In case you hadn’t already figured it out, this is the shape of things to come for U.S. Persons abroad: relentless bipartisan attacks on the Foreign Earned Income Exclusion in the name of “simplifying the tax code” and “cutting subsidies to favoured groups”, because the “non-partisan” Joint Committee on Taxation (which is composed entirely of Homelanders) classifies it as a “tax expenditure”. The latest effort in this direction: Dennis Ross (R-FL)’s HR 6474, which purports to implement the recommendations of the Simpson-Bowles Commission regarding territorial taxation. It contains provisions to phase out 20% of the FEIE every year until it is fully eliminated in 2017:
SEC. 271. FIVE-YEAR PHASEOUT OF CERTAIN TAX EXPENDITURES.
(a) In General- Effective for taxable years beginning after December 31, 2012, the amount allowable as a credit, exclusion from gross income, exemption from taxation, or deduction for the taxable year under the tax provisions specified in subsection (c) (determined without regard to this section) shall be reduced by the applicable percentage of the amount so allowable …
(c) Specified Provisions-For purposes of this section, the tax provisions specified in this subsection are as follows:
(1) Section 911 of the Internal Revenue Code of 1986 (relating to citizens or residents of the United States living abroad).
Boom! Right there on top in pole position, the very first “tax expenditure” they propose to cut. That in itself should tell you volumes about Congress’ attitude towards U.S. Persons abroad.
“Tax cuts”?
Ross’ bill also proposes lowering the personal income tax rate to 10% for incomes under US$100,000 and 20% for incomes above that level, and the capital gains tax rate to 0% for capital gains under $1,000,000. At first glance, this would seem to be a significant benefit to U.S. Persons abroad as well as Homelanders (if those reduced rates prove to be realistic — which, given the U.S.’ massive budget deficits, they do not appear to be). There’s “only” two problems.
First, Ross’ bill does not eliminate any of the ridiculous red tape that U.S. Persons abroad are expected to file with regards to “foreign” bank accounts, “foreign grantor trusts” (also known as our retirement plans, educational and medical savings plans), and “passive foreign investment corporations” (mutual funds, index funds, corporations owning a rental property to provide for limited liability in case of a tenant lawsuit). This means the continuation of $3,000 tax return preparation costs for middle-class Americans who exercise their human right to leave their country of origin — made even more complicated by the elimination of the FEIE. Instead of the comparatively-simple Form 2555, U.S. Persons abroad will have to wrestle with multiple copies of Form 1116 (one for each category of income, each bringing with it the struggle to figure out which tax paid in which local tax years corresponds to which U.S. tax year).
And of course, the IRS would reserve the ability to levy five and six-digit fines against people with three digit tax deficiencies, or use the threat of those fines to herd Canadian grandmothers into the OVDP where they can “volunteer” to be fined a mere 27.5% of their assets. In otherwords, Homelanders who fall behind on their taxes get a tax rate of some small multiple of 10%; we U.S. Persons abroad get a tax rate of 10,000%. How do you like that tax cut?
Second, in addition to the paperwork, Ross’ bill retains all of the “Internal” Revenue Code’s punitive booby traps on income from CFCs or PFICs, which result in capital gains being treated like ordinary income or even worse. Phil Hodgen outlines the godawful mess that is PFIC taxation. Other, more obscure provisions — like 26 USC § 1248 relating to treatment of income from the sale of stock in a CFC — remain lying in wait like snakes in the underbrush to bite ordinary Americans abroad selling small businesses. Homelander corporations, well advised by expensive international tax lawyers the rest of us cannot afford, will effortlessly find their way around these punitive taxes — meaning in reality they apply only to us little folk.
“Territorial” taxation?
Now, here comes the “territorial” part of Ross’ bill: it uses the taxes and penalties raised from U.S. Persons abroad to cut taxes on Homeland corporations, allowing them to repatriate their foreign profits with a waiver of 85% of the U.S. tax that would be due,
SEC. 206. RENEWED TEMPORARY DIVIDENDS RECEIVED DEDUCTION.
(a) Election- Subsection (f) of section 965 of the Internal Revenue Code of 1986 (relating to election) is amended to read as follows:(f) Election- The taxpayer may elect to apply this section to–
(1) the taxpayer’s last taxable year which begins before the date of the enactment of this subsection, or
(2) the taxpayer’s first taxable year which begins during the 1-year period beginning on such date.
Such election may be made for a taxable year only if made on or before the due date (including extensions) for filing the return of tax for such taxable year.
Naturally, if you’re a U.S. Person abroad, you don’t get to treat any of your “foreign” profits this way. Remember kiddies, corporations are people too — except when it’s more convenient not to be — and U.S. Persons abroad are Americans who should be proud of their full membership in the Greatest Country On Earth™ — except when it comes time to distributing the tax goodies, which are reserved solely for Homelanders.
(Technically speaking, there does exist something called a “Section 962 election” allowing an individual to choose that his or her “foreign” dividends be taxed at corporate rates. It’s so obscure and rarely-used that it doesn’t even have its own tax form, but has to be taken by attaching a free-form letter to your tax return and writing “Section 962 Election” in the appropriate parts of your 1040. However, Section 962 as written would not seem to allow individuals to opt into the benefits of Section 965’s “dividends received deduction”, and Ross’ bill doesn’t touch Section 962 at all.)
Jobs for Homelanders, not for you
Even better, in the usual display of social engineering and economic nationalism for which the “Internal” Revenue Code is famous, the benefits of this tax cut will be denied to U.S. corporations which do not maintain their “U.S. employment levels”. How exactly is “U.S. employment level” defined? Why, the number of Homelanders you employ! It doesn’t count if you employ some of those traitors living the high life in Paris and Tokyo to help you balance out America’s ridiculous trade deficit:
(4) REDUCTION IN BENEFITS FOR FAILURE TO MAINTAIN EMPLOYMENT LEVELS-
(A) IN GENERAL- If, during the period consisting of the calendar month in which the taxpayer first receives a distribution described in subsection (a)(1) and the succeeding 23 calendar months, the taxpayer does not maintain an average employment level at least equal to the taxpayer’s prior average employment, an additional amount equal to $25,000 multiplied by the number of employees by which the taxpayer’s average employment level during such period falls below the prior average employment (but not exceeding the aggregate amount allowed as a deduction pursuant to subsection (a)(1)) shall be taken into income by the taxpayer during the taxable year that includes the final day of such period.
(B) AVERAGE EMPLOYMENT LEVEL For purposes of this paragraph, the taxpayer’s average employment level for a period shall be the average number of full-time United States employees of the taxpayer, measured at the end of each month during the period.
(D) FULL-TIME UNITED STATES EMPLOYEE- For purposes of this paragraph–
(i) IN GENERAL- The term ‘full-time United States employee’ means an individual who provides services in the United States as a full-time employee, based on the employer’s standards and practices; except that regardless of the employer’s classification of the employee, an employee whose normal schedule is 40 hours or more per week is considered a full-time employee.
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.
I tend to agree with zuludogm. Once they get rid of FEIE, all multinationals are going to get involved, because it will cost them big bucks to send needed expats abroad. It will not only cost them the cost of doing the taxes for their expats, it will cost them how much the employee pays in tax as well. Which employee would agree to spend several years abroad with a pay cut, or pay twice the tax. Nowadays, they don’t even get the promotion of higher position when they come back like it was the case many years ago. In fact, in my company, it is the expats’ responsibility to find a position prior to his return.
Getting rid of the FEIE will be the coup de grace for US citizens abroad until the US gets rid of citizenship based taxation. Maybe it will be what accelerates the talk/transition to territorial taxation.
Like for FATCA, they don’t have a clue of the consequences of the law they’re proposing/voting for. Incompetence is the word that comes to mind.
On the other side of the coin, eliminating the exclusion may have the effect of waking up the US international oil corporations, where the typical pay might be about $200,000 in Saudi or Dubai, whose liability today is on the last half of their income. Elimination of the exclusion would then also tax the first half of their income, If those corps wake up, they indeed have lobbyists.
The broader point about a hardening of attitudes is taken, but USCs in Canada are protected from double taxation both by the FEIE and by the provisions of the tax treaty. If the FEIE was abolished entirely, they would still not pay much in the way of actual US taxes.
Thanks for more wise words, renounce!
*: @Renounce, also appreciated the eloquent tirade! 😉
@Edelweiss, both my accountant and adviser say the same as yours; that ISA’s don’t require the dreaded foreign grantor trust forms…(3520 and 3520A). But I can’t understand why Canadian funds that are similar to ISA’s seem to require them. Perhaps the tax treaties are different. So confusing!! I’m wondering if the Canadian accountants are taking a more cautious interpretation of the rules and assuming that the foreign grantor forms are required when, in fact, it may be a grey area.
@Edelwiess, I’d be curious to know who your UK-based accountant and adviser are and what they’re charging if you don’t mind me asking… Isaacbrock has its own private forum and, of course, I have noted that you’ve also been posting on the Expat forum; you could pm me there if you wanted to! I realise you may not want to divulge but it would help me to be able to compare notes. 😉
I have to admit that I wouldn’t mind the FEIE being abolished either for the same reasons as Zulu and A Broken Man. Itg would create more pushback for our cause. There was a major push back back when President Ford abolished the FEIE for several years back in the late ’70s, so would imagine that there’d be similar protesting once again.
As upset as I am, I still would like to see this fiasco resolved before renouncing. I only want to give up my US citizenship if I’ve concluded that it’s the only way I can survive. As I’ve said many times before, I still love America and would be renouncing to simplify my compliance burdens rather than to merely stop being double-taxed, as annoying as the double-tax is! Though obviously annoyed about it, while I would still be grudgingly willing to pay out a few hundred dollars per year in double tax, I am certainly NOT willing to be shelling out annual professional costs in the four figures (for the rest of my life) just to stay compliant. That is taking the p*ss.
@monalisa,
The RRSP (Registered Retirement Savings Plan) is addressed in the Canada-US Tax Treaty as probably is the ISA in the UK-US Tax Treaty? A Form 8891, though, must be filed each year for the RRSP to not be taxed in a particular year. Not addressed in the Canada-US Tax Treaty are TFSAs (Tax-Free Savings Accounts), RESPs (Registered Education Savings Plans) and RDSPs (Registered Disability Savings Plans). They are considered by the US “foreign trusts” and taxable and reportable each year on 3520 and 3520A’s.
@monalisa,
To each of us his own on what can be tolerated, LCU-wise and robbing all we’ve earned and been taxed on in other countries-wise. Your pain level tolerance appears to be much higher than mine. I am proud that I have gotten myself to the point where the gun has been taken from my head and I am almost (I hope) free of the oppressor. I have the heritage of being born in the US (purely by accident of birth). I love many there, my relatives and others I’ve met along the way. It is a tragedy this nonsense is now a barrier to a relationship with those relatives and friendships and the common decency in treatment of citizens of one country with the same respect as those of another. I do not have a great love for a lot that is going on in the US, not just taxation issues. I am not a prisoner of ‘the patriotic best country in the world’ brainwashing — there are many countries in this big world, none of which need to be forever claiming to be THE BEST. Why don’t we just all grow up and try some more common sense methods and save our whole world?
*Calgary, I am not critical of you or others here. I am quite supportive of your situation especially with your son; I also realize that every person’s situation is unique. I also realize that many simply can’t afford the compliance costs and I can barely afford to pay the accountant, etc.
@ Mona Lisa
I PMed you on the forum here. At least I think I did. Given that the thread I posted on at the other forum you referenced was shut down immediately after I had mentioned the “R” word, it might take me a while to get the posts required to PM you there.
*@Edelweiss, OK, thanks 😉 Will try to check it now. 🙂
@monalisa.
We are not renouncing for tax reasons! That the US would use this site and what we are discussing to further entrap their citizens is reprehensible. That we would not have the freedom to discuss what this is doing to people’s lives, their costs for complying, their loss of retirements savings, the taxation of capital gains on their sale of homes in foreign countries, etc. by defining that as “because of taxes” is gagging us. The fear they instill in us with the Reed Amendment certainly works.
I do know, monalisa, that you are supportive of my situation with my son, which is just an extension of my individual tax and reporting compliance situation, and I thank you for that. I’m just pointing out that your tolerance for what the US is able to do to you with their extra-territorial citizenship-based taxation is far, far greater than mine. I wish you every success in one day reaching the end of (what I consider) the abuse you are being put through by the country you truly still love, despite it all. I hope the US in no way can keep you from your US family. I hope your US family will support whatever decision you need to make for your own well-being — I think they would.
This is just a ‘Stay in Kansas, Dorthy’ tax bill for all would be job seekers outside of American borders
Time to issue more warnings to Expats!
https://twitter.com/FATCA_Fallout/status/270273999911653376
This is sooooooooo depressing. We just can’t get a break anywhere. 🙁
This is getting even more ridiculous. The House just passed a resolution for normal trade relations with Russia and Moldova. The resolution starts with:
Later on, same thing for Moldova:
WTH?
Here is the relevant law, 19 USC 2432:
Unbelievable.
Wow ShadowRaider, the gross hypocrisy of the US government is stunning. Wonderful document to quote, thanks for posting it here. Would that we could engineer a UN challenge – on the grounds that we’re denied the right of choosing citizenship, and basically strip-searched and pay for the privilege, before we’re allowed to leave – except we’ve already been gone for decades….or born abroad.
I find it interesting that Mike Moore @NZAmbassadorUS
NZ ambassador to DC, is really excited about this bill, for some reason. Look how many times he has commented and re-tweeted!
https://twitter.com/NZAmbassador
Ah, good old Jackson-Vanik. It took the US government nearly half a year to get this trade-relations law passed after figures within the administration started making noise about it in June:
http://isaacbrocksociety.ca/2012/06/07/u-s-trade-representative-urges-repeal-of-law-requiring-u-s-to-impose-sanctions-on-itself/
So this is the best case for the speed of government. Anyone want to put up a guess on how long it will take the US government to fix citizenship-based taxation, an issue which no one in the administration gives a damn about and which no highly-paid corporate lobbyists are pursuing?
@monalisa and others: I honestly, seriously, strongly doubt that the IRS is “monitoring” this site or tracking IP addresses etc. 1) The IRS would probably welcome the end of citizenship-based taxation as much as we would. Then they could focus their efforts on people who actually owe significant taxes. 2) They do not care about the likes of us, who have done nothing illegal and are not encouraging anyone to do anything illegal. 3) They only have the manpower to pursue people who are doing illegal things.
I feel the need to repeat: I really, really, really doubt they care about us. Probably some IRS workers even enjoy reading this site. 🙂
*@Rodgrod, I hope you’re right. I was actually thinking more in terms of the State Dept or CIA possibly monitoring the site because of what could be considered extreme anti-US govt sentiment.
@Monalisa: Well, who knows what they monitor. But check out the comments section of any political article on cnn.com, Huffington Post or Fox: you’ll find way more anti-US gov sentiment then you’ll find here. 🙂
@Monalisa: “…extreme anti-US govt sentiment.”
Hardly. As far as I recall the worst anyone here has ever hoped for is that the US gets bit of an economic black eye as well-deserved blow-back for foisting idiotic and unworkable tax laws on the other 194 or so nations on the face of the planet. Practical advice on complying with US tax laws while disengaging legally from a de-facto abusive relationship meets no useful definition whatsoever of “extreme”.
Personally I hope State Dept or similar is paying attention to IBS (though in truth I doubt they are). One of the main reasons we’re here is to make our voices heard by folk in a position to influence things. It’d all be just hot air if no-one were listening.
*True, true 😛
RE: Being detained at a US Consulate.
Paula Broadwell describes how there were Libyan “terrorists” being held at the CIA annex in Benghazi (made after Petraeus resigned). This nasty little secret keeps popping its ugly head up and some are saying that there was even CIA torture going on there. There is no rule of law anymore, there is only the will of the empire. Plan accordingly.
I wonder if the CIA has an annex in Canada. I suppose they could use it to arrest and detain Brockers. Not something I can really plan for.
Who is this Broadwell person? She seems very close to Petraeus and has pretty clear understanding of what was going on in Libya.