Cross-posted from the Flophouse. Probably the closest I’ve come to losing my temper over this whole business. And thank you for the comments and the encouragement you left chez moi – as always it’s wonderful to see familiar names and to read your words.
U.S. citizens and Green Card holders living abroad are waking up to the fact that their status and connections to the “Land of the Free” brings with it certain obligations. If you’ve ever read The Moon is a Harsh Mistress, one of the great science-fiction classics by Robert Heinlein, you’ll be familiar with the acronym “TANSTAAFL” which stands for “There ain’t no such thing as a free lunch.”
Citizenship is never a “free lunch.” All countries require certain things of their citizens and where there are rights, there are also duties and responsibilities. American citizenship is turning to be a very expensive lunch indeed (a four course meal with wine AND cheese AND dessert) because the United States practices something that is often called “citizenship-based taxation.” That term is a bit misleading and should probably be renamed “worldwide taxation” because its scope includes people who are not citizens of the United States of America: U.S. residents and immigrants like Green Card holders living in the U.S. or abroad. Very briefly what the U.S. tax system requires is that all U.S. persons (wherever they live) report their personal financial information to the U.S. government, file tax returns and pay U.S. taxes on income or investments earned outside of the U.S. every single year. No other country in the world besides Eritrea does this and it brings new meaning to the old term, “American Exceptionalism.”
Most homeland Americans are blissfully unaware of these requirements which is probably normal since they have absolutely no impact on them. What is more disturbing is that until very recently most U.S. Persons (American citizens abroad, Green Card holders and U.S. residents) were also completely in the dark. Overseas Exile has an excellent post about “Expat Alice.” This is a very typical story and I know people here in similar situations. Even with the news reports I am still meeting people in Paris like the two American au pairs I encountered a few months ago who have been here for a couple of years working for French families. They went sheet white when I explained it to them. Yes, both should have been filing tax returns and FBAR’s since they earned a yearly salary that was over the filing threshold and their parents had set them up with bank accounts here with sufficient money to rent studios and pay their tuition for French classes. Even I, someone is more or less clued in, made my own filing error. It had not occurred to me that my daughter who is a U.S. citizen, should have reported her own bank account in Canada. I had to check but it was indeed over the reporting limit because we set her up (like the parents of the au pairs) with enough money to pay her tuition and living expenses. I had to search our bank records from last year, convert the amounts from Euros to U.S. dollars, and then send all that information to my daughter so she could fill out her own FBAR thus adding yet one more piece of paper that the U.S. Treasury must process in 2012.
So, as you can see, this matter is of more than academic interest to me and it is a topic that I write about often. Am I angry about it? Absolutely. Here I am working on a tax return with my accountant that is so thick I could use it to line my cat box even though not one dime of my income or my investments came from or was earned in the U.S. I have an extension to file late but I still had to pay a few thousand dollars to the IRS earlier this year and now I’m paying for someone to help me navigate the bloated U.S. tax code so I can get the paperwork done. That’s pretty expensive cat litter, mes amis. And just for information I am strictly middle-income and have a career as an IT manager which pays decent money but does not, and never will, put me in the millionaire category.
Yes, homelanders, I pay U.S. taxes though I have not lived in the U.S. for years. But apparently many of you don’t. On top of all of the above, and to really add insult to injury, was some news I had from a family member who lives in the U.S. and has about the same income. He did his U.S. taxes and was pleasantly surprised to discover that not only is he not paying a dime in Federal income taxes, he gets a refund* of around 4000 USD. Imagine my surprise to discover that he is not alone. According to this Huffington Post article around 46% of homeland Americans didn’t pay any Federal income taxes in 2011.
How interesting.
So let me see if I have this straight: someone who lives in the US and has about the same income as me and who benefits from all the government goodies like national parks, Social Security, interstate highways, schools and so on can get away with not paying a dime even for the troops whereas someone like me who lives abroad and uses none of the benefits homeland citizens take for granted ends up with a hefty bill.
I understand that life is not necessarily fair and I am not someone who is against the idea of contributing to the well-being of my country of citizenship. I am also aware that the reason many of these homeland Americans do not pay is because they are too damned poor to do so. You have no idea how much I hate that and how ashamed it makes me to have to admit to it.
But at some point over the past 10 years homelanders ordered themselves up a four course meal at a fancy restaurant and put the bill on a Chinese credit card. In retrospect this wasn’t such a hot idea but at the time it was politically very popular to order up a filet mignon for some and to order a bottle of wine for those nice folks at the table on the other side of the restaurant who turned out to be non-drinkers and sent it back. But it’s a done deal and arguing over bad past decisions is a fruitless pastime. In fact the national debate in this issue would be vastly improved if every American just accepted that everyone has some responsibility for how things shook out and that the most important thing now is to do the Next Right Thing.
To that end Americans abroad should be given a seat at the national table. We may all be reduced to eating at Mickey D’s but I’m cool with that. Representative Carolyn B. Maloney of New York has put forward a very modest proposal for a commission that would start a dialogue between us. It would cost around 3 million dollars a year, a mere drop in the bucket compared to the overall federal budget – though I suppose if we asked a U.S. military contractor to cater it, it might cost quite a bit more than that. The ACA and AARO are ready with some well researched material about how citizenship-based taxation and other homeland legislation effects us and does no good whatsoever for the homeland.
But don’t you dare walk out of that restaurant and stiff us for the bill while mouthing platitudes about duty and responsibility and how we are all in this together. Clearly that is not the case and one of these days if that doesn’t change, we may be the ones walking and leaving you to do the dishes.
*In my original post I called the money my friend got back from the Federal government a “refund” and a reader asked for clarification. To be precise, it was not a refund of taxes paid but rather a subsidy based on that person’s deductions for children and mortgage interest. It wasn’t much of one but it still represented a kind of social assistance – a bit like an indirect “les allocations familiales” in France.
@Victoria — awesome post, per usual!!
@Tim — very interesting events in the news. I appreciate your continuing gems and insight. Thanks.
@Tim, It’s not just a rumor, Foreign Affairs Minister John Baird said so himself.
http://www.thestar.com/news/canada/article/1232639–baird-eyes-shutting-down-eritrean-consulate-in-toronto
Eritrea has an embassy in Ottawa and a consulate in Toronto.
@monalisa,
Hang with us, kiddo. All I can say, is what a long term of imprisonment by the US (even if you’re serving your “time” in your own home). I will rejoice when you really know that you are not to blame — how could you have known, really? Take care!
*@Calgary411, my prayers and best wishes to you and your son!! 🙂
Thanks, monalisa — and to each and every one of us. We’ll get by with a little help from our friends — and they’re here on Isaac Brock!
@Victoria, my son, a dual US-Swiss citizen in his late twenties cannot claim his son for a US child credit because…. his son isn’t a US citizen (phew). This is only possible because he is not married to his longtime girlfriend, the child’s mother.
Victoria, did you vote for Obama? I ask this because I think this question is relevant to the being able to discern the degree of your culpability. You see, if you were an Obama supporter, you sided with such clear and great tax hypocrits as Warren Buffet, Rahm Emanuel, Al Gore, John Kerry, Michael Moore, Bill Clinton, and on and on and on. These guys would have us believe that they would gladly pay any tax if it was determined by “science” or “social justice” to be their “fair share”. Were these stalwarts of the democratic party you, Victoria, they would gladly pay the expat tax for the privilege of being an American. And if you helped vote this party of hypocrits into power, you are culpable.
Victoria – You have a gift for writing on these issues in a way that should evoke empathy from hardest hearts and bunkiest brains. But the Unointed Stoats clearly cares about nothing “overseas” except extracting assets and disbursing collateral damage. One detail you could inject into your listing of asymmetries: spend a lifetime outside the sanctified borders, remain fully compliant with taxes and filings, collect no significant benefits whatsoever … and still be ineligible for Medicaid when you reach that certain age. The basis is years of residence not years of compliance. What a shameless rogue state to hail from! This specificity of atrocity should stand high on your personal horizon. It is encouraging to see you finding focus and energy for this writing in your present condition.
@confederateH
At the risk of causing you to have another Tourette’s-like anti-liberal attack, I fully admit that the only time I ever voted in a US election was to help Obama get elected. I’m not the first nor the last person to be disappointed by a politician of their choice. I’ve learned a lot since then, thanks to the insights of you and many others here and elsewhere, and you know that many regret the outcome of Obama’s election, so what possible benefit could there be at this stage in castigating those who may have made that choice also?
@ConfederateH
I don’t think that those who voted for Obama are “culpable”. The word “culpable” carries a connotation of “blameworthy”.
Middle English (in the sense ‘deserving punishment’): from Old French coupable, culpable, from Latin culpabilis, from culpare ‘to blame’, from culpa ‘fault, blame’
People voted for Obama because they wanted to believe in the “Hopey Changey” stuff. They cannot be blamed for believing in the vision. What they failed to realize is, that when it comes to Obama, winning the election is the only vision. Once gain, those who voted for Obama are not to be blamed. I’m sure that you have made many decisions in life that didn’t turn out as you hoped.
But, what I do think is this:
Although not “culpable”, the majority who voted for Obama are responsible for this. In life we all make mistakes. Our character is largely defined in terms of how we deal with those mistakes. In this case, every U.S. citizen abroad, who voted for Obama, should get out and vote against Obama. The only way to vote against Obama is to vote for Romney.
But, alas it is becoming increasingly clear that they won’t. They say: “Romney will be the same.” I think this is a ridiculous position.
We know absolutely 100% what we get with Obama. The most we can do is guess what we get with Romney.
Those who refrain from voting against Obama are saying: “things MIGHT not be better with Romney”. Therefore, I don’t think I will vote.
The Obama administration (NOT “ConGROSS”) has attacked you, your life and your family. Democrats Abroad has the temerity to suggest that: “an election is not a time to talk about important issues.” Really, I thought that’s what elections were for. If Democrats Abroad think elections are NOT the time to talk about important issues, then you shouldn’t vote for a Democrat.
I realize I am just venting (and few of you share this view), but I will say it again:
“If you value your future, if you value the future of your children, if you value the future of the rest of your family, if you have any self respect, if you don’t approve of FATCA, if you don’t approve of the FBAR Fundraiser, if you don’t approve of OVDI, if you don’t want your country of residence to be affected by US regulations, if you have a single “American Patriotic” bone in your body, then you get out and vote against Obama!
If Obama is reelected, I guarantee you that, if free speech still exists in the U.S., (a questionable assumption with a president who thinks that “due process” does not include “judicial process”), then the most popular bumper sticker in the country will be:
“Don’t blame me, I took the time to vote!”
*@bubblebustin
Nicely played.
Atta-girl.
@renounce, I agree that it was the Obama administration that decided to apply FBAR penalties, and this is the main source of despair for Americans abroad (and immigrants, let’s not forget them too). However, it was Congress that created the Reed amendment (1996), the expatriation tax (2004), the exit tax (2008) and FATCA (2010). The majority of Congress was Republican in the first two cases, and Democratic in the last two.
Speaking of exit tax, I just found out that before 2004, the expatriation tax was simply that the former citizen (or permanent resident) would have to pay tax on income from US sources that is not normally taxed of nonresident foreigners, such as capital gains from stocks and bonds, for the first 10 years after renouncing citizenship (or green card). I don’t see any problem with this, as it makes sense for people to pay income tax to the US on income from US sources anyway. In 2004, it was also added that the former citizen would be taxed on worldwide income if physically present in the US for more than a month in a year, an absurd in my opinion. In 2008, the expatriation tax was changed into the current exit tax, where unrealized capital gains (US and foreign) are taxed at the time of expatriation, but after that the person is subject to US tax as any other nonresident foreigner, so capital gains other than on US real estate are not taxed. The exit tax also created the status of covered expatriate, whose gifts and estate are taxed if received or inherited by a US person.
The expatriation tax that existed before 2004 actually made sense, and it was a real anti-tax avoidance measure targeted at those who made their fortunes from US corporations. I think this is actually what Americans would want from an expatriation tax. For example, under those rules, Eduardo Saverin’s Facebook shares wouldn’t be an issue because they would be taxed normally when he sold them, as they are capital gains from US sources. And any future capital gains in the following 10 years would also be taxed by the US. The exit tax of 2008 only made things worse for both the expatriating citizens and the government, I don’t understand what Congress was trying to achieve with that. (By the way, Facebook shares have almost halved in price over the year, so Saverin ended up paying twice the tax he would have paid if he had remained a US citizen. The media did not report this as much as the first story. I think this is a pretty convincing argument that he did not renounce to avoid taxes and it had more to do with banking restrictions due to FATCA as he mentioned. If Facebook shares somehow rise again, the additional capital gains will not be taxed by the US under the current rules. Chuck Schumer’s Ex-Patriot Act would have been more efficient if he just reverted the expatriation tax to the rules before 2004.)
Voting in the last election, my first and only US election, was one of the worst things I did to myself (and others), in more ways than one. I have a renunciation appointment November 14th. How can I justify in my mind, or to the Consulate should I be asked, that I again exercised my rights as a US citizen to vote in another US election?
For a renunciation, it’s strictly speaking irrelevant. I used my US passport to go to the US the week before I renounced.
But that’s just a question of obeying a legal requirement. I agree that voting would feel a bit different. I voted in a US election once, and came away with a sort of intuitive feeling that voting in more than one place was kind of cheating, even if the laws of the countries concerned allowed it. (Actually I sent the ballot back mostly blank, having voted only for federal offices.)
@Calgary
Simple, you care about the U.S., it’s just that you can no longer be a citizen. If asked, your vote on November 6 was because, as a good citizen, you wanted to make your contribution to the well being of the country as your final act of citizenship.
@Shadow
FATCA was part of the Hire Act that was signed into law by Obama – by Obama. FATCA was a “Trojan Horse” provision – meaning Congress didn’t even know what they were signing. You know, another Pelosi style “We should pass the bill so that people can see what’s in it” kind of thing.
The origins of FATCA are clearly indicated in the following post which features Obama laying out the philosophical justification for FATCA.
http://isaacbrocksociety.ca/2012/07/15/fatca-fbar-ovdi-ex-patriot-act-fatca-form-8938-where-it-came-from-how-it-came-about-what-it-means-for-u-s-citizens-abroad/
Sure I agree that Congress is a problem too. But, the most immediate problem is the application and administration of citizenship-based taxation. The application and administration, is under the direct control, of the Executive branch of government – specially the Obama administration. Question: most Brockers have lived outside of the U.S. for many years? When did your problems begin? Under what administration?
The FBAR rules very specifically allow the secretary of the Treasury – Mr. Geithner (isn’t that the guy who didn’t pay his taxes?) to exempt specific groups – including US citizens abroad from FBAR. He has not. In addition, the question has been specifically considered (there is a reference in the Federal Register which I can no longer find) to this. The primary problems of US citizens abroad lie in the the administration of of the existing laws (none of this started until the Obama presidency). So, I see this as the result of the Obama administration. Some point out that Mr. Shulman was appointed by President Bush. True enough. But, I remind you that the IRS is under the direct supervision of the Treasury. The problems of U.S. citizens abroad, are the result of an understanding, that it was a priority of the Obama administration,to go after tax evaders (UBS, etc.). U.S. citizens abroad were swept into this (OVDI, etc.) and the FATCA problem. I remind you also that when Obama was in the Senate he, along with our friend, Carl Levin was very supportive of (I believe he co-sponsored Levin’s “Stop Tax Haven Abuse Act” – but I am not 100% certain of this) legislation to go after tax evasion related to offshore accounts.
So, people keep saying:
– it’s all about Congress. Yes, to a point. But, it’s mainly about the administration.
– the Republicans are just as bad. Whether they are or not, it is the Obama administration that has inflicted this on U.S. citizens abroad.
– Romney would not be better. We don’t know that.
There is only one thing that is crystal clear here. The main problem is with the administration of these laws and the Obama administration bears the primary responsibility for this. I suspect that Obama himself may not know much about this particular issue. But, he is the chief executive and therefore is responsible.
One of the best political speeches I have ever seen was Al Gore’s speech at (I think) the Democratic convention in 2002. The theme was (referring to the Bush administration):
“It’s time for them to go.”
Seems like a good idea in relation to the Obama administration.
[http://www.youtube.com/watch?v=PMEInTNsacg]
*Found an interesting post made yesterday:
@renounce, You’re right, all these problems started during the Obama administration. The executive has total discretion to choose who to exclude from the FBAR requirement, its thresholds, when to apply its penalties, and the same for FATCA. The IRS could have created a voluntary disclosure program with no penalties, as many countries do. And Mitt Romney has foreign investments so he should have an idea about the complexity of reporting and limitations for Americans abroad.
I also want to point out two positive changes in taxation for Americans abroad made during the Bush administration: the foreign tax credit for the alternative minimum tax became 100% allowed starting in 2005 (it was previously allowed only up to 90% of the AMT), and the foreign earned income exclusion became adjusted for inflation starting in 2006.
@ShadowRaider: The expatriation tax that existed before 2004 actually made sense, …
The pre-2004 rules still had significant problems.
From the government perspective they lack teeth. A patient renunciant could pay zero US capital gains tax by waiting ten years before selling appreciated assets. The 30% special expat tax on gains otherwise untaxed if held by “normal” non-resident aliens drives investment away from the US and towards other countries. “We welcome investments, just not your investments” isn’t a great marketing tool. Also enforcement. The IRS cannot reasonably administer this ten year shadow tax on people who are by definition outside the US tax net. Prohibitively expensive and impractical.
From the renunciant’s perspective it’s futile paperwork. A 1040NR every year for ten years even if zero US income, and with a special 30% punitive extra tax you can bet zero US income is the norm! Careful organization of investments to avoid US situs assets for the next decade. A lose-lose outcome for both the individual and the US treasury.
Taken alone, the post-2008 rules are at least clearer. If congress hadn’t drawn them so punitively so as to draw in retirement plans, home values, gifts back to US persons and so on, they might have even looked like a slight improvement. As ever though, congress could not resist tipping the balance further in its own favour while claiming it to be a neutral tax change. And it’s in combination with citizenship based taxation that the exit tax becomes life-changing. Compare and contrast with Canada’s version of the same thing. While nobody likes that, it’s visibly more reasonable and so less contentious than the US exit tax.
@renounceuscitizenship:
“They cannot be blamed for believing in the vision.”
To a large degree the question is: Does willful ignorance constitute culpability. Well the German Volk were certainly made culpable for the Kaisers sins by the great western powers after WWI. And lets not even talk about H*****. How many times have you heard “ignorance of the law is no excuse”, even by the IRS? So history shows that ignorance alone can constitute culpability.
The Democrats have been fanning the flames of class and tax warfare for decades, but Obama was and is absolutely shameless. And all those decrepit stalwart Democrat Congressmen like Kerry, Kennedy, Shumer, Levin, Frank were and are beating that tax crusade drum until the drumskin has worn through. Willful ignorance doesn’t even start to cover it I would say it is closer to self-destructive negligence. The cover up of Obama’s past by the media was also shameless and blatant. But many middle and upper class women fell for it because Obama was to be their savior, he would give them free and unlimited birthcontrol and protect them from that eeevil Sarah Palin. Well IMO Obama and his gang of Chicago thugs are preparing the groundwork so if they get the chance they will pull a Chavez style putsch. Meanwhile the lies and hyperbole from the left keep the sheeple willfully ignorant:
http://www.youtube.com/watch?v=_X1LVgh0Vl0&feature=player_embedded
@Just Me: yes, Japan taxes the worldwide income of residents only, regardless of citizenship.
My problems with the US tax system started under Bush. That was when I first innocently stepped on the double-secret PFIC landmine, and learned about FBARs. The FEIE stacking rule (which didn’t affect me, but was not a move in the right direction) was also signed into law by Bush. So I don’t give credit to either party for trying to give us small-fry living abroad a fair shake.
As for voting, I will vote for neither Obama nor Romney this time around, since neither has promised to do anything about our problems. That is my minimum qualifying requirement this year, before even looking at other issues.
ShadowRaider – Brazil doesn’t tax Brazilians if they move overseas, AND file a form with the Receita Federal. But they tax EVERYTHING and EVERYONE in their borders for more than 180 days, on ALL income sources, including foreign income. — just letting you if it differs with what is in the table.
FOREIGN FINANCIAL ACCOUNTS
There is also the requirement to declare foreign financial accounts. But I don’t know what the penalty is if one doesn’t declare. Everyone declares because they know that the Central Bank will give tax them heavily if they have never declared these funds, should they choose to transfer the money back to Brazil.
TAXATION OF FOREIGN ACCOUNTS
Also, foreign accounts are really no big deal here. If someone has the money, they could open an account in Canada or the US. When they repatriate the money, they will be taxed at 15% on the gains. The government gave the green light a few years back. There’s nothing “devious” about this.
DIFFERENT SYSTEMS
My assets are seperate from my wife’s. We use different accountants to file our taxes here. I have never felt a sense of “trickery” in dealing with taxes here like I have with the US– knock on wood. Maybe it’s because we don’t hear this heavy language, or people being thrown in jail for non-payment. That said, I’ve heard of a few “personal” stories from people that tried to cheat the system and they got caught. The fines and penalties efffectively doubled the original tax bill. So I just pay as I’m supposed to do.
Shadow Raider wrote: “The IRS could have created a voluntary disclosure program with no penalties, as many countries do.”
Wouldn’t matter. I’d never reveal my bank accounts to a foreign country (i.e., US), especially since I am married to a Canadian spouse. It is after all, a violation of the Fourth and Fifth Amendments to the Constitution. The correct and righteous response to a law that is the equivalent of a general warrant is to ignore it and not to waive one’s Fourth Amendment rights.
Here is an update on the whitehouse and democratic party position
http://www.whitehouse.gov/blog/2010/09/22/america-has-spoken-will-gop-listen
@Mark Twain
Thank you for this. Just created a tweet on this:
https://twitter.com/USCitizenAbroad/status/245536813802999808