SC upholds Obamacare because it is a tax – Homelanders join #americansabroad in paying tax on “unearned income” bloomberg.com/news/2012-06-2… #FATCA
— U.S. Citizen Abroad (@USCitizenAbroad) June 28, 2012
In the fall I wrote a post describing how Obamacare is to be funded by taxing “unearned income”. This is one of many examples where the US taxes income that people have never earned. I am cross-posting this post from the RenounceUScitizenship blog. After publishing this post, I noted some very interesting comments, including some based on “technicalities” from Shadow Raider and Eric. These comments raised questions, about what would be included in, and what was meant by “unearned income”. Interesting comments. I have updated this post to acknowledge your comments. But, I will leave it to you to sort out the details. Suffice it to say that Obamacare is a massive tax increase that will make U.S. tax compliance even more difficult. In addition, Obamacare will certainly increase the role of the IRS in your life in a more supervisory way.
Note the following comments of Commissioner Shulman in this regard:
The situation is indeed dismal. I don’t understand everything in the following article, but I can see that this is going to:
1. Add more bureaucracy and cost to filing your U.S. tax return – it is not clear how this is intended to impact expats (if they are considered at all);
2. Clearly interfere with your ability to invest and plan for retirement. The U.S. has become a nation of forms and bureaucracy.
Taxing Unearned Income in General – Where does the money come from to pay the tax?
Before discussing the new tax provisions in Obamacare, it is important to understand that the U.S. government is already taxing unearned and undistributed gains when it comes to PFICs (and perhaps more). Stop for a moment and think what this means. The idea behind income taxation is that a certain percentage of what you receive as INCOME is to go to the government as your contribution toward running the government. In its most simple terms, this means that (imagine a tax rate of 20%) that if you receive $100 then $20 goes to the government. The taxpayer does not receive all of that he was paid. When it comes to taxing “unearned income”, one needs to ask the following question:
Where does the money come from to pay the tax? In some cases, it could mean the forced sale of the asset. Let’s consider the following theoretical example:
You own a $100 of stock. The value of the stock increases to $150 during the year. You have a gain of $50 that has not been realized. If the stock were to be sold, then you would have a profit of $50. That $50 would be taxed as income. To tax the “unrealized gain” is to pretend that the stock has been sold, even though it has not. If the government is to tax that $50 at a rate of 3.8% that means that one would have to pay a tax of $3.80 per $100 of unrealized gain or $1.90 on the $50. This might not sound like much, but one must ask: where does the $1.90 come from? If the gain is realized, the money (at least in theory) exists to pay the tax. But, if the gain is not realized, there is no obvious source of revenue from which the tax can be paid. In theory, this means that the asset could/would have to be sold to generate the money to pay the tax. In addition, you can bet that 3.8% is just the beginning. In addition, this kind of tax provision means that people will spend more time on tax planning than on investment analysis. For example, if unearned gains are taxed, this means that a rational investor would favor income producing investments over growth investments (that pay little in the form of dividends). In fact, it would be dangerous to your financial health to invest in assets that grow in value. This is fatal to an economy that depends on growth.
Finally, it is obvious that a tax on unearned income is a form of “class warfare” – Let the rich pay! But, it is not the rich (whatever that means) who will pay. (What it really is: Let’s make those who invested their money rather than spent their money pay.) When it comes to tax: everybody should pay. If more money is needed to fund Obamacare, then there should be a general tax increase to pay for it. Perhaps, you enact a national sales tax. If everybody, benefits from Obamacare then everybody should pay. (By the way compliance with Obamacare is to policed by the IRS – creating another frightening level of bureaucracy.) It is immoral, unjust and bad economic policy to force those who invested, to empty their retirement accounts to pay for Obamacare (sound familiar?). Furthermore, “Con-Gross” should not hide this tax increase in a piece of legislation (just like what was done in FATCA). You may recall that Nancy Pelosi famously announced that (rather than read the legislation) that Obamcare should be passed so that the American people could learn what was in it. Tax increases are serious business and should be:
1. Announced and understood by everybody; and
2. Affect everyone.
The democratic process has become a game – the purpose of the game is to force somebody else to pay your bills. This is not just a problem in the U.S. However, the level of obfuscation and corruption in the U.S. is without precedent in the modern world.
Special Tax on “Unearned Income” in the context of Obamacare
In the context of “Obamacare”, it is impossible for the average person to understand what is included in “unearned income”. Absolutely impossible. No U.S. taxpayer can navigate life without an accountant or lawyer in tow. The more I learn about this, the more I realize that U.S. tax laws are incomprehensible to the average person. I don’t call it “Form Nation” for nothing! “Shadow Raider wrote an interesting comment on this post where he suggests that for the purposes of Obamacare that unearned income does NOT include income that has not been realized. Eric suggests (in a comment responding to Shadow Raider) that “unearned income” can include unrealized gains (giving the example of a PFIC – the most punitive tax known to man).
The real point is (leaving aside the specifics) that, as confirmed by Justice Roberts, that Obamacare is a massive tax increase on U.S. taxpayers – including U.S. citizens abroad. Furthermore, it cannot be understood by anybody except the high priced accountants and lawyers. The professional fees associated with this are simply a “tax on a tax”. U.S. tax compliance is so complex, expensive, and subject to penalties, that U.S. citizenship is too expensive to keep. Renounce U.S. citizenship, rejoice and live free of the insanity of citizenship-based taxation.
As a start, have a look at the following article. It appears that the tax increases to pay for Obamacare will impact U.S. citizens abroad. For example, the article includes the following:
For most individuals, MAGI will be their adjusted gross income unless they are U.S. citizens or residents living abroad and have foreign earned income. The tax is equal to 3.8% of the lesser of net investment income or the amount by which MAGI exceeds the threshold.
The taxable gain on the sale of a personal residence in excess of the Sec. 121 exclusion would be included
With respect to tax planning the authors state:
Wealthy taxpayers have approximately a year and a half to develop methods and strategies for avoiding or reducing the impact of this new tax on investments. A good portion of the implementation of plans to limit this tax may take place in the last quarter of the tax year ending on December 31, 2012. This would be a good time for taxpayers to analyze their investment portfolios and harvest any year-end gains, thereby limiting the 3.8% tax on top of the income or capital gain tax assessed on the gains. Given that the wash sale rules do not apply to gains, selling a security at year end and repurchasing it may make sense if the investment is still a good portfolio choice.
It is essential that you get out of the U.S. tax system. To remain a U.S. citizen and stay in the U.S. tax system will:
– force you to pay taxes on gains you have not received (where does the money come from for this);
– force you to spend too much time thinking about taxes.
It is clearly time for the people to take the government back from the political parties.
When it comes to U.S. public policy, there’s:
Dumb, dumber and Obama!
Read the following and then attempting to understand it, then go out and pay some parasitic accountant or lawyer (who probably doesn’t understand it either) to explain it to you.
“Planning for the New 3.8% Medicare Tax on Unearned Income
Effective in 2013, the Health Care and Education Reconciliation Act of 20101 will subject some individuals to a 3.8% Medicare contribution tax on unearned income. This new tax will apply to single taxpayers with a modified adjusted gross income (MAGI) in excess of $200,000 and married taxpayers with a MAGI in excess of $250,000 if filing a joint return, or $125,000 if filing a separate return. The provision is contained in new Sec. 1411, Unearned Income Medicare Contribution. Congress added the provision as a means of raising revenue to pay for health care reform. It targets wealthier taxpayers, as can be seen by the thresholds at which the tax applies.
MAGI is defined as:
adjusted gross income increased by the excess of—
(1) the amount excluded from gross income under section 911(a)(1), over
(2) the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) with respect to the amounts described in paragraph (1).2
For most individuals, MAGI will be their adjusted gross income unless they are U.S. citizens or residents living abroad and have foreign earned income. The tax is equal to 3.8% of the lesser of net investment income or the amount by which MAGI exceeds the threshold.”
Read the complete article here.
Well, that made my head spin a bit! Just glad that I’ve already renounced, because my ability to comprehend the US tax code grows worse with each passing day…
There is a misconception here. Unearned income means interest, dividends, pension and social security payments, realized capital gains, rents, royalties, and other kinds of investment income, as opposed to earned income which is mainly wages. Unearned income is not undistributed capital gains, as far as I know these are not taxed (even the exit tax allows deferment until the assets are sold). I don’t like the term “unearned income” because it sounds like the person hasn’t earned it, but it basically means income from investment.
What I understood is that the health care law creates a tax of 3.8% on unearned (investment) income if the person’s total income is above $200,000 (single) or $250,000 (married). People who use the foreign earned income exclusion have to consider the entire income before the exclusion is applied.
Examples (single person):
wages; interest; income subject to 3.8% tax
$150,000; $20,000; $0
$20,000; $150,000; $0
$180,000; $30,000; $10,000
$30,000; $180,000; $10,000
$230,000; $40,000; $40,000
$40,000; $230,000; $70,000
@ Shadow? Where is the misconception? The entire new tax will be applied across the board on US citizens living in Canada because the current investment income tax rates are lower than in the United States now.
This irks me. The United States should pay its own healthcare. I don’t care how they do it. But they shouldn’t be reaching across the border to tax Canadian residents. We have our own health care system to pay for.
@Petros, the post confuses unearned income, like interest and dividends, with undistributed capital gains. The example about taxing the stock before it is sold does not apply to this case. I was just trying to explain the new tax because it seems some people were confused.
I’m not defending this, I’m very much against the idea of taxing the “rich” to pay for everyone’s health care. And you’re right, this additional tax applies to US citizens abroad as well, and I agree that they have nothing to do with this and should not have to pay for health care (or anything else) in the US as they will not benefit from it at all. I am aware that Canada and other countries have tax incentives for different kinds of investment, so the foreign tax credit does not completely prevent double taxation even when the overall tax rates in the other country are higher.
@Shadow Raider: if you made a QEF election for a PFIC, the US will tax you on unrealised gains inside the PFIC as if they were ordinary income. Similarly if you have a CFC which earns “unearned income”, the US will tax you on the unrealised gain on your CFC stock. So indeed, emigrants will be paying tax attributable to gains they may never realise in order to pay for health care in a country whose hospitals they never use.
@Eric, thanks for the information. I’m not familiar with PFIC, but it looks like one more argument against citizenship-based taxation. I’ll include it the next time I contact my representatives about the subject.
@ Eric, yes thanks. I knew that someone here had written about this, but couldn’t remember the details.
article clarifying issues about that pesky 3.8%
Although it is unlikely that “unearned” pension income would exceed the threshold for the new tax, it is already the case that the FEIE does not apply to pensions drawn abroad. In countries that do not tax pension income or do not tax it at the normal rate, this means that there would be no FTC to offset. Some of the renunciations in Switzerland have been caused by this.
Notice the difference between the cut offs for “single” and “married filing separate” and “married filing joingly.” Canadians will often get caught up in owing more taxes to the US if they owe capital gains or dividend tax to the US on income that isn’t “income” in Canada: income within TFSA’s, RESPs, or gains on their principal residence. Obviously, if those people don’t want to subject their non-US citizen spouse to US taxes, they will file “married filing separate” rather than “married filing jointly”, and they aren’t allowed to file “single” A taxpayer selling a former Canadian principal residence that they have been renting out for 3 years, for example, will owe full capital gains tax to the US on that sale, even though they will owe much less to the Canadian government. Or, a taxpayer selling a home that increased in value more than $250,000 will owe taxes to the US on the sale while they owe nothing to Canada. In this situation, a taxpayer will owe the 3.8% on any capital gains over $125,000. This is in contrast to the single filer, who must pay only on the amounts over $200,000. This comes out to up to $2,850 extra that the taxpayer who files “married filing separate,” must pay because they happen to be married to a Canadian citizen who doesn’t want to pay US taxes. So not only does this Canadian taxpayer (and their spouse) have to fund Canadian Health Care, they must also pay a higher share of the US health care, which presumably they will never use, and which their non-US citizen, non US resident spouse can never use! Discrimination!
Again… another thing which I just bother reporting as they have zero way of ever knowing about it anyways.
Here is the link to ACA statement that Obamacare does not apply abroad.
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