U.S. Imposes A Punitive Tax On Dual Citizens: 150+ Comments

John Richardson - Dual Citizens

Due to all of the commentary from U.S. Citizens living abroad, I thought it was a good idea to include a portion of a post written by Tax Lawyer John Richardson:

“The Internal Revenue Code of the United States of America”
– Title 26

The beauty, genius and timeless wisdom found in the Internal Revenue Code include the principle that:

“The Internal Revenue Code in its majestic equality punishes both Homelanders and Americans abroad for having financial assets and accounts outside the United States.”

Part C – What does it mean to be a U.S. citizen abroad?

  1. All U.S. citizens abroad live outside the United States.Therefore, they live in “Foreign” countries. They will have bank accounts and retirement accounts that (although local to them) are “Foreign” to the United States. A FATCANatic (true believer in FATCA) would refer to your bank accounts as being “offshore”.
  2. Most U.S. citizens abroad are required to BOTH earn a living and invest for retirement.To this end they may have a pension from their place of employment (“foreign”). They may invest in mutual funds in their country of residence (foreign – PFIC). They may invest in retirement planning vehicles that are appropriate in their country of residence (foreign – PFIC). If you own an investment vehicle that is a PFIC, you should avoid either buying or selling without getting specialized counseling.
  3. All U.S. citizens abroad are required to pay taxes in their country of residence.This point is neither understood nor acknowledged in the United States. Yes, it’s true (I can personally confirm this) that U.S. citizens abroad are required to pay taxes to their country of residence. Furthermore, (to add insult to injury), they are often required to pay VAT (value added taxes) in their country of residence. These VAT taxes are significant. In Canada they are 13%. In some European countries they are 20%. The point is that U.S. citizens abroad may pay significant taxes of a kind that often don’t exist in the United States. (Therefore, for purposes of “foreign tax credits”, the U.S. doesn’t regard them as real taxes.) In addition, they pay (usually at a higher rate) the usual income and property taxes that Americans understand.
  4. U.S. citizens abroad may have “non-U.S. citizen spouses”.It is true that there are many unmarried U.S. citizens living in the United States. Nevertheless, it’s common for a U.S. citizen abroad to enter into a marital relationship with a non-U.S. citizen (AKA an “alien”). It is NOT common for a U.S. citizen abroad to return to the United States to seek a spouse. U.S. law is premised on the assumption that a marriage between a “U.S. citizen” and an “alien” is for the purpose of tax evasion. This is reflected in punitive taxation (see below) and requirements that a U.S. citizen who shares a financial account with an “alien” spouse is required to report those accounts to the IRS. It is no surprise that “U.S. citizenship” is the only citizenship in the world that is becoming grounds for divorce. On the other hand, the “alien spouse” does present some possible U.S. tax planning opportunities.
  5. U.S. citizens abroad may start and develop businesses.In addition to marrying “aliens”, many U.S. citizens abroad enter into other forms of “business relationships” with other “aliens”. This is clearly subversive and is required to be reported to the Internal Revenue Service. In addition, if the form of the business is a “Foreign (non-U.S.) Corporation” extremely punitive tax and reporting rules apply.
  6. U.S. citizens abroad may be “self-employed”. In the absence of a “totalization agreement” (fortunately, Canada has one) U.S. citizens abroad will be liable for “self employment taxes” to the U.S. government.

So far it appears that it would be prudent for a U.S. citizen abroad to NOT marry, not have an income, not create businesses or engage in self-employment.

But, let’s imagine that a U.S. citizen abroad does one or more of these things. What does it mean? How will it affect his life? “Tax compliant” U.S. citizens abroad are required to consider how the “Bible of the Homelander” (the Internal Revenue Code) impacts these relationships. Once the principles of the “Bible of the Homelander” are understood, one will understand what one is NOT permitted to do, and the draconian penalties associated with doing so.

The “Bible of the Homelander” is based on two basic principles:

Principle 1: The “Bible of the Homelander” hates anything that is foreign. In fact, if the word “Foreign” appears in the “Bible”, the word “penalty” (generally starting at $10,000) is sure to follow.

Principle 2: The “Bible” is designed to punish all forms of “tax deferral” that are not “Homelander Permitted Tax Deferral” (think IRA).

Now, from these two great principles, we will develop the “Ten Commandments” of living a clean American life outside the United States.

“Living Clean” – The Life of a U.S. citizen abroad

Here are the ten commandments of “Living Clean” that apply to U.S. citizens abroad. They are designed to ensure that:

If a U.S. citizen lives outside the United States that he lives according to the principle that:

When in Rome, live as a Homelander does, when elsewhere, live as they live elsewhere.

 Ten Commandments

  1. Thou shalt NOT have a bank or brokerage account outside the United States. If you do so, it must be reported to U.S. Financial Crimes on an annual basis. Failure to disclose is “Form Crime”. You may be fined an amount that is more than 300% of the value of the account.
  2. Thou shalt NOT marry an “alien”. If you do so, you will have difficulty leaving your estate to him or her. Better to return to the Homeland to search for a suitable spouse.
  3. Thou shalt ensure that your “alien” spouse agrees to be a U.S. taxpayer. Failure to do so, will result in your having the punitive filing status of “married filing separately”. This will guarantee greater exposure to the Alternative Minimum Tax, the new 3.8% Obamacare surtax, higher tax brackets and lower thresholds for reporting (including FATCA Form 8938) requirements.
  4. Thou shalt NOT believe that the sale of your principal residence is a “tax free capital gain”. In fact, the sale of your principal residence will trigger a 23.8% capital gain which means that your house cannot be used as a retirement investment.
  5. Thou shalt NOT buy non-U.S. mutual funds. If you do, you will have your gains confiscated in the form of an “Excess Distribution” Tax. Buy American. Buy U.S. mutual funds.
  6. Thou shalt buy ONLY “term insurance”. Any other form of “insurance that has cash value” will be treated as a sacred instrument of tax evasion. Furthermore, if you purchase a “foreign insurance policy” thou shalt pay a special excise tax.
  7. Thou shalt NOT buy or participate in an RESP, RDSP, employer pension plan, or any other kind of retirement planning vehicle which will be considered to be a TAXABLE “Foreign Trust” (with all the attendant penalty laden reporting requirements).
  8. Thou shalt neither be self-employed NOR carry on business through a non-U.S. (AKA “Foreign”) corporation. If you do, punitive taxes, deemed income, and expensive reporting requirements will descend on you.
  9. Thou shalt NOT relinquish U.S. citizenship. In the event that you do, you may be subjected to an “Exit Tax” which applies to your “non-U.S.” pension, “non-U.S.” assets, and assets that accumulated after you ceased to live in the United States. In addition, there are certain “Form People” who claim that you may be banished from the Homeland forever.
  10. Thou shalt file, every year, file the following forms with the IRS: 1040 and all required schedules, FBAR, FATCA, 8938, 8965, 3520, 3520A, 709 (up to a maximum of up to about 45 forms). Understand that this will cost you thousands of dollars.

And this ladies and gentlemen, is why your problem is NOT “coming into U.S. tax compliance”. Your problem is “living as a tax compliant U.S. citizen abroad”. It really can’t be done (if you want any kind of life).

What does all of this mean practically?

Punitive Taxation – Think PFIC and Foreign Investments

U.S. citizens abroad also are subjected to the most punitive aspects of both the U.S. tax system and the tax system of their country of residence. In other words, it is NOT possible for them to get a “tax break”.

Examples include:

  • double taxation (example Obamacare 3.8% surtax)
    • tax payable to the U.S. that is not payable in Canada (sale of principal residence or TFSA)
    • deemed income that you haven’t received (Avoid Canadian controlled private corporations)
    • payment of taxes in Canada that are not available as tax credits in the U.S (think HST)
    • taxation of currency exchange rate based gains

Intrusive Reporting Requirements – All of your life is reportable – There is NO financial (or any other kind of) privacy for Americans

U.S. citizens abroad are required, under threats of draconian penalties, to disclose almost every aspect of their financial lives to the IRS annually.

FATCA and Banking Restrictions – Many U.S. citizens are being dropped from their banks and brokerage accounts because they are U.S. citizens. It’s simply too expensive and dangerous for some financial institutions to have “U.S. person” clients.

FBAR – Including children – The simple fact is that, by April 15 (as of 2016) of each calendar, EVERY “U.S. person” (citizen or resident), to the extent that he or she has “foreign financial accounts” (including but NOT limited to bank and brokerage accounts), which (in aggregate)  have a highest balance exceeding $10,000 USD,  is required to report those financial accounts to the U.S. Financial Crimes (FINCEN). Incredibly, as a recent post describes, this requirement applies to children as well. In fact, the filing of “Your First FBAR” is a right of passage for American citizens abroad. Yup, it’s true. (I won’t get into the draconian penalties for failure to file in this post.) That said, the problem is serious. In fact, an adoption agency in British Columbia has publicly warned people of the dangers of adopting U.S. born children because of the problems of FBAR and citizenship taxation. To learn more: Google “FBAR”.

and more …

The preceding includes “some examples” of why, for U.S. citizens abroad:

The problem is NOT coming into “U.S. tax compliance”.

The problem IS living as a “U.S. tax compliant person”.

Conclusion and the message for Americans abroad:

“Tax compliant U.S. citizens abroad” will live their whole life in the “penalty box” – starting at $10,000 a penalty. As long as they have paid their penalties they will be released to continue to experience the profound injustice of “double taxation”.

You have been warned!

P.S. The Foreign Earned Income Exclusion (Form 2555) and the Foreign Tax Credit (Form 1116) do NOT and are not intended to eliminate all of the problems. They apply to narrow classes of income.

P.P.S. Some Americans abroad mistakenly believe that the tax treaties protect them from U.S. double taxation. This is incorrect. U.S. tax treaties contain a “savings clause”. The purpose of the “savings clause” is to obtain the agreement of other countries that the U.S. can tax it’s citizens while they are resident in that other country.

And finally …

This post has focused on the taxation of U.S. citizens abroad while they are alive. Did you know that U.S. citizens abroad, (like Homelanders) die? Did you know that when they die they may be subject to the U.S. Estate Tax? Yup, it’s true.

Original Post By:  John Richardson – Citizenship Solutions

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55 comments on “U.S. Imposes A Punitive Tax On Dual Citizens: 150+ Comments

  • Satish Patel & Associates, Pc

    Thanks for the article. Very informative and very helpful. I have one question though. I have clients who are U S Citizen or Green card holders LIVING IN THE UNITED STATES OF AMERICA but also holds citizenship of other country like India. Can you explain any effects on them?

    • To the extent that U.S. tax residents, (including those living in the USA) which include: citizens, permanent residents (Green Card holders) and those who meet the substantial presence test have any foreign assets/accounts they are subject to punitive reporting and taxation in relation to those items.

      It’s a “witch hunt” which reminds one of the McCarthy era. The question to ask your clients is:

      “Do you, or have you ever had a non-US (foreign) asset or financial account?”

      Particularly problematic for Green Card holders with assets in their home country …

    • Thank you for this article! The US taxation of non-residents is madness. Had planned on becoming a dual citizen of Australia/America but giving up my green card in the coming months as a result of the taxes

  • Keeping and sustaining a business requires grit and determination, but with US tax laws applying onerous overseas filing requirements I am always worried if I made the right decision.

    What is ironic is at some I will have to engage a US based business. One could appreciate this helps the export sector and keeps stateside people happily employed. This can be undermined because conditions are already awful, but Congress can quickly implement new sources of pain like they did with TCJA 2017.

    “Foreign” is becoming more pejorative regardless of loss of commercial activity or loss of livelyhood.

    • You write:

      “Foreign” is becoming more pejorative regardless of loss of commercial activity or loss of livelyhood.


      If the word “foreign” appears in the Internal Revenue Code – the world “penalty” is sure to follows.

  • Your Ten Commandments sums up the difficulties of being and American Abroad quite nicely. And when it’s all listed together like that, the impossibility of the situation is quite clear.

    • Yes it is impossible. Your options are to either return to the USA or renounce.

      I am hopeful that the Holding bill will provide relief for some affected individuals.

      You should hope for the best, but (regrettably) prepare for the worst.

      • I unfortunately have given up and will be returning to the US…the burden is just too much. Well played Mr. Tax man…well played…

        • The U.S. tax Code seems to assume that no self-respecting American would ever live permanently abroad. To do so would be, well, “Un-American”.

          Welcome home!

  • I pay taxes in the country where I live and where I earn my income. The US is massively overreaching its boundaries by taxing tax residents of other countries. It is impossible to be completely compliant to two different tax regimes. It makes me very angry and very sad that the US is forcing its citizens to commit citizide just so that they can live a normal financial life in the country where they live without the fear of huge penalties imposed by the IRS — even though no tax is owed!

    • I agree with you. But, there are many Americans abroad who do owe U.S. taxes based on the creation of fictitious tax events. For example, look a the Sec. 965 transition tax which is a retroactive tax based on 30 years of profits (yes you read right). This is operating to in effect confiscate the pensions of Americans abroad who use small corporations as private pension plans. This happens because in many countries (example Canada) small business corporations are used as private pension plans. Be happy that your costs are limited to compliance costs. Imagine having compliance costs plus the outright confiscation of your assets!

  • This is just wrong on so many levels.The US itself is becoming the country it once abhorred.

    • Actually the USA is not changing. What is changing is the conscious application of these punitive tax rules (led by the compliance industry) to the lives of Americans abroad. To that I would agree that the evolution of the fictitious tax events (Transition tax, GILTI, Sec. 877A Exit Tax, PFIC) is adding a new dimension to the unfairness.

    • Sure, not sure if I reference those or not – but hey, I described “Ten Commandments” not “The ONLY Ten Commandments”. Honestly, I didn’t want to make it seem worse than it was, but if you insist …

    • The US has a long history of undermining those it despises then disguise it as a social good. Even when it is against their own interest they plow ahead with bad policy. So it is with US overseas tax policy. Taxation slows purchasing power with a negative affect on the economy. I am noticing European economies purchasing powers are slowing down yet they are not counting the impact FATCA is having.

  • This is undoubtedly the hardest part of being an expat! The unfairness of it all. I’m just a one person company trying to make a living, being treated as criminal and tax dodger. Seriously considering giving up my citizenship – if I can afford it, that is! Ugh.

    • Yes, for Americans abroad who are doing their best to comply with the U.S. tax system (the version of the tax system that applies to Americans abroad):

      “All Roads Lead To Renunciation”

  • I live in the UK and pay far more tax here than I would in the US, accruing many thousands of dollars of foreign tax credits – but the IRS won’t apply that credit to the taxes it imposes on mutual funds and bank interest. And you can be taxed on phantom gains – an investment can lose money, but because everything has to be converted to dollars, swings in the exchange rate can make it look as though there’s been a gain. And the way the IRS taxes mutual funds once you cash them in basically confiscates the whole lot – sometimes you owe more US tax than your investment was worth. Rich Americans living abroad get advice and know not to buy mutual funds where they live – ordinary middle-income people don’t have access to such advice and find out when it’s too late. US tax rules make it impossible for Americans living overseas to save and plan for the future.

    • Yes, thanks for your comment which accurately describes the problems of being a “Middle Class” person attempting to live as a “U.S. tax compliant” American abroad. The mutual fund thing is particularly problematic because of the “tax penalty” which is described in the IRC as an “interest penalty” on deferred income. I am going to write a post on this topic. Basically Form 8621 stacks the cards in favour of the USA. (Actually they play the PFIC card from the bottom of the deck.) More on this later … When it comes to leaving the USA: You can leave the borders of the USA, but you are shackled to the US dollar. Question: How do you like your freedom now?

  • Karl from Switzerland

    Well written, just two other points:

    1. Career opportunities are limited for U.S. citizens abroad. No company would want a U.S. person to have signing authority on company bank accounts as this will trigger complicated reporting.

    2. Capital gains can be due in U.S.$ even when there is no capital gain. Buy something for €100, sell it for €100, there is no gain BUT if the exchange rate has gone from $90 to $160, you have gain.

    • Sorry for the duplicate – this was intended for Karl:

      Sure, not sure if I reference those or not – but hey, I described “Ten Commandments” not “The ONLY Ten Commandments”. Honestly, I didn’t want to make it seem worse than it was, but if you insist …

  • Brilliant… A friend told me that our partner in this esteemed club of 2, Eritrea, will be leaving us as it will be abolishing taxing its non-resident citizen abroad, leaving us the honor of being the only nation to continue this practice.

    • It is wrong to compare the USA to Eritrea. Both countries may imposes taxation on it’s citizens abroad. But, Eritrea:

      1. does not impose the complex and punitive system that the USA does (Eritreans at least know what is expected of them); and
      2. does not attempt to impose taxation on “accidental Eritreans” the way the USA does.

      To be honest, to compare Eritrea to the USA is a gross insult to Eritrea. Please don’t make this comparison.

  • Massonet philippe

    Good summary of the incredible complexity of tax rules to which expatriate dual US citizens are submitted.

    • Your comment speaks of “dual U.S. citizens”. But, the greatest injustice is to attempt to impose this tax system on “accidental Americans” who do NOT even agree that they are U.S. citizens at all. Imagine being born outside the USA to U.S. citizen parents and being told that you are U.S. taxable property for life. The USA is not capable of considering how the Internal Revenue Code interacts with the Immigration and Nationality Act.

  • Every day I need to tell myself “they’re just taxes, don’t let them get you down.” This piece didn’t help. Thanks for posting anyways, very illuminating!

    • James:

      Part of the point of the article is that this is NOT just taxes. It’s about enforcing a life style on Americans who attempt to live outside the United States. The principle governing Americans is this:

      “When In Rome, Live As A Homelander!”

  • andrea fernandez

    Thank you for capturing how difficult it is for US citizens abroad. I cringe every year during tax prep time. It’s so stressful and confusing, and so utterly unfair.

    • Focusing on your use of the word “confusing” …

      The single biggest problem is that few Americans abroad even understand what is required of them. The people who are the quickest to renounce U.S. citizenship are the ones who want the most to be in compliance, but either:

      – cannot be in compliance; and/or

      – cannot be certain that they are in compliance

  • Being a US citizen has put a anchor around my neck in regards to any financial or life planning. Its not only put a strain on my time, wallet and opportunities but it has also negatively affected my quality of life in terms of health and family relationships. The US needs to cease taxing the tax residents of other countries – simple as that!

    • Or you need to cease being a U.S. citizen. The USA doesn’t care about your plight. It’s not even that they don’t care that is the problem. The real problem is that:

      When it comes to Americans abroad, the USA doesn’t care that it doesn’t care.

  • Anne-Marie Buzatu

    Thank you for the article, which I want to share high and low! I have lived in Switzerland for more than 13 years, and am a few weeks away from getting my Swiss citizenship. I have just left my employer of 12 years to start my own non-profit humanitarian NGO, and now I am facing opening a bank account on which I (along with a couple of other non-US mationals) need to have signatory power. Already, our choices are limited because of my US nationality, and I am a burden on my partners and on the work we want to do. Any advice you could share on how to do this better would be most welcome. Also, I would be interested in taking a more active role in this fight! I am a lawyer by training and have more than a decade of experience in international policy.

    • Ms. Buzatu – thanks for describing this aspect of your life. I have assisted a number of people expatriate who renounced specifically because the non-Americans would not allow them to become shareholders in their businesses (as long as they were U.S. citizens). It really is that bad. Americans are toxic and (because of these laws) need to be avoided at all cost. Yes, please do get involved in this fight. You will find that many people think that you are making all this up. But, you now have some real wounds that you can share. Congratulations on your upcoming Swiss Citizenship. It’s the first step to freedom.

    • Look at the bright side. Once you are renounced you won’t be burdened by the layers of problems that U.S. citizens must drag along with them on their life journeys.

    • Sorry – this was for @AbroadSave

      Look at the bright side. Once you are renounced you won’t be burdened by the layers of problems that U.S. citizens must drag along with them on their life journeys.

  • As Greg Swanson described so well in his article recently, the US is abusing its soft power. Expats are informal ambassadors, but when I take myself as an example, I am no longer a positive “ambassador” for the US due to the way they treat their expats. I felt forced to renounce as I am slowly nearing retirement age and had to protect my retirement and my and my family’s financial future. Whenever the topic comes up, I warn anyone and everyone not to do anything that would cause them to enter the US tax system. I spread the word that everyone should warn anyone they know about how the US treats its expats and long term green card holders (who just want to return to their home country).

    • Yes – the sad truth is that the fastest and most articulate form of anti-Americanism in the world is now coming from Americans abroad. The real battle among the great powers is dominance in “moral authority”. The loss of support from Americans abroad and “accidental Americans” is something that the USA can ill afford.

  • This is well written, thanks for sharing and getting more people aware of our issues. I dream of the day I am not longer being stressed out from all the reporting requirements and can live a normal life paying taxes to the country I live and work in.

    • Having lived in uk since aged 5 and never worked or intend to or live in USA it is appalling an totally unfair that am burdened with ridiculous tax laws being applied to accidental Americans …IRS you should be ashamed and embarrassed to implement such an unfair system …

      • Believe me. They are not ashamed. Many of the lawmakers (1) don’t even understand the difference between a citizen and a resident and (2) therefore they think the USA has residence-based taxation. A good example would be Representative Connolly who was one of the participants in the 2017 Meadows FATCA hearing. He actually proclaimed that: “All countries tax their citizens”.

    • “I have a dream. I have a dream. I dream of the day when people are taxed according to the content of the laws of the country where they reside, rather than according to the content of the laws where they (or their parents) were born.”

      Seriously, almost 50 years later Barack Obama famously said: “The circumstances of your birth should not determine the outcome of your life”. Well, America is one of the last countries where (at least in terms of their tax policies) this is still true.

  • FATCA has imposed HELL on overseas Americans… bureaucratic nightmare of forms required to be compliant… penalties for an error could wipe you out… can’t get banking services and on and on it goes… no wonder so many of us have made the decision to renounce citizenship… no other country on earth treats its own people in such a horrible way.

    • Well, no other country on earth treats its citizens abroad as badly as the U.S. treats its citizens abroad.

      Domestically – On the one hand the USA does have the highest incarceration rate (actually in the history) of the world, My theory is that because the USA has too many laws. But you are unlikely to be jailed because of your political beliefs or harassed because of your religion. Interestingly Americans do not have the same level of human rights as do citizens of many other countries (the exact opposite of what most people think).

  • John’s article clearly describes the situation and the alternatives. I have been writing and telephoning members of Congress since 2013 in order to attract their attention to this insanity. There are words define the majority of the members of Congress when it comes to this issue: ignorant, incompetent, and apathetic. As John so succinctly wrote above: “When it comes to Americans abroad, the USA doesn’t care that it doesn’t care.” Every member of Congress should be ashamed but they just don’t care enough to be ashamed.

    • One day I believe that this will be a significant fact in the inevitable lawsuit against these abuses. Clearly Americans abroad are (with the meaning of the Carolene Products footnote) a politically powerless and discrete and insular minority for which heightened judicial solicitude is appropriate. (To learn more Google “Carolene Products footnote” – it’s a 1938 US Supreme Court decision.).

  • My personal belief on why there are not a lot more renunciations is because the fee itself is too high. Let’s say there are 10,000 Paraguayan – Americans wishing to dump their citizenship because of the onerous tax filing requirements. But with the average Paraguayan income at $4000 / yr, how can they afford the fee & especially if a family wishes to renounce? The premise of the size of the fee is another example where the US government does not operate in the interest of the public. They set the bar so high to slow the exodus and it is a last effort by the USG to harm your well-being on the way out the door. Not everyone wishes to renounce is from a high earning, first world country.

    • I don’t think the US Government cares in the least whether people renounce. Look at this way:

      1. Renunciants who are NOT covered expatriates have not been paying much tax to the USA anyway, so who cares; and

      2. Renunciants who ARE covered expatriates pay an Exit Tax when they renounce anyway.

      Unfortunately U.S. citizenship is primarily about taxation.

  • I feel like a slave. The US demands superflues complex paperwork in a for me foreign language. For what? The theroretical right to „return home“? My home is not there.
    And if I want to get out of this mess, i shall pay a ransom of 2350 USD.

    What kind of nation is that?

  • “I feel like a slave. The US demands superflues complex paperwork in a for me foreign language. For what?”

    There is no reason for it at all. Not a single reason. You can’t even make a reason up. The USA simply loves laws and loves punishing you for violating laws. “It’s the law.”

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