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Salam: No taxes for Americans abroad
Reihan Salam
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Kai Ryssdal: There was a brief moment of agreement on tax policy over the weekend: House Minority Leader John Boehner said he'd vote to let Bush-era tax cuts on rich Americans expire, as the White House would like, if that was the only way to save tax cuts for the middle class. Senate Republicans said today they will agree to no such thing, so we're back to more of the same, with the mid-term elections looming.
Commentator Reihan Salam has another part of the tax code he wishes would get some attention.
Reihan Salam: Hundreds of thousands of Americans have left home to serve as ambassadors of American capitalism. Many are corporate employees working for big multinationals. Others are hungry entrepreneurs looking to profit from white-hot economic growth in countries like China, India and Brazil. They spread the gospel of the profit motive, and they also help drive what scholars call "brain circulation," which benefits the U.S. economy.
Consider the Indian-American immigrant who goes back home to his native Bangalore to launch a tech start-up. He takes his Silicon Valley know-how to the old country, but he also brings back knowledge about the growing Indian market to the U.S. by keeping in touch with old colleagues. That helps U.S. firms and Indian firms profit from each other's success.
But the problem is that the U.S. is the only industrialized country that taxes its citizens on income earned abroad. That means successful American expats have to pay taxes to the IRS on top of taxes to their country of residence. Complex new regulations are making matters worse.
This has led a tiny trickle of expats to actually renounce their citizenship or their green cards. We're in danger of losing some of our most talented citizens for good.
We ought to encourage Americans to work abroad, not punish them for it. At the very least, we should stop taxing expats for income earned in their country of residence.
The truth is that all Americans profit from having a large U.S. diaspora sprinkled across the globe. They spread ideas, but they also find ideas and use them to jumpstart new trends. Think of all the cuisines and movies and technologies we'd miss out on without them.
Many will say "good riddance" -- who needs these economic Benedict Arnolds? But that's a short-sighted view that will leave all Americans worse off.
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Reihan..
Regarding your comment "This has led a tiny trickle of expats to actually renounce their citizenship or their green cards. We're in danger of losing some of our most talented citizens for good."
I think you are right. As I understand it, numbers are up, although still small at this stage as compared to the total Expat universe.
Here is a recent blog entry with some good details about the exit tax this creates for those exercising this option, and there are some additional reader comments that might be of interest those reading here.
Reihan, you are exactly correct in your analysis,(other negative comments here aside), although your story was too brief to explain more fully why.
Reihan, you are exactly correct in your analysis,(other negative comments here aside), although your story was too brief to explain more fully why.
I am surprised about all those posting comments here, who really think that the wage exclusion and the foreign tax credits are sufficient to offset the tax complexity, cost and compliance issues associated with the Citizenship based taxation system America has.
The US claims tax dominion over you no matter where you live in the universe. No other civilized country in the entire world, does this, but never mind. That is the cost of being the servant of the Empire. I suppose, the world does belong to America, so it does assert it's rights here. BTW, do you know when that started and why? I will let you google it, if you are interested enough.
While exclusions and credits do provide some relief from double taxation, it adds a lot of complexity to the problem of tax preparation, because as you move overseas, you have to file taxes to two countries. One for your new country of residence, and one for America. My experience is that I never have got a tax credit to match the amount of taxes I have paid in the country I reside, and because of the difference fiscal periods, I often have to amend my previous 1040s, once I finally file my residency countries taxes. Again, additional complexity that the US Citizenship taxation model brings to your life.
Of course, living overseas, you quickly realize how little the "effective" tax rate is that Americans actually pay with its adjusted gross income, plus deductions, credits, exemptions, exclusions, deferrals, IRAs, etc, etc, etc.. It is amazing that Americans are paying the lowest effective rates since I was born in 1948, and yet they think they are Taxed Enough Already. No wonder there is such a BIG deficit, but I digress.
When it comes to the Foreign Tax Credit, has anyone commenting here who really thinks it is a great benefit, ever looked seriously at form 1116 or the instruction booklet? Or do you just pay a CPA to do it for you? Can you tell me with a straight face that you understand it and how it works and the instructions all make sense? The first time I had a CPA do it for me, who was supposedly an international tax expert, he got it wrong. He could not explain why the credit I was getting was way less then the foreign taxes I paid. For that I paid him $1000. What a deal! I went elsewhere, but why should I even have to do it, as I am not residing in America any more? My Auzzie wife, who has had a green card and resided in America for 30 plus years, doesn't have to file tax forms and report income back to Australia. They let go of her, once she is no longer resident there. But, now that she is considered a "US person", when she moves home to Australia, she still has to file and pay US taxes back to America as well as start paying Australian taxes again. GBA!
Also, remember, or maybe you are not aware, if you are living overseas, you most likely will have to file a Foreign Bank Account Report (FBAR) every year to the Treasury department by June 30th, in Detroit, of all places, or face some very serious fines for failure. There is a pretty low threshold of $10,000 aggregate of all accounts to trigger this requirement. It is the hook the IRS is using to impose some pretty Draconian penalties on "so called" tax cheats right now in its Voluntary Disclosure process, so Beware!! Normal banking activities will take you over those limits in no time at all. DO NOT NEGLECT THIS FORM!! Be a compliant little citizen, and give them what they want!
Also, just to make life more interesting for you, coming this next year, when you do your 1040, there will be a new IRS form, that asks for the same information as the FBAR (another bit of duplication and complexity). Additionally it will want to know about the assets you acquire overseas. US residents won't have to declare this in America, but if you live overseas, so you will. Lovely!
That is IRS form 8938, and here is a link to the draft, so you can get stared early...
http://www.irs.gov/pub/irs-dft/f8938--dft.pdf
This does not replace the FBAR. It is just duplicative work. Remember the 8938 goes with your 1040, and the FBAR is filed separately to Detroit. I hear there is an office there in some big warehouse that used to manufacture automoblies that loves filling up empty files with paperwork.
Finally, I will just add to what other commentators here have said about a particularly nasty piece of legislation called FATCA, where the IRS is tasked with getting all the world's financial institutions (more than just banks) to be a tax collector for the IRS. Mark my words, there are already banks in the countries that you are living in that won't be wanting US Citizens as their customers. Being FATCA compliant is just too burdensome. Some will just quit doing business with America, period. I would suggest that those commenting here, who don't know about these things should be reading a bit more at the American Citizens Abroad web site....
http://www.aca.ch/joomla/index.php
In conclusion, my opinion is that America should move to a residency based taxation system like everywhere else in civilized world, or if it can't close it's deficit by increasing the tax rate on a few millionaire residents by 3%, maybe the US could get every other countries citizens to pay tax to the USA, as that is the direction the Empire seems to be moving with FATCA.
Reihan, keep up the efforts on educating the masses that haven't a clue about Expat taxation issues. Thank you.
You're spot-on, Thomas. My wife was elected Treasurer of the school Parent-Teacher's Association. She had to resign because she could not perform her duties because was denied her access to the PTA's bank account. Why? She's a US citizen and that would impose large reporting obligations and expenses on the bank because of the new US FATCA law.
Rylla made a good point as well. Tax preparation fees for the US alone were quoted to me at 3000 dollars.
And the benefits?? Where's my cash-for-clunkers? Where's my tax credit for putting in energy efficient windows in my home? Access to Medicare? - no way.
And while the Americans on shore ran up the debts over the last 10 years, they eroded the dollar. They get the all of the benefits, but we share the bill.
This masquerades as fair.
It is amazing how uninformed many of the comments are.Yes, there is an exemption of 91'400 today, but in many countries in Europe, that does not get one very far. (By the way, its 91'400 today, but what about topmorrow, Congress is often talking about repealing the exclusion). Also, don't forget, if you are in the States visiting (your sick mother for example) more than 36 days, in a year, you dont benefit from the exclusion. As well, a US Citizen abroad must reveal far more about his/her finances to the Gov't than a US domestic resident (ie details of wealth; not just income).
We can debate about the so called benefits of US Citizenship; but for most expats including myself; US citizenship carries no foreign benefits to speak of, as most do not live near any danger.
Now with the coming Financial Reform Bill, US Citizens abroad will be at an even greater disadvantage. If you are on the board of a Charitable foreign foundation ( or an executive at a small company)for example; as a US citizen with signatory rights to the company, you must give all the financial details of the company/foundation to the US Gov't. Extra paperwork for a company just to please the US; less Privacy for a company/foundation, etc. Result: why bother having an American on your staff; its just not worth the hassle.
Believe me, small foreign companies do consider US citizenship a Disadvantage in hiring considerations.
Bottom line, Most Americans abroad are enraged about this (just take a look at the ACA website); the disadvantages of US Citizenship while living abroad far outweigh any advantages; and it seems to get worse.
After moving to Basel, Switzerland with my husband's job as a local hire, we not only get to pay taxes here and in the U.S., but also paid about $2,000 just to have the taxes done. We have no fancy expat package to cover incidental expenses, so we pay for our insurance, kids' schooling costs, etc., like our local counterparts. Only we get to pay taxes here and there. We love the experience and wouldn't trade it for anything, nor would we ever give up our U.S. citizenship, but it does seem like we are getting the double whammy.
(My name is pronounced Rilla, rhymes with Vanilla, just in case)
Calling the US taxes small or trivial mis-characterizes the nature of the problem for expats. First, let's be clear, only the US and a few brutal dictatorships follow this policy of double taxing their citizens.
Being subject to two systems is daunting - especially considering that one of them is the onerous US system. There are so many complex consquences and all of this is done for "fairness".
Americans have almost no deductions available except the Foreign Earned Income Exclusion. 91k may sound like big money, but today the US Dollar fell below the Swiss Franc. You can get government assistance with an income of 91k francs.
We don't get the pre-tax medical contributions that on-shore Americans get. We don't get deductions for most of our other much larger taxes such as VAT, property taxes, wealth taxes and fuel taxes. Do you pay 7.50 per gallon? We do.
The worst part is that as the dollar plummets, it plays hell with our lives. While Americans on-shore enjoyed a 6% decline in federal taxes since 2001, Americans abroad saw a 17% increase from the US alone.
The US does not allow Americans abroad to make tax deductible retirement savings. On top of that, the capital gains taxes on what we do save exceeds 100%. We pay capital gains even when we have a loss.
This is terribly unjust and the results are not lost on Americans abroad. I don't believe the renunciations are a trickle. The waiting list for renunciation is now more than 1 year long in most countries. This is not political protest - these renunciations are for tax reasons.
I know people who are doing it and they have a grim choice. Divorce your foreign spouse and go back to the states or stay married and eat cat food in retirement.
In the mean time, my Canadian, Australian, Irish and UK friends are loving it. They are snapping up our jobs.
NO taxes for ex-pats? Why? Don't those citizens receive some value from their citizenship? Services from the US Department of State, for example. Maybe double-taxation should be changed, but that is not the same as saying they should pay no taxes.
Most of the comments on here are idiotic. I live in a country with no income tax and a very high cost of living. All of the expats that I work with (British, French, Canadian) have it made in the shade. They pay no income tax whatsoever, and I have to write a check to Uncle Sam every year.
I am also a German citizen, and of course pay no German taxes. My employer is now discriminating against hiring Americans because most of us ask for more money to make up for the tax differential and put us on par with the other expats. I am patriot and just like the founders of the US, I want the government to stay out of my wallet and out of my business. The most American thing that one can do is declare independence from a tyrannical government, so I support all those who renounce their citizenship for tax or any other purpose.
I found Reihan Salam's argument a slippery slope at best and spurious at worst. As a former expat who is contenplating a return aboard, one of the reasons why I enjoy working abroad is the tax policy. For the 2009 Tax year, the IRS allows individuals to earn, roughly $91,400 USD per year tax free. Secondly, the IRS allows you deduct taxes paid to foreign nations, which are usually higher than the USA. So, if you earned $200,000 USD abroad, paid a 50% tax on that $200,000, you're left with $100,000. Of that $100,000 your tax liability would be 15% of $8,600 making your tax bill to Uncle Sam a whopping $1290 USD. Not too shabby for a military that protects you across the globe.
The arguement to end taxation on expats is based on the entitlement belief, unfortunately held by many wealthy, that one should never have to pay taxes, period. If some of the wealthy want to renounce their citizenship, I say "Good riddance!" And when they try to travel to the USA, Western Europe, or any other 1st World nation on a 3rd World nation passport, I hope they get the same scrutiny as the "natives" on receiving a visa to travel.
Brian, allow me to suggest that you take another look at becoming an Expat again.
The Tax which the US levies on its citizens living and working abroad is essentially a Sin Tax. It is a fiscal punishment meeted out to those who live in a country whose tax system does not both mirror the US sistem or whose tax rates are not as high as the US reates. If the foreign tax system so mirrors the US system then the earned income exclusion and foreign tax rates may very well offset totally your US tax obligaion and you will own nothing additional to the IRS. Even though you produce zero revenue for the US Treasury you are a "ggod boy" and therefore will not be punished. That is why it is a Sin tax rather than for the purpose of generating revenue for the US Treasury. You are scott free except that you will probably have to keep very careful records and employ a qualified accountant to prepare your US tax return, error free. This will probably cost you $3,000. It is not a job for H R Block. You will have to report your foreign bank accounts to the US Treasury and submit the new FATCA report on your assets abroad that is still in the prliminary stage. You will also likely find it difficult to open a bank account abroad because the reporting requirements the IRS imposing in foreign banks with US account holders is resulting in their closing them down. Moving abroad you many have to convert your foreign paycheck to dollars and depoisit them in a US bank and then withraw cash from an ATM abroad to pay your rent and your other bills. Also remeber that as a US citizen living abroad under the Know your Client provisons of the Patriot Act you may have trouble maintaing an account with a bank in the US.
But remember there income items abroad that are taxed by the IRS that folks in the US don't have to be concerned about: If your foreign employer contributes anything to a foreign Social Security system, that employer's contribution is taxed by the US. If your employer contributes to a foreign pension fund, that is also taxable by the IRS. And if part of your salary is deposited in the foreign equivalent of and IRA, or other deferred compensatioh plan those deposts are not tax free but are subject to US tax.
Also if you pay foreign value added, sales, wealth or personal property taxes, they are neither deductible for US tax purposes, nor can they be used for foreign tax credits. Likewise if you make contributions to a church or a foreign charity, these are not deductibe for US tax purposes because they are not US organizations.
And if there is a change in the exchange rate between the US dollar and the foreign currency in which you are paid, such that the value of the foreign currency increases in its dollar equivalent value between the time you receive your pay check and the time you spend it, then you are subject to either a short term or long term capital gains tax, depending on the time period. Just the bookkeeping task to keep track of all of these things is not an insignificant time burden.
But if you live in work in a country with a tax system that is different from that of the US, which means most other countries, then is when it really gets tough. Some countries have no income tax or a low income tax because they raise their government revenues largely through other kinds of taxes, none of which are either deductible or usable for foreign tax credits. And if are working for a US employer who wants to deploy you abroad and is willing to provide additional compensation to cover your double tax obligantion, provide you with a company vehicle and security guards for you and your family and pay the tuition so you kids can obtain an education abroad in English that will allow them to qualify for admission to a US college or university when they graduate, all of these "in kind" payments are taxable income under US tax law. And if the foreign country has anti-discrimination laws similar to those in the US which prohibit compensation discrimination based on national origin, it may very well be illegal for your employer to compensate you as an American citizen for these additional US tax costs.
In countries with very different tax systems you will pay a heavy tax to the IRS. This is a Sin tax for hving commited the crime of living in a country with a tax system different from that of the US.
So best to check it out thorougly before you make the move.
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