I met an expat for coffee in Moscow. He is British, but also has a U.S. passport because his mother is originally American. He runs a company that does business in Russia and the U.K. He has to file taxes both in the U.K. (because he works there) and in the U.S. (because he holds the passport). Much of the U.S. work is disclosure, e.g., of real estate owned or money withdrawn from a foreign bank account, e.g., to pay for an apartment. “It takes me one hour to do the U.K. taxes,” he said. “I use the government’s web site and it leads me through it step by step.” What about the U.S.? “That takes a week and it is the worst week of my year.”
13 thoughts on “U.S. versus U.K. taxes”
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Given that he’s paying US taxes as a US expat & a British citizen, why doesn’t he just renounce his US citizenship ?
Also, what % of their income do American expats typically have to pay the IRS ?
Why not renounce? He is young and might want to work in the U.S. one day, I guess. It also gives him the freedom to travel to the U.S. without being hassled.
What percent of their income do expats pay? They are taxed at the same rates as American citizens who live domestically, though they receive few services. They’ll get credit for what they’d already paid in tax to the country where they actually live. So if they live in Monaco they pay just as though they lived in Texas or Florida. If they live in France they might not pay anything (since French tax rates are similar to U.S.).
French tax rates are definitely higher than the US, but then you get a lot more for your tax dollars: nearly free higher education, universal health care, day care and other social services, as documented with only a trifle exaggeration by Michael Moore in “Sicko”.
The military-industrial complex is to blame a little (4% GDP vs 2% GDP) but it’s mostly health care, 50% funded by the Feds (nearly 20% GDP vs 11% GDP). That accounts for the lower productivity of the US taxes. And if you dig further, that is due to the astounding level of corruption and inefficiency in the US health care system (and also in the education system), which in turn feeds corruption in Congress. French government is pretty corrupt by Northern European standards, but French politicos lack the level of ambition US ones have in the scope of their greed.
Is he paying FICA and SS taxes as a self employed person? Or as a business owner and expat is he not obligated to pay those taxes? I am curious if that is also why he is still keeping his US citizen ship so that some time in the future he might move to the US and draw SS and Medicare.
I thought there was a deduction for being an expat. I think the first $95K or something like that is not taxed by uncle sam, regardless of taxes paid to the other country.
@fazal
Healthcare isn’t free in a single payer system. The lower cost is a result of monosopy power from having, essentially, one buyer, and a willingness to say “no,” to people that demand too much healthcare.
The US has too many insurance companies, and because old people will vote out any politician that doesn’t give them useless surgeries and dangerous pills Medicare buys anything a doctor prescribes.
Fun fact. Giving more people health insurance under obamacare grew the number of opioid addicts, resulting in *decreased* life expectancy.
None of that really counters Fazal’s point. The fundamental problem in the US is pervasive racketeering in industries like healthcare and education. Banking probably, also, but that’s equally true all over the world.
The extent to which the healthcare system is public or private probably doesn’t matter all that much as long as hundreds of thousands of relatively well off people in the industry feel entitled to run rackets.
Bobby: I stand corrected. The law was updated to allow an exclusion of about $95K (depending on the year), just as you say (see https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion ).
If I recall correctly, as US citizen abroad, you still need to actually file a tax return, even if you owe no actual taxes.
My daughter is a US expat running her own business in London and she has difficulty getting bank accounts and Financial services because the banks hate the US disclosure requirements on the banks. She also says US tax week is her worst week every year, for the hassle not the actual tax due.
Again, for those who don’t understand US tax laws as they apply to expats:
1. If you’re a citizen of the US, you have to file regardless of where you live.
2. You also have to file disclosures of all your foreign accounts annually.
3. Renunciation is a painful process, and even getting a consular interview to complete it can take a year now. And it costs $2350, maybe 6x higher than the next-highest-cost country to relinquish.
4. When you relinquish, if your assets exceed $2M, you are a “covered expatriate” and are charged a punitive exit tax on your assets as if they were liquidated on that date. $2M is not that much if you’re living in a large city anywhere in the world, and own a house, and also have a retirement savings plan. (I can hear you saying “cry me a river”)
5. As “the other Donald” mentions, financial service organizations have been rejecting US expats for some time due to onerous FATCA reporting requirements. There are also cases where co-ops and condos refuse to allow US citizens on their boards for similar reasons.
6. The US and Eritrea are the only countries in the world that tax extra-territorially based on citizenship. All other tax on the basis of residence.
7. There are thousands of “accidental Americans”, people who were born in the US to parents who were academics, military, diplomats, or otherwise temporarily located in the US. My son-in-law was born in Princeton NJ during his father’s PhD studies. He hasn’t lived there since he was 1. He is trying to straighten out this mess now, getting a US SSN and passport.
8. Yes, there are tax treaties, and yes, there is a foreign earned income exemption, and mostly expats don’t pay US taxes as a result. But the “no double taxation” principle of the tax treaties does not seem to apply to all income categories, and one of those appears to be some forms of retirement income. Gotcha! I say “seems” because of the uniquely convoluted, contradictory and complex US tax code, which seems to benefit tax preparers more than it does the US government.
Google “Isaac Brock Society” if you are mildly curious about this.
Rant over.
The tax situation is actually really complicated. The exclusion is more or less fine if you are an employee of a foreign corporation (one of the main ways to avoid problems is to structure everything as employment income one way or another), but if you are in business there are several gotchas which make it a bit useless.
First of all the exclusion is for “earned income” – dividends, various kinds of pensions, capital gains etc are all taxed. Foreign real estate income is also considered unearned income in most cases, and for all capital gains/deductions purposes considered as if it were in the US (which often conflict with local tax regulations – meaning you get a bad tax deal in either the US or the local jurisdiction). Self-employment tax and FICA are NOT covered by the exclusion, and you end up being taxed at around 15% unless the US does has a totalization treaty with the country in question (there are something like 6 – far fewer than for double tax treaties, and there they come with their own details).
Another potential surprise is that the foreign earned income exclusion applies to gross income, not profits, so if for example you earned $1 million against $800,000 in expenses, it essentially disappears. Your tax bracket is also determined as if the exclusion didn’t exist. Essentially, it is all a giant pain in the neck, and far more complicated than you might think. To avoid making a very costly mistake it is probably wise to hire an accountant, but those that actually understand the interactions between multiple tax codes are few, and jolly expensive. Or you can do it yourself, in which case a week of pain is guaranteed. Oh, and this is just tax. There are also the endless disclosure requirements for bank accounts, real estate, controlled entities…with inane questions such as “what was the highest balance during any day on the year (has to be calculated manually with great difficulty). Imagine doing that for 20+ bank accounts! The potential fines for any mistakes are also enormous (around $10000 per account if the mistake is deemed willfull) and from my experience seemingly random fines of $100-500 are regularly given, with appeal possible, but only if you are willing to risk the headline figure (10-20x more).
All in all, it’s a bit much. As to why a chap might keep his US passport: well, giving it up costs money and guarantees an audit (with an exit tax levied depending on the level of your assets). Also, future opportunities in the US might become more problematic. Nobody would keep it to use SS and Medicare – UK healthcare is good and free.
Seb 12:
UK healthcare is free? You mean that it is not financed by taxes and debt and available at any moment someone may need it to a degree it is needed? Are hospitals covered with doctors available 24/7 for any condition? I ma glad to hear that British doctors and medical equipment companies are all altruists and charge $0! What is bad health care? The one that does not cure or does not try to cure?