Although I would never take the words of our friends the cross-border professionals at face value, I am getting more and more confirmation from unrelated sources that the Obama 3.8% tax on unearned income cannot be offset by the Foreign Tax Credits of U.S. citizens abroad. To put it simply:
U.S. citizens abroad, who via taxation in their country of residence, pay for health care in their country of residence, are now required to pay for health care for U.S. residents. Oh well: I guess that’s consistent with the definition of citizenship that Obama gave in his State of the Union address.
We are citizens. It’s a word that doesn’t just describe our nationality or legal status. It describes the way we’re made. It describes what we believe. It captures the enduring idea that this country only works when we accept certain obligations to one another and to future generations; that our rights are wrapped up in the rights of others; and that well into our third century as a nation, it remains the task of us all, as citizens of these United States, to be the authors of the next great chapter in our American story.
U.S. citizens abroad must accept their obligations to those remaining inside the U.S. Hmm. Would that mean that Homelanders have obligations to U.S. citizens abroad? What has the U.S. government done for you lately?
I don`t know why you are getting so upset 🙂 falls into the same category as the so called “non-US qualified deferral pension plans“ just another piece of the puzzel – I am padding myself on the shoulder every day now that I am basically bailing out the “HOMELANDERS“.
At least for now it won’t affect any married filing separately with less than (I believe) $125,000 or $200,000 if single. So this shouldn’t affect your average lower middle class expat unless, of course, they sold their home or perhaps cashed in their tax-deferred retirement plans which could bring them over the threshold; It also occurs to me that if the economy there really sinks due to the spiralling deficit that the U.S. could significantly lower the threshold in which this medicare tax applies; also, if the dollar tanks it could artificially move most Expats into this higher tax bracket.
I’d imagine that $125,000 is no big deal living in Switzerland, etc. So this could adversely affect Expats there especially.
…their tax-deferred retirement plans ….. sorry @MonaLisa but you have to cross out the word “tax“ here …. they are deferred alright but that is it 🙂
…. if the dollar tanks it could artificially move most Expats into this higher tax bracket…..
yes the $ will tank but since I am by far in the top bracket anyway my withholding taxes at source will appreciate as well – nothing gained, nothing lost 🙂
I’m just so relieved I got out when I did. Paying (if I remember correctly) 2.9% of all my freelance earnings to Medicare – a plan with no benefits whatsoever for those living outside the USA – was simply extortion. Now it seems ObamaCare is looking to make matters even worse for expats.
Here is an article from the Financial Post (a Canadian newspaper):
http://business.financialpost.com/2013/01/12/obamacare-could-cost-some-canadians-a-lot-of-money/
and the Globe and Mail:
http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/us-expats-in-canada-face-new-obamacare-health-care-tax/article7372249/
According to these articles, the 3.8 percent health care tax would apply to persons with income of $200,000 and couples with income of $250,000. Most individuals will be well under these threshholds, but it would apply to the proceeds of the sale of a home, which might hit people with fairly modest incomes.
A further thought…
Let’s suppose that this tax applies to the proceeds of the sale of a home. In that case, is there any reason it would apply outside the US but not within the US? And if it did apply within the US, would there not be a great hew and cry? If the intent is to tax high income people, taxing people of modest income on the sale of a home would appear to be an unintended consequence.
Yes, but capital gains from the sale of one’s house is passive income in the U.S.’s eyes, no?
@Northern Shrike, a good example of the casualties created by US double extraterritorial taxation – for people to use when speaking with their MPs – since our concerns are often dismissed or deflected by ” oh, but we have a treaty to prevent that” and “but that is offset by the FEIE and Foreign Tax credits”. We know that is not true, but this extraterritorial doubletaxation example is so clear and so recent, that they cannot dismiss it.
Canadian MPs know that those with higher incomes, and seniors, are more likely to vote, and I would think that Canadian Conservatives would be concerned when those Canadians with mid or higher incomes are going to be double taxed by the US – because that would anger some of their natural constituents. For example, see; http://m.theglobeandmail.com/news/politics/meet-the-average-tory-new-democrat-and-liberal-voter/article2048568/?service=mobile http://www.theglobeandmail.com/news/politics/the-new-tory-constituency-far-less-francophone-far-more-multicultural/article2039303/ . Key “is to identify your supporters, nurture them, and ensure they get out the vote” http://www.vancouverobserver.com/politics/2012/03/07/robo-call-scandal-origins-inside-conservatives%E2%80%99-voter-suppression-school .
In this case, we have heard absolutely nothing about what Harper and Flaherty are planning to do about this particular US crossborder tax – if anything. Not even any public statements indicating concern. Surely, this is a very good example of how US citizenship-based taxation is sucking Canadian generated assets out of Canadian households. And since we know that the US reserves the right to continue to invent ways of getting at assets created in Canada, belonging to individuals and households who have no US connection other than inherited status from a parent, or an accident of birth – we know to expect more of the same.
It may be that in the near future, as US crossborder taxation of those in Canada becomes more widely known, the federal Conservatives will find that their ‘natural’ constituents, who are always concerned about their level of taxation in Canada will increasingly include a heightened concern about their level of US cross-border taxation and entwined ‘foreign’ financial reporting liability (FBARs, 3520/A, FATCA form 8938, forms re PFICs, etc.) as aided and abetted by the government in power in Canada – and particularly how the Harper government actions or INACTION is helping to aid and abet the US IRS and Treasury to operate across our border and steal Canadian made earnings and savings.
This may very well become a crisis for Harper and the Conservatives. If they pledge to be fiscally responsible, and not raise taxes on Canadians, they can hardly be seen to be aiding the US IRS to superimpose layers of US tax liabilities on top of what we pay via the CRA. They have known for quite some time now about the serious US taxable problem with their pet creations – the TFSA, RESP, and PRPP (as well as for the RDSP) for some time, as well as the rigid requirement for the treaty exempted RRSPs and RRIFs to have annual elections filed. They know about the crisis created by the FBAR requirements, and now – FATCA for 8938, and FATCA in general.
Anyone advising the federal Conservatives should be pointing out that they will be remembered as the Canadian IRS party if they don’t come out and do something public and substantive to assist us.
Harper can hardly keep his promise not to raise taxes on Canadians, or to be fiscally responsible, if he aids and abets a ‘foreign’ country – the US – to raid the savings of our households, tax the sale of our principal residences, and impose US taxes via reporting penalties on our Canadian bank accounts.
I think that is a strong argument to use in speaking with Conservative MPs.
badger, as usual, a big thanks!! The silence is deafening…
Well, Mikey, good for you if it gives you a warm fuzzy. What it does for me and for my wife is PISS US OFF! It’s like paying for the black sheep in the family who just can’t stop spending. People get in DEBT that way. And frankly, the best way to do it is to cut the mooch off.
@calgary411, it will be interesting to see what response we might get from using this Obamacare Tax as a lever here in Canada – as there can be no argument from our MPs, that in this case, this is a ‘foreign’ US double tax on Canadians, that is NOT offset by the treaty.
On further investigation, I think this is less of an issue than it first seemed. Here’s how the Net Investment Income Tax works:
For an individual tax filer with an income over $200,000 ($250,000 for joint filers), any profit over $250,000 ($500,000 in the case of a couple) from the sale of a primary residence will be taxed at 3.8 percent.
Example 1:
An individual with an income of $50,000 sells her home, realising a profit of $300,000. Her income and proft = $350,000, making her subject to the NIIT. She will then be obliged to pay 3.8 percent tax on $50,000 ($300,000 profit minus $250,000 exemption), or $1900.
Example 2:
A couple, joint filers, with a joint income of $100,000 sell their home, realising a profit of $300,000. There total income is $400,000, putting them over the $250,000 threshhold for NIIT. However, their profit of $300,000 is less than the joint exemption of $500,000 and they will owe no tax.
For more information see Howard Gleckman article in Forbes:
http://www.forbes.com/sites/beltway/2012/04/02/there-is-no-obamacare-tax-on-most-home-sales-really/
or the IRS website (note in particular section 10. “Does this tax apply to gain on the sale of a personal residence?”)
http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs
In short, yes it is unfair. But it looks to have at best a marginal impact on “US persons” living in Canada, far less impact than FATCA.
@Northernshrike
The issue here is the principle of the tax first and the amount of the tax second. I assure you that:
Where the acceptance of the principle goes, the increase in the tax is sure to follow.
What is important for the purposes of discussion and why this is particularly relevant is that it is a US levy on Canadian residents that cannot be offset through a tax credit and cannot be avoided through the earned income exclusion. That is the key point!
@USCitizen, that is so very clearly put, that it would be very useful to refer to in writing to our MPs. Thank you.
This tax illustrates the absolute folly of any country allowing the US to institute any extraterritorial citizenship-based taxation structures at all – because they can (and do):
– invent new categories of tax that are not covered by existing treaty
– change the terms on which existing taxes will be levied, and get around the treaty
– use the ‘last in time’ rule
– use the ‘savings’ clause
– lower the thresholds which define and limit who is subject to the reporting and taxation
– increase the tax rate
– redefine any and all of our savings and investment and asset categories as taxable whether they are taxable in Canada or not. (ex. TFSAs, RESPs, RDSPs, PRPPs)
– agree to exempt some types of assets from taxation, or defer it, but require onerous annual elections in order to get treaty benefit (RRSPs, RRIFs)
-refuse to recognize and credit types of taxes we pay where we live as taxes for US tax credit purposes
The US obviously will continue to define ‘taxable’ persons as broadly as possible, and define ‘taxable’ and ‘reportable’ assets as broadly as possible, and as we see with Levin, set penalties as high as possible (apparently the sky is the limit), work around or suspend any existing statute of limitations (ex. under FATCA 8938), and otherwise make every facet of our lives impossible to live in any normal way.
@USCitizenAbroad
Thank you. You may well be right. I thought it important to figure out exactly what the impact would be. May I add to your objections that it is a tax with zero benefits to the individual paying the tax, if that tax payer is living outside the US.
Cheers
The thing I like best about the filing jointly as an expat, is that you are disclosing everything about your spouse as well. My Non-Resident Alien spouse is just hilarious when it comes to this whole mess. Here are my options: I can either go to the US embassy and pay for notarization of her papers at $50 a sheet and then mail all that personal information off and hope for the best. Or I can mail her original documents off and hope for the best. All so I can get a number so she too can become liable for US taxes and ensure that a foreign government hostile to her own knows even more about her than her own government does.
In the past, you could just file NRA online and be done with it. But that changed, nope, wanna file your taxes with NRA instead of ITIN? Gotta do it physically now, and nothing beats sending off confidential info, all the info you need to commit identity fraud with by the way, through the mail, going through customs that increasingly scans everything “just to be safe”. To straighten that out if it happens, has to be done in person too, Not to mention that e-file is free, while physical means paying money. Either way, it means paying for the privilege of being taxed more. And my wife is very firmly against them having her info anyways.
As such, I just do what everyone else here in the same position that has a brain does… keep filing single, they don’t know any better anyways. File every year, don’t tell them anything they can’t prove on their own, and basically claim you’re poor as all fuck. Being honest to a party that affords you no benefit and only wants your money is just stupid…. go ahead, attack me, persecute me, I’ll just claim refugee status and make a media circus about it that you’ll never live down. And my host nation will be more than happy to go along with it all.
Informative (if rather bloodless) post about the NRA spouse issue over on Seekingalpha
http://seekingalpha.com/instablog/1347881-chadcreveling/1602471-american-expats-with-foreign-spouses-choosing-your-u-s-tax-filing-status
Meh, nothing new as far as information goes. I prefer to simply refuse to disclose my personal life to a government that doesn’t need to know anything about it. I’m “single” as far as they know.
Discussion of this tax starting in Canada among practitioners.
http://www.linkedin.com/groups/New-medicare-taxes-2283518.S.200903605?qid=bf3ae5b3-e96f-4439-ae7d-83dfcb9fbcdb&trk=group_most_popular_guest-0-b-ttl&goback=.gmp_2283518.gde_2283518_member_214128380.gmp_2283518
The Application of the New 3.8% Medicare Tax on CFC’s & PFIC’s Got You Confused?
Section 1411(e)(1) exempts a “nonresident alien” from the §1411 tax. The proposed regulations confirm that the term “nonresident alien” is determined in accordance with the “resident alien” definitional rules of §7701(b). However, the regulations give no guidance on how to apply §1411 when an individual is a U.S. citizen or resident alien for part of the year, and a nonresident alien for the balance of the year.
The regulations do not discuss the status of so-called “treaty tie-breaker aliens” who are classified as resident aliens under §7701(b), but who are also classified as income tax residents of a country having an income tax treaty with the United States under the “tie-breaker” rules of the treaty. Regs. §301.7701(b)-7(a)(1) provides that a tie-breaker alien will be classified as a nonresident “for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder … .” Thus, whether a treaty tie-breaker alien is exempt from the §1411 tax probably depends on whether the §1411 tax is an “income tax” within the meaning of U.S. income tax treaties.
Mike.
a) For NRA holding joint bank accounts with their US spouses in Canada. You are still open to IRS scrutiny through FATCA. It doesn’t matter what S.1711 (e)(1) says about exemption from Obamacare Tax. The fundamental problem is the fact that the Non-Resident Alien spouse’s bank account dealings which are supposed to be opaque to scrutiny by the US because he doesn’t fall under FATCA’s purviews still are transparent thanks to FATCA requirements that the US spouse make transparent all his/her dealings.
And considering the fact that most houses in Canada are over the $200,000 threshold, it makes a lot of families subject to the Odumbasscare rule if you sell a home or inherit one from the death of a family member who wills their home to you.
The whole reason this pisses me off is that as the NRA family member, my mother potentially passing away (she’s elderly and in her late 70s – with a spouse gone from a heart-attack and in ill-health herself). She has well over $500,000 in home value and Odumbass is going to get his grubby “entitlement” paws all over it through my US citizen spouse? No ~insert expletive of your choice~ WAY!
@ The_Animal
I realize it isn’t fair to either you or your spouse to do this but my UNqualified advice (I don’t even know a lawyer) is that in the event of your mother’s passing you must ensure that you are the sole heir and do not put any of the inheritance into an account with your spouse’s name on it (no signing authority), nor even the deed to your mother’s home if you care not to sell it. Later perhaps conditions will arise which will make it safe to have a normal financial arrangement with your spouse. We can hope it is so.
@Animal, is your spouse considering expatriation to simplify your lives? I seem to remember though that you can’t presently afford the inevitable costs of coming into compliance since she’d have to back file five years, etc. If this is the case, it really sucks to be stuck.
Yep, stuck and ostrich…is the whole situation in a nutshell. 🙁 The only choice that she can do right now is claim Canadian citizenship once she jumps through the hoops. At least then she has Canadian protection then and that is the one thing that she is going to do.