to the IRS) or those who have never entered the US tax system? Thanks.
Hi, I am an American by accident I never file taxes in the US, and now my Bank is asking because I am a US person. I am afraid, what can I do?
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