Expat homeowners will see some benefit; expats with other local assets won’t
A couple of weeks ago, Timothy Walberg (R-MI) introduced H.R. 6225, a short series of tax code amendments to “provide for economic growth and personal financial liberty”. Its full text is finally available. Right before the summer recess, Congresscritters introduce all sorts of tax legislation for the purpose of grandstanding and campaigning rather than actual lawmaking. Walberg’s bill is more of the same, but at least it contains the kernel of a nice idea: indexing individual taxpayers’ basis in certain assets to the cost-of-living adjustment.
The significance of Walberg’s plan is that when people sell their assets and pay capital gains tax, they’d only be paying tax on the amount that actually reflects an increase in the value of the asset, as opposed to the decrease in the value of the U.S. dollar — unless that asset is an ETF, a mutual fund, or a business you formed in the country where you actually live, in which case you’re clearly an Evil Tax-Evading Traitor who doesn’t deserve the benefits of “personal financial liberty”.
The relevant part of Walberg’s plan reads:
(2) Stock in certain foreign corporations included
For purposes of this section
(A) IN GENERAL—The term ‘indexed asset’ includes common stock in a foreign corporation which is regularly traded on an established securities market.
(B) EXCEPTION—Subparagraph (A) shall not apply to
(i) stock of a foreign investment company,
(ii) stock in a passive foreign investment company (as defined in section 1296),
(iii) stock in a foreign corporation held by a United States person who meets the requirements of section 1248(a)(2), and
(iv) stock in a foreign personal holding company.
In otherwords, if you are a U.S. Person abroad who invests where you actually live as opposed to a foreign country like the U.S., the benefits of Walberg’s inflation-indexing would be limited to your house and your stocks. Granted, this would already be a welcome bit of relief to U.S. Persons in Canada or Switzerland who can’t move house because they’d have to pay capital gains tax on inflation-driven U.S. currency depreciation, in addition to the actual rise in the value of the house.
But notice what’s explicitly excluded from the benefits of Walberg’s plan. Exchange-traded fund on your local stock exchange? Sorry, “passive foreign investment company”. Local REITs? Sorry, “foreign investment company”. A small business you built with your own sweat and tears (of course using infrastructure paid for — and workers educated by — the country in which you actually live)? Sorry, not “regularly traded on an established securities market”. I’m only surprised he didn’t explicitly try to exclude foreign real estate as well.
(For those of you who are wondering, 26 USC § 1248(a)(2) referred to in clause (iii) above is yet another tiresome anti-expat provision which denies even the normal capital gains treatment — let alone indexed treatment — to certain owners of “foreign” corporations, and instead forces them to treat capital gains from the sale of a “foreign” corporation as if they were dividends. It’s an extension to the Subpart F tax regime that was obviously aimed at rich homelanders with international investments, but utterly missed its target and instead inflicted a bunch of collateral damage on U.S. Persons abroad.)
It’s also highly doubtful that Walberg’s plan would affect the treatment of capital gains under the § 877A expatriation tax. Of course, if you did have any assets that would benefit from Walberg’s plan, you could probably just sell them right before giving up U.S. citizenship, and buy them back afterwards. However, as detailed above, many of your assets may not be “indexed assets” — unless, ironically, you exactly match the NBC Nightly News stereotype of renunciants as people who actually make all their money in U.S. assets and then “flee” to the Cayman Islands.
My heavily-biased conclusions
The above was merely a factual analysis of the scope of this proposed tax reform. Now here’s my political rant. Walberg’s plan is yet another example of a phenomenon which U.S. Persons abroad need to understand: Republicans do not give a fig about you. They are just as bad as the Democrats. They may want to cut taxes and paperwork, but they emphatically do not want to cut your taxes or your paperwork. They do not care that the U.S. is the only country on earth that imposes citizenship-based taxation, because they do not know or care about other countries anyway. Even when they propose a tax cut, they make sure the benefits are available to Homelanders only, just like “despicable” hypocrite John Duncan (R-TN) did with his “Bring Jobs Back Home” bill.
Similarly, don’t be fooled into thinking that recent calls for “territorial taxation” are intended to benefit you. They are intended to benefit U.S. corporations. It is perfectly possible to write the tax code in such a way that there’d be a territorial system for corporations but a worldwide citizenship-based taxation system for individuals. They’d have to eliminate a few strange tax breaks that no one cares about, like the Section 962 election, but it’s easily doable. Have no doubt: the Republicans would happily trade away the interests of expats — un-American traitors who mysteriously refuse to live in the Greatest Country on Earth™ — for something that actually benefits their base, like a “repatriation holiday” for corporations or another couple of points shaved off the estate tax rate.
Incidentally, Walberg just won the Republican primary in his district. He defeated challengers including Dan Davis, whose platform called for an 11% flat tax and total reform of the IRS. In his bid for a third term this November, he will face off against trial lawyer Kurt Haskell. Do I have any voting advice for U.S. Persons abroad who are registered in his district? I could say “hold your nose and vote for Walberg instead of letting another one of Carl Levin‘s buddies get a seat in Congress”. But I think it makes much more sense to encourage you to vote with your feet and with your passport.
Regarding the US Nightly News stereotype of renunciants, since this is the prevailing stereotype, this is why I find it very vile that someone who lives abroad and then lives in the US, even with a green card, can get nailed with the FBAR fines. Nobody really warns them properly in the first place.
Closer to our situation:
Imagine if someone inherited a lot of money, assets, or businesses in a country that IS NOT the Greatest Country on Earth™. They are expected to give a large chunk to a far away government that provides them with absolutely nothing in return? That is what the US expects…. talk about the worst possible form of slavery!! At least here, slaves got a roof over their heads and enough food to eat so that they could work. We don’t even get scraps.
@Eric, a very strong, and I think correct post. No need to denigrate the way our detractors by calling it a “rant”. You are a truth sayer, and there are not of enough of such people around.
You are right about democrats vs. republicans. Its a choice for expats between Miller and Miller Lite. (Tastes great, less filling). But it all amounts to same frothy sameness.
For those who think we should not be political, I just want to remind them that Isaac Brock is political: we have a specific goal which is freedom and justice for US expats. But we are not partisan. I only dislike Republicans a little less than I dislike Democrats. Neither party cares one whit for us.
@geez- actually slaves only got scraps too. That is why Black ethnic soul food includes things like; chitterlins (pig intestines), chicken feet, snouts, brains, kidneys etc. basically all of the least desireable parts of the animal that the slave owners thought beneath themselves. Slaves also didn’t get the best in housing. There are lots of archival pictures that will confirm this statement.
Slaves didn’t own their lives and we don’t own ours. We aren’t even afforded the decency of being able to live where we want to live. Freedom of movement for a U.S. person is an illusion when it comes to living outside of the U.S. They won’t let you go unless you disown them and even then some have found, they reserve the right to reclaim you.
We may be the house slaves of old who had it a little better than the field slaves did but we are still slaves none the less. Don’t go getting uppity and acting above your station.
@recalcitrant, interesting. You are suggesting that slaves also had to grow their own food on fields that they were allowed to cultivate. So Lord of heaven fed them by providing sun and rain; it wasn’t even their masters who provided food for them.
recalcitrant – Slave food don’t gotta be so bad. Think BBQ. Lesser cuts, properly prepared, can taste better than what massa eat. Don’t tell massa! And let massa keep on thinkin USA big house is nummer one. We don’t want massa tryin to live nowhere else! Or if he do try, he need to stay in that compound so we don’t hafta put up with his ugly face.
@USX, if you are trying to write in Jive, I’m pretty sure you’re not getting it at all. Here, take a lesson from June Cleaver (warning: this video may contain some language that people find offensive; it is provided only as a lesson in linguistics and it is not endorsed by the Isaac Brock Society or its sponsors); lesson begins at 1:00 minute:
whoa guys, don’t try inflame any emtoions! I wasn’t trying to disrespect anyone who was born into servitude, nor would I disrespect any US Person for complaining about the way the US views them…
*Sorry, but this stuff is giving me a headache. I guess, it’s not good to read about the US after being away on a very nice weekend, staying at a castle hotel. I’ll try this again later in the week when I need a distraction from work.
The text of the bill by Carolyn Maloney has also been released.
It looks like she is not willing to abolish citizenship-based taxation. The seven matters to be studied by the commission are: financial reporting (FBAR), access to foreign banks (FATCA), citizenship to children, ability to vote, Social Security and Medicare, student loans, and other federal programs. No mention on taxes or the IRS. And the commission would only make recommendations on administrative actions by federal agencies, not on laws.
The members of the commission, if not already US federal employees, would be paid at level 4 of the executive schedule, which is currently $155,500 per year.
There is no need for this commission as the work has already been done by ACA and others, and the relevant information is already available. The $3 million would be better spent on other things.
@shadowraider- the commission’s only purpose is to attempt to put citizenship based taxation on a more appealing footing. They just want to be able to say that “they tried”. Now look how ungrateful those expats are. The other part of the approach will most likely be to make renunciation even more burdensome of a process.
Making converts of these religious fanatics is a waste of time. To borrow a line from Star Trek’s Borg, “resistance is futile, prepare for assimilation”
*And people seem surprised about this: Why? When all we’ve seen out of the government down there, is hyperbole and jingoism about how great the United States is and how grateful the rest of the world should be at their magnanimous gestures. We’ll just take half your RRSPs than rape you financially for 200% of your assets. With friends like those – who needs enemies.
Petros – Thanks for the tutorial. Anyhow, you got the idea. Quack and dirty, that’s me. After all, I ain’t no Mark Twain. And you gotta allow for some degree of white trash infusion. This is a good time to reproduce the NOTICE at the front of Huckleberry Finn:
Persons attempting to find a motive in this narrative will be prosecuted; persons attempting to find a moral in it will be banished; persons attempting to find a plot in it will be shot.
@all- so their plan is a sly one. First they will disallow us from using the tax advantaged college savings options that we have in our country of residence and in return they will allow our children to become “debtor” slaves of their student loan empire.
It seems like a lot of contorted maneuvering for expats to have to go through to only end up with an inferior result. And for that dubious show of American care we should be grateful. But this is the stupid myopic American way.
Just do the right thing U.S. Congressmen/women and stop robbing us of what you have no right to in the first place.
This
*recalcitrantexpat, I must have missed this somehow. Where can I read about expats being denied tax advantaged college savings? Does this also apply to college savings in the US or only abroad?
@swisspinoy- In Canada, and I am sure in other countries also, there is a college savings plan called the, Registered Education Savings Plan (RESP). Now in this plan the parent(s) contribute a certain amount of money each year and the Canadian government makes a contribution. I forget the exact amounts.
Under IRS rules these plans are considered to be foreign trusts and the increase in the value of the plan, along with the contribution that is made by the Canadian government, is all taxable in the year it is realized. This negates any return plus it requires that you file expensive 3520’s and this also takes away from any increase in value.
The investment industry in Canada has told Canadian residents who are also U.S. persons that they should avoid investing in these and other similar government tax advantaged programs because of the tax obligations and the potential penalties that you are exposed to.
The whole problem is purely a fabrication of U.S. injustice and stupidity. The only thing that is necessary to address the taxation problems of U.S. persons is for the U.S. to get off of its high horse and stop stealing. It is as simple as that. It doesn’t take a 3 million dollar study or two years. Just admit you are wrong and move on.
The study is a pure charade. Its only purpose is to furthur the lie.
@swisspinoy- I forgot to mention that the Patriot Act makes it illegal for expats to have U.S. based financial assets if they aren’t associated with a U.S. address so that closes the door on saving for college there.
Basically with the looming FATCA, U.S. persons are closed out of everything financial every where. Unless you have that precious W-8(?) to show your bank. The truth though is that most financial institutions are shooting first and not asking questions later. They just don’t need the hassle of U.S. person account holders. They can make more money by avoiding IRS exposure which means that they can sleep well at night.
Worth noting: Form 3520 is authorised by 26 USC 679 and 6048. The IRS has, under 26 USC 679(e), the power to “prescribe regulations which may be necessary or appropriate to carry out the purposes of this section”. And under 26 USC 6048(d)(4), “The Secretary is authorized to suspend or modify any requirement of this section if the Secretary determines that the United States has no significant tax interest in obtaining the required information.”
Of course, the IRS cannot be bothered to do this. If you ask them why they are harassing U.S. persons abroad, they’ll make the lame excuse that you should “blame Congress”, even though Congress explicitly gave them the power to create sensible regulations so that parents saving for their kids’ tuition do not have to spent thousands of dollars filing tax forms every year about accounts which cannot possibly be used for tax evasion.
@Eric- I believe the correct IRS term for what you are describing is, “willful ignorance”. I’m sure that they wouldn’t like being found guilty of doing the very thing that they charge the “little” people with.
But wanton ignorance it is. The information is out their for them to read but they are too lazy to look into it. And Congress is too lazy to make them.
All of these bills that get introduced and go absolutely nowhere…the US politicial system is so inefficient and ineffective. Parliamentary systems of government aren’t perfect, but at least this sort of nonsense is much less common place.
Then again though…I think that if the US had an efficient parliamentary system that could produce governments that could actually govern, the monster would truly be released…
For those who still have some hope: I finished writing my draft of a bill to replace citizenship with residence-based taxation. You can read it here: https://docs.google.com/file/d/0B7VqDyDIAgW2Ukhaam0xNzhpbFE/edit. To read the current US code and understand the changes, I recommend http://uscode.house.gov/search/criteria.shtml.
This draft took a lot of time and effort, and now writing the actual bill shouldn’t be too hard. I also need another title, “Ex-Patriotic Act” was just a joke.
Interesting article here, outlining Canada’s residence based taxation vs the US’s, and how one should go about ensuring that the CRA no longer finds you a Canadian taxpayer while living abroad.
‘The Canada Revenue Agency defines someone as a “factual resident” if they maintain “significant residential ties” to Canada. This means you may be temporarily working outside of Canada, vacationing but still have a home in Canada, have a family living in Canada and have a Canadian drivers licence.
…and how a substantial presence test in the US can be challenged: “You basically assert that you have a closer connection to another country and this is why you won’t file a U.S. return,”
I somehow don’t think it’s would be that easy to get off the IRS’s hook should you overstay your visit to the US.
http://www.cbc.ca/news/business/taxseason/story/2012/04/18/f-taxseason-filing-taxes-living-abroad.html
*The “closer connection” is actually based on tax treaties. In Canada the equivilent is being a “Deemed Non Resident”. So for example if you move to the UK which has a treaty with Canada(as does about 90 other countries) from Canada you become a non resident of Canada the day you become a resident of the UK.
According to the CRA, a hapless Canadian who’s found themselves snowbirding too long in the US may establish a closer connection to Canada:
“How do you determine a closer connection to Canada?
…Significant ties include the location of the following:
-your permanent home and business activities;
-your family;
-personal belongings such as cars, furniture, clothing and jewelry;
-social, political, cultural, or religious organizations to which you belong;
-the jurisdiction where you vote; and
-the jurisdiction where you hold a driver’s license.
How do you advise the IRS about your closer connection to Canada?
You have to file IRS Form 8840, Closer Exception Statement for Aliens…”
Any real estate seminar aimed at Canadians considering buying property in the US should include this CRA link. I know that this may have been discussed here before, but it doesn’t do any harm to cover it again:
https://docs.google.com/viewer?a=v&q=cache:-WbUXiOxBGcJ:www.cra-arc.gc.ca/E/pub/tg/p151/p151-11e.pdf+substantial+presence+test+closer+connection&hl=en&gl=ca&pid=bl&srcid=ADGEESiSPjOvMhNuSsgY7d2rP4hrZI6episHnjsgm2d7JwBwz8kuK6rKzvJtpLw80rnBouLe9RBMjLzKtEPZRN-HYr2OA0OSTLSgeY7qEzZh8GWTI2DARpFrXq2B646PROEIi2nR1bmt&sig=AHIEtbQ9szalbXy5HoBuo5JKslHFHaAYGA
@Shadow Raider
Mate, that is a pretty impressive effort to identify all the changes that need to be made. I don’t think this should be just buried in a string of comments. I would hope you would pull it out for a separate post and discussion. My hat is off to you for the effort. I hope others acknowledge the work you have done.
Thank you.