“The Law That Makes U.S. Expats Toxic” is a Wall Street Journal article by a former U.S. State Department diplomat. It covers what happens to American who want to earn a living in the global economy but get caught up in the 2010 Foreign Account Tax Compliance Act. (Personal story: A friend from Europe gave up his Green Card and moved back to Europe because his job was money management (of a small foreign fund) and the costs of compliance with Fatca ended up exceeding his total compensation.)
The author concludes that “The best solution is for the U.S. to join the rest of the world in taxing based on residency rather than citizenship.” I’m not sure that is practical given the uncompetitive tax environment of the U.S., e.g., compared to Switzerland (negotiable rates) or Singapore (top marginal rate of 20%), and how comfortable a Gulfstream G650 is. But on the other hand this will become an ever-larger issue as an ever-larger percentage of the world’s good jobs are outside of the U.S.
A lot of American thinking in general is rooted in the assumption that America is the richest, most advanced and well educated country on earth, i.e. as it was 1955 and not 2015. Hence Hillary’s memorable applause line – “America is not Denmark.” Over half of all Americans don’t hold passports and maybe half of outstanding passports are only used to cross the border into Mexico/Canada (pre-9/11 there were only around 50 million passports outstanding). So most Americans have never seen another country (especially not China – only around 1M Americans/ year visit China and probably a large % of those are ethnic Chinese). In their mind, Chinese are still pedaling around on bicycles. Personally, it wasn’t until I saw Shanghai and Beijing and all the sparkling new subways, high speed trains, etc., etc. that I realized how old and broken down our infrastructure is. And if you compare PISA scores in Shanghai with those in big American cities, you would weep.
As an expat, I can tell you the laws are a complete mess. Not even the IRS/Treasury knows exactly what it is doing and the confusion they create has resulted in them pushing back “deadlines” for filing on several occasions in the past. FACTA is also confusing because it has different thresholds depending on the conditions. If you are residing in the US, but hold foreign assets of >$50,000 you must report. If you are a single expat living abroad, then it’s $200,000. If you are expats, married, and filing jointly then it’s $400,000. As a US expat my foreign bank will not allow me to invest in mutual funds or stocks because the reporting costs (or risks) are too high.
FACTA btw, is on top of the already previously created FBAR requirement which serves the same purpose. Formerly this was from TD F 90-22.1, which just a while ago convert now into FinCEN Form 114 (FinCEN = Financial Crimes Enforcement Network). This is actually more of a pain than FACTA because you must report every single bank account that you have that is >$10,000. Now get this – even if your balance went up to $10,001 for just one day, you must report it. And if it is above $10,000 you must report the *highest* value it had through the year. Believe me, it is a pain in the ass. And Turbotax does not offer these forms in their software, so it is quite easy to go for years not realising you must file FBAR & FACTA forms. Unless you check the IRS website monthly you’d only know by word of mouth or if mentioned in the news, or be a sucker a pay a “tax professional” $2000 to advise you to fill out these forms, which honestly you can do yourself. The advisors don’t really do much, since it is you who have to dig up the records and spend the time deciding what is the correct data to give.
On another note, with regard to tax filing, the irony is that as a rich expat bastard I end up getting a tax refund from Uncle Sam. After the Foreign Earned Income Exclusion is subtracted (up to $100,000 for 2015), my AGI falls to something like poverty levels, and I get a child tax credit for my kids around $1500. So how does that make sense?
I made my kids American citizens after they were born, but now I realize I’ve doomed them to forever filing American tax returns for the rest of their lives.
They have triple citizenship and perhaps will attain a fourth one in the future, so I guess they will need to get used to bureaucracies from an early age.
The only way to get congress attention is to make it clear that this could put a stop to the important industry of birth tourism.
The other danger is if I buy a house, and then sell it later. If the currency exchange rates changes significantly (eg. the dollar loses value as the euros rises) then I could be held liable for significant amount in capital gains taxes (http://www.greenbacktaxservices.com/blog/expat-taxes-buying-selling-real-estate-abroad/). Houses with 160-200m^2 of living space typically go for 400,000-600,000 euros in my area.
Life as an expat can be complicated. Is it worth it? In the end it’s all about compromises. In my opinion, the safety and quality of life in Germany is better than US/UK. Cost of living is reasonable. Healthcare has been quite good in my experience, I’ve never sweated the medical bills (I’ve had 2 hospitalizations and my daughter needed an ambulance after a gash on the head). 30 days vacation + 10 public holidays + 10 days of overtime returned to me per year, which is honestly more valuable to me than the money. Germans are desperate for young blood to feed their vampire elders, so childcare is cheap – my twins just started kindergarten, and 5 hours per day costs only 79 euros per child, lunch costs another 75 euros, so max I am paying is 300 euros per month. And this is already covered by the 368 euros a month in child allowance from Oma Merkel.
It’s a socialist workers paradise here… is it sustainable? Don’t ask me.
You’re looking at it from the point of view of labour moving to the US and from the US. But what about those living outside the US who are born into US tax slavery for life because of a US parent? Or whose parents were short term or temporary visitors like students, and who were born in the US but lived there for only day, months or a few years as minors before they returned to their family’s country of origin? Should they be sentenced to a lifetime of indentured servitude to the US Treasury reporting and being liable to US tax imposed from afar, on top of the local taxes (often much higher) they already pay?
The US is a huge hypocrite in imposing lifelong tax and reporting burdens on people who were born or live permanently abroad – using no US services and receiving no US benefits. In fact, the US disables us abroad from saving for our child’s education, or disability or retirement, by calling our local government tax preferred savings vehicles ‘taxable foreign trusts’, imposing incomprehensible reporting even if no US tax is owed, and reaping income from imposing confiscatory fines. The US IRS urges US residents (who are not even citizens) to use tax deferred or tax free strategies for their US resident children’s college education and disability, but effectively punishes those outside the US who try to use their local version – since we cannot use the US ones.
What arrogance and hypocrisy – to claim we benefit from US citizenship, yet burden us with penalty regimes and reporting demands that are much more onerous than that imposed on actual US residents.
That is why I am EX-US. The US treats us like dirt and regularly issues BS claims that we’re not ‘paying our fair share’. Well in fact, we’ve already paid up in full where we actually live, are citizens, and where the income was actually generated and held. Which is far more than you can say about US corporations with US head quarters holding their profits ‘offshore’.
But I guess that’s because we’re not wealthy enough to keep a whole flock of lobbyists and lawyer on retainer to intercede directly with the powers that be in the US government.
Since when was parentage or geographic birthplace the basis for fair taxation?
What they said. My child lives permanently in the UK with her US expat husband and two children – they wrestle with this nightmare every year.
Citizenship-based taxation and draconian reporting requirements aren’t the only unfair issues facing American expats.
Imagine that the US decided it wanted to prevent Americans from using a corporation to grow investments tax-free (or low-taxed). To address that “risk”, imagine it passed a law that made corporate profits flow through to shareholders for personal taxation, regardless of whether or not the corporation actually distributed those profits.
Such unfairly treatment of the legitimate majority, in order to prevent the illegitimate activity of a few would trigger marches on Washington in protest.
But that’s exactly how the US treats Americans who happen to own foreign corporations. If “US persons” collectively own more than 50% of a foreign corporation, then the profits of that corporation can flow through to those shareholders for personal taxation in the US, regardless of whether the corporation distributed those profits or not.
This is covered in a set of laws relating to “Controlled Foreign Corporations” (CFCs), and is one of the most complex areas of tax law. (So in addition to the issue in principle, US expats doing business abroad face large expenses to professionals versed in these laws.)
And what’s tragically ironic about the situation is that the US evidently doesn’t consider the concept of growing investments in a tax-favored corporate structure, because that’s exactly what it promotes to foreigners via corporate structures in Delaware and Nevada. Outside the US, the US is considered one of the most attractive “offshore” locations in the world.
Having to deal with the messy US system is kind of like buying insurance in the event of the next global unrest. US still has the best military. Some Chinese American couples I know purposely let one person to be US citizen and keep the other as Chinese citizen. I guess in case World War 3 breaks out, you are somewhat hedged whichever side wins.
What I find so depressing about the whole situation, is:
1. We 8.7 million expats have no representation in the government.
2. When you express these concerns to US non-expats, you’ll often get a response along the lines of, “If you’ve decided to move away from the greatest country on earth and the land of the free, then you can live with the consequences.”
(Just see the comments in that WSJ article…)
We’re dealing with this problem now. We’re small fish: no big accounts, no trusts, no huge investment portfolios, one house etc. I’m Canadian, and my wife has dual citizenship, having moved here in 1968.
She does not want to renounce her citizenship, as she still has emotional and familial ties to the US. We’ve considered it, but the potential costs outweigh the advantages, so we will continue to file (jointly, so I have to have an ITIN) with the IRS.
Renouncing is NOT easy, since it involves a final-year tax filing that can trigger an exit tax if your net worth exceeds $2M. It embarrasses me to say so (“Cry me a river”, I hear you saying) but that $2M threshold is not very high if you have owned a house in a major urban market anywhere in the world. And the exit tax is.. punitive. You also have to face interviews with US consular officials that (I am told) are unpleasant and invasive.
Then there’s the $2350 processing fee for renunciation. If I recall correctly, this is around five times higher than the next-highest fee any country charges to cancel one’s citizenship.
Our plan is to simply buckle under and keep paying several hundred dollars a year to a “tax professional” to have our return prepared. We’ve tried it ourselves, but frankly, the IRS and the US Tax code could defeat a Talmudic scholar. The emotional stress simply isn’t worth it.
Oh, yes. You NEVER get feedback. The IRS doesn’t feel obligated to close the loop. You’re never quite sure if you’ve done the right thing. And the penalty threats!
Our Canadian taxes usually take under an hour to prepare, while the US ones take a couple of days when we’ve done it ourselves. The CRA sends me a statement within a few weeks telling me if I got it right, or if I messed up. They’re usually right.
We’ve NEVER paid any US taxes. Canada is a relatively high-tax environment (health care, ya know) so the credits always offset any US payments. Yet the IRS maintains an establishment to deal with us, and millions like us, for no offsetting revenue.
And benefits of US citizenship? How about my wife getting quizzed by US border guards if she forgets, and tries to enter on her Canadian passport. Or that thing about the Navy Seals arriving in rubber boats to protect us from the beavers. Not sure we need to pay for that.
We can’t take advantage of any of the tax-deferred savings vehicles here besides the RRSP, equivalent I think, to you IRA accounts (not sure here), so I can’t contribute on a tax-deferred basis to an educational account for my kids or grandkids, or to a savings account to protect a disabled family member after we are gone.
We have no problem with the IRS going after offshore accounts of tax evaders, but what they declare “foreign” accounts >aren’t< for us. This is our home.
It's time for the US to move to residence-based taxation, along with the rest of the world.
And frankly, if your tax regime results in a few high-net-worth individuals taking their Gulfstreams full of cash abroad, you're better off without them. They aren't, and never were citizens. Just taxpayers.
And, we have "accidental Americans" in our community: people whose parents were academics, diplomats or military, or otherwise working on a short-term basis in the US when they were born. The IRS considers them citizens for tax purposes, and theoretically (based on the exchange of data under FATCA) pursue them for past tax liabilities and penalties, even though they have never earned a nickel of income in the US.
Citizenship-based taxation is a scourge on the world.