Why London Mayor Boris Johnson is a poster boy for 8 million U.S. expats: http://t.co/7oZlcURnhz
— Laura Saunders (@Saunderswsj) December 4, 2014
This article is behind a paywall – perhaps somebody can provide a direct link. It apparently will be in the print edition tomorrow so it would be good to get comments up today. The text of the article is here.
The article includes:
Now he has a new claim to fame: as a poster boy for millions of U.S. “tax cheats” living abroad.
Recently, the 50-year-old Mr. Johnson, who holds dual U.S./U.K. citizenship, complained that the U.S. is “trying to hit” him for taxes on the sale of his London home, even though he hasn’t lived in the States since he was five.
In an interview with NPR about Churchill, Mr. Johnson called his U.S. tax bill “absolutely outrageous,” after a listener asked about his citizenship status. When pressed as to whether he would pay, Mr. Johnson said, “No is the answer…why should I?…I pay my taxes to the full in the United Kingdom, where I live and work.” These taxes are often at higher rates than in the U.S., he added.
Mr. Johnson’s spokesman says he has no further comment on the matter. The Telegraph, a British newspaper, has reported that he and his wife bought a London house for GBP470,000 (about $750,000) in 1999 and sold it for GBP1.2 million (about $1.9 million) in 2009. The Internal Revenue Service is prohibited by law from commenting on issues involving individual taxpayers.
Mr. Johnson’s case is a perfect illustration of the dilemmas faced by many of the 7.6 million U.S. citizens living abroad as a result of U.S. authorities’ five-year campaign against secret offshore accounts. It began after disclosures that Americans were being encouraged to hide money in Switzerland.
Most of these expats have never had a numbered Swiss account, but many of them, like Mr. Johnson, are finding they haven’t complied with U.S. tax laws that seem to them highly unfair. “It’s a clear example of the harm befalling citizens caught in the maw of multiple tax systems–a status imposed on every American citizen abroad,” says Jackie Bugnion, a director of American Citizens Abroad, an expat group.
The root cause, experts say, is that both the U.S.’s definition of citizenship and its tax system are broad.
Read more: http://www.nasdaq.com/article/london-mayor-is-poster-boy-for-expat-tax-woes-20141204-00782#ixzz3KxFIzjmS
Great article, but his is NOT an expat. He is in his patria (he likes his Latin, so he may even call it his patria). In October, i asked a large group of Britons whether they considered Boris to be an American. Nobody did.
There’s an un-paywalled version that Keith Redmond posted on the AARO Facebook page, the link for which I can’t seem to copy…
The Boris Johnson case is extremely interesting and may prove to be very informative. If they want a face-saving out, the IRS may say that in assuming elected office in another country he effectively relinquished his US citizenship. (This would require backtracking, but it could be done.)
Otherwise, it will be very interesting to see whether they are able to collect taxes and penalties so long as he is outside the US. And if so, what mechanisms they find to do this. It is quite possible that they really have no tools to effect such collections.
Slightly off-topic: The basic justification for CBT used by the US is the protection of Americans abroad by the US military. Examples are the rescue of Jessica Buchanan and more recently the attempted rescue of Luke Somers. I’m very thankful and greatly praise the US military for saving people’s lives, but one important detail is that they don’t discriminate based on citizenship (and rightly so). For example, in the two operations mentioned above, citizens of Denmark, Yemen, Saudi Arabia and Ethiopia were also rescued. Besides, these cases are so rare that their cost could be easily diluted into cents and buried in the passport fee charged from all Americans who travel or live outside the US. CBT remains unjustified.
London Mayor Is Poster Boy for Expat Tax Woes
Boris Johnson Says He Won’t Pay Certain Taxes the U.S. Is Seeking
Boris Johnson, the mayor of London, is a flamboyant Conservative British politician and commentator known for his unruly mop of blond hair, his potential as a successor to Prime Minister David Cameron and his new book celebrating Winston Churchill’s legacy on the 50th anniversary of his death.
Now he has a new claim to fame: as a poster boy for millions of U.S. “tax cheats” living abroad.
Recently, the 50-year-old Mr. Johnson, who holds dual U.S./U.K. citizenship, complained that the U.S. is “trying to hit” him for taxes on the sale of his London home, even though he hasn’t lived in the States since he was five.
In an interview with NPR about Churchill, Mr. Johnson called his U.S. tax bill “absolutely outrageous,” after a listener asked about his citizenship status. When pressed as to whether he would pay, Mr. Johnson said, “No is the answer…why should I?…I pay my taxes to the full in the United Kingdom, where I live and work.” These taxes are often at higher rates than in the U.S., he added.
Mr. Johnson’s spokesman says he has no further comment on the matter. The Telegraph, a British newspaper, has reported that he and his wife bought a London house for £470,000 (about $750,000) in 1999 and sold it for £1.2 million (about $1.9 million) in 2009. The Internal Revenue Service is prohibited by law from commenting on issues involving individual taxpayers.
Mr. Johnson’s case is a perfect illustration of the dilemmas faced by many of the 7.6 million U.S. citizens living abroad as a result of U.S. authorities’ five-year campaign against secret offshore accounts. It began after disclosures that Americans were being encouraged to hide money in Switzerland.
Related
More Americans Renounce Citizenship (Oct. 24, 2014)
Tax Officials Express Doubts About Fatca (Oct. 8, 2014)
Offshore Accounts: What to Do Now (June 20, 2014)
Expats Break Up With Uncle Sam to Escape Tax Rules (June 16, 2014)
Most of these expats have never had a numbered Swiss account, but many of them, like Mr. Johnson, are finding they haven’t complied with U.S. tax laws that seem to them highly unfair. “It’s a clear example of the harm befalling citizens caught in the maw of multiple tax systems—a status imposed on every American citizen abroad,” says Jackie Bugnion, a director of American Citizens Abroad, an expat group.
The root cause, experts say, is that both the U.S.’s definition of citizenship and its tax system are broad.
Mr. Johnson, for example, is a U.S. citizen because he was born in New York while his British parents lived here during the 1960s. If he had been born in many other countries, he wouldn’t automatically have been a citizen.
The U.S. also is among the very few nations that tax nonresident citizens on their world-wide income—which Mr. Johnson called “this incredible doctrine of global taxation.” While tax law and treaty provisions alleviate some problems caused by Uncle Sam’s long reach, many gaps and pitfalls remain.
For example, the U.S. gives no credit for some large taxes paid by U.S. citizens abroad, and it often doesn’t recognize other countries’ tax breaks—such as for retirement or education savings accounts that are similar to individual retirement accounts and 529 plans.
The income earned by such accounts is taxable annually, and the complex reporting for them can run up thousands of dollars in tax-preparation fees, experts say.
In Mr. Johnson’s case, the issue is that the U.S. doesn’t recognize the U.K.’s exemption of the full capital gain on the sale of a primary home. Instead, the gain appears to qualify only for a U.S. exemption of $250,000. (This assumes he uses the “married, filing separately” status because his wife is British.)
According to a back-of-the-envelope calculation, the mayor could owe about $50,000 in U.S. tax on the sale, plus interest—and possibly a 20% penalty—with no offset in Britain, says Robyn Limmer, a U.S./U.K. tax specialist at the Frank Hirth accounting firm in London.
Should Mr. Johnson need to correct other past errors, the penalties could seem draconian. If he failed to report financial accounts abroad, such as his British checking account, the penalty could be 27.5% of the high balance of assets—assuming he is allowed to enter a special IRS program, says Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink in New York.
If the mayor isn’t eligible for the program—and he may not be—the penalty could rise to 50% a year of the highest account balance for multiple years, even if no income tax is due on the accounts. And although there is another IRS program that imposes no penalty on undeclared assets held by expats, Mr. Johnson might not qualify for it, Mr. Skarlatos adds.
Of course, the mayor could decide to renounce his U.S. citizenship, as record numbers of citizens have done in recent years. But as he said in the NPR interview, “It’s very difficult to give up.”
To renounce, U.S. citizens have to certify they have been tax-compliant for the previous five years—which means filing returns and paying any taxes, interest and penalties due.
There also is an exit tax for many renouncers whose net worth is $2 million or more, or whose average annual income tax is greater than about $160,000. The tax applies to the person’s world-wide assets and treats them as if they were sold or liquidated; there is an exemption of nearly $700,000 of gain.
According to Stow Lovejoy, another tax lawyer at Kostelanetz & Fink, Mr. Johnson might not owe the exit tax because he is a dual citizen from birth who has long been absent from the U.S. But he still would have had to file and pay taxes for at least five years.
Mr. Johnson’s case also shows that expats can’t just ignore what they perceive as Uncle Sam’s unfair rules because they pay full taxes to the countries where they use services, as the mayor said he does.
Such ignorance was a strategy that worked for decades, but no longer. Provisions of the Foreign Account Tax Compliance Act now require foreign financial firms to report information about U.S. account holders to the IRS annually. Many expats are about to be “outed.”
And what of Mr. Johnson’s outraged refusal to pay his U.S. tax? Experts stateside are betting the mayor’s irresistible force will yield to the IRS’s immovable object—unless his outcry helps move Congress to change the law.
That will be tough, for many reasons. One is that the U.S. policy of taxing individuals’ world-wide income goes back to the Civil War, so it is fully baked into the system.
In addition, many U.S. expats have come into compliance and paid penalties since 2009, so changing the rules could seem unfair to them. The IRS has recently taken heat for making one of its compliance programs more lenient for some expats, because people who stepped forward earlier couldn’t use it.
In sum, Mr. Johnson and millions of other expats are facing—as the British say—a sticky wicket indeed.
—Email: taxreport@wsj.com
Laura Saunders “gets it” more than most journalists.
She is hinting at the incredibly narrow and unfair US treasury definition of “double taxation” that disallows credit for large taxes paid because they are on perhaps a different category of income or assets. The definition to be fair should be very broad covering all tax paid with credits that may be applied across all categories.
Also nice that she mentions poor treatment of retirement accounts.
Missing: WSJ interview of those in government about the fairness and equity of this all.
How do we get journalists to question/interview US politicians in regards to the equity and fairness of the double taxation, excessive compliance, excessive penalties, denial of tax deferred accounts such as retirement, etc. all without representation or services ?
Who should we ask the journalists to question/interview?
Do we send an official letter of request from Isaac Brock Society, Maple Sandbox, ADCS? I tried to suggest to Robert Wood and Laura Saunders. They have the closest knowledge to be able to effectively question, and they are from leading press brands within the US. Why haven’t there been such questioning? Let’s instigate it!
Great article from Laura Sanders. She gets it!
@Shadow Raider
A very valid point. Non-US persons actually get rescued (cough, cough) far more than people deemed to be US persons. Just look at the justification for most of the recent wars based on the doctrine of “humanitarian intervention” whereby the US attacks or invades another country to allegedly rescue the citizens of that country (non US persons) from an evil repressive government (cough, cough).
Haiti, Bosnia, Kosovo, Iraq, Libya, Syria, etc, etc,
http://en.wikipedia.org/wiki/Humanitarian_intervention
Ain’t non of those people filing/paying US income tax or FuBARS.
Boris Johnson for president
https://www.facebook.com/groups/732721426814991/
An associate of Ms Saunders, Liam Pleven, sent me a link to the article (pay walled!!??) and this is my response to him:
Hi Liam,
Laura’s article is pretty spot on. She managed to cover a lot of turf quite accurately and neutrally – with the exception of implying that many expats have ignored their tax filing obligations, and have used “ignorance” as a strategy for non-compliance. First of all, it’s not unreasonable to speculate that the vast majority of those the US considers to be taxpayers were reasonably unaware of their tax filing obligations considering many didn’t and still don’t know they are even US citizens. Secondly, if you consulted with the IRS’s NTA, Nina Olson, you’d learn that it’s primarily the IRS’s willful ignorance and negligence that’s led to this crisis, not that of it’s citizens abroad. Last of all, “ignorance” cannot be used as a strategy, when according to the definition of ignorance, it’s the absence of awareness!
As far as citizenship-based taxation being baked into the system goes – so was slavery. As nice as it was for Laura to mention how those of us like me might feel to see others emancipated from CBT after what it’s cost us, if Boris managed to press the US into going to residency based taxation, I would be IMMENSELY relieved to no long have to make the choice between retaining my US citizenship and the ability to thrive where I live. No reasonable US citizen living abroad, regardless of what their experience under the current system has been, wants to keep CBT and the ongoing hardships it produces.
…
“reduces double taxation and prevents fiscal evasion” This language has confused many. Some think that as they live in a relatively high tax country and that there is a tax treaty that they would owe no tax so why file? We may see this misconception in the comments to recent articles commenting that there would be no tax because of the tax treaties.
The Australian Tax Office got confused themselves and mixed up prevention and reduction:
What are tax treaties? ” …They prevent double taxation and fiscal evasion…”
https://www.ato.gov.au/General/International-tax-agreements/In-detail/Tax-treaties/What-are-tax-treaties-/
The definition of double taxation itself is confusing and not intuitive as credits for large taxes paid may not be carried across onto other categories.
You can get around the paywall and go straight to the article by putting:
London Mayor Is Poster Boy
into google.
Nobody mentions the disparity between the US system and that of another country.
Mr Boris likely pays more in tax in other areas of the UK system than the American system
but the American IRS still wants tax when applied to the American system.
This is the injustice. it is immoral, unethical and plain unfair to subject a citizen to two systems.
How can one country claim tax on any citizen who is resident of another country who
likely can pay more tax in specified areas of tax law to their country of residence??
Or what if a resident pays for a service in their country that would be gov. subsidized in America
through taxes? Schooling for children is a perfect example. Many expats must pay heavily for school in their country when this would be at no cost in the USA in the public system.
Boris should ask for a credit then from the IRS for anything more paid such as UK/local income tax
when his income compared to the US system. The IRS will likely end up owing him money.
Boris had better not turn cheek on this.
Well, it’s about time a high-profile person got caught by this, it can only help expose the injustice of it all. Perhaps he would like to donate to one of the lawsuit groups.
I appreciate the number of column inches that Ms. Saunders has devoted to this issue including this current article, but I take exception to the following section (I have deleted the separate paragraphs): “Experts stateside are betting the mayor’s irresistible force will yield to the IRS’s immovable object–unless his outcry helps move Congress to change the law. That will be tough, for many reasons. One is that the U.S. policy of taxing individuals’ world-wide income goes back to the Civil War, so it is fully baked into the system. In addition, many U.S. expats have come into compliance and paid penalties since 2009, so changing the rules could seem unfair to them.”
Laws must change with the times and, indeed, they are constantly changing. That’s what governments do. They pass legislation. Sometimes that new legislation revokes old legislation because it doesn’t work anymore. Slavery has already been mentioned as a case in point. Civil rights legislation inspired by the famous uprisings of the 1950s and 1960s are another case in point. The current President of the United States would be riding at the back of the bus and sitting in a segregated booth in the local diner today instead of living in the White House if the US government hadn’t revoked some musty old laws left over from those days of slavery. Slavery and discrimination had been “baked into the system” far longer than CBT.
Yes.. Bad laws *do* get expunged from the law books. But must it take riots in the streets to make it happen? No. It takes reasonable people using their brains and quite a large portion of their hearts to sit down and do something about it. To do nothing is pure indolence.
As for the people who have already paid and might feel they have been treated unfairly: here is what Bubblebustin has to say to that: “As nice as it was for Laura to mention how those of us like me might feel to see others emancipated from CBT after what it’s cost us, if Boris managed to press the US into going to residency based taxation, I would be IMMENSELY relieved to no long have to make the choice between retaining my US citizenship and the ability to thrive where I live. No reasonable US citizen living abroad, regardless of what their experience under the current system has been, wants to keep CBT and the ongoing hardships it produces.”
Addendum: I support Boris 100% in his resistance to the IRS and I fervently hope that his high-profile stand will help to bring long-overdue change in US tax law and set us all free.
New article:
London’s Reluctant Expat Mayor: Boris Johnson Faces a U.S. Tax Quandary
LAURA SAUNDERS
http://blogs.wsj.com/expat/2014/12/05/londons-reluctant-expat-mayor-boris-johnson-faces-a-u-s-tax-quandary/
Wall Street Journal senior reporter Laura Saunders writes this week that London Mayor Boris Johnson has become the poster boy for millions of U.S. expats with tax woes, following comments to NPR in a U.S. interview.
Saunders observes that the mayor is a dual U.S./U.K. citizen because he was born in the U.S. while his parents lived in the states for a few years.
In the NPR interview, Johnson had complained that the U.S. is “trying to hit” him for capital-gains tax on the sale of his London house, although he hasn’t lived in the U.S. since he was five.
But in at least one way the mayor may be lucky, according to Robyn Limmer, a U.S./U.K. tax specialist with the London firm of Frank Hirth. It’s that the pound-to-dollar exchange rate of about $1.60 in 2009, the reported year of the house sale, is roughly the same as the exchange rate in 1999, when Johnson apparently bought it.
Limmer notes that in order to figure their U.S. taxes, expats often have to do complex currency translations. If the dollar/pound exchange rate had differed greatly between the time of the home’s purchase and sale, Johnson could have owed tax on a foreign currency profit as well as on the sale of the house.
In a further complication, the tax rules look separately at the foreign currency effects of mortgages on a home such as Johnson’s. Thus if he paid off a mortgage as part of selling the house and realized a foreign currency “profit” on that transaction because of differing exchange rates, that gain could be taxable as well.
However, says Limmer, if U.S. taxpayers like Johnson have foreign currency “losses” on a home sale or mortgage, these amounts aren’t deductible.
The complexity of the U.S. tax rules and fear of outsized penalties drives many expats to use professionals to prepare their U.S. returns, which can be hundreds of pages long, says Limmer, and “the nightmares multiply” if expats have foreign savings acounts, pensions, or unit trusts.
As a result, the tax-prep fees owed by expats are often “out of all proportion” to their income, she adds.
Email Laura Saunders at laura.saunders@wsj.com. Follow her @SaundersWSJ.
Email your expat finance questions to expat@wsj.com and watch WSJ Expat for responses from our panel of experts. Follow us @WSJexpat. Join our Facebook group.
The Cola Party has been established.
On December 16, 2014 and every year thereafter, American ships shall be boarded and their Cola shall be dumped in the Sea.
Join now and help establish the appropriate candidates and leadership
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I have a question. I have just read the UK-USA tax treaty.
http://www.hmrc.gov.uk/taxtreaties/in-force/usa-consolidated.pdf
Article 13. Gains.
This article appears (I am not a professional) to detail that the US, for instance, can tax the sale (alienation) of property you sell in the US if you live in the UK.
But paragraph 5 states:
“Gains from the alienation of any property other than property referred to in the preceding paragraphs of this Article shall be taxable only in the Contracting State of which the alienator is a resident.”
Frankly, this is clear language. The alienator, Boris Johnson, has alienated his UK property in the UK where he resides. Therefore it is not taxable in the US.
End of story?
It is not, for me, a stretch to imagine that the IRS would (by mistake…) ask for a tax that is in fact not due according to an applicable treaty. They may say that it’s not their job to know about all the treaties.
I will now offer my advice to Mr Johnson for a small fee!
I have unearthed the treaty for the country where I reside and it seems to exempt a lot of stuff!
I’d enjoy critical comments from professionals or people more knowledgeable than I.
@Fred: It is courageous of you to read the treaty. I’ve done that too.
The fly in the ointment with your common sense use of Article 13 is the Savings Clause.
Article 1 4. Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
There you have it, the way CBT is maintained within the so-called Double Taxation Convention.
@Ricard. THANKS! Fascinating. To think I had skipped “General Scope”.
I read another treaty (my country of residence) and found similar language. Bummer.
Why write a treaty if it’s full of exceptions (always to the advantage of the US)?
Jeez.
@Fred: “Why write a treaty if it’s full of exceptions” — combination of sticks & carrots. The US wants to maintain its citizenship-based taxation system. The other country they’re negotiating with usually doesn’t understand CBT and they just wants to help their own companies doing some business in the US to avoid getting entangled in the US tax system too badly, so they were willing to accept this strange clause whose effect they didn’t really know, in exchange for concrete benefits. And a lot of these clauses date back several decades when one or both sides had heavy restrictions on dual citizenship anyway, so the other side didn’t imagine it would affect their own citizens.
That said, there has been some pushback on this. Not to the extent of getting a “saving clause” removed from a treaty, but for example the Netherlands managed to get an exit-tax exception written into their tax treaty with the US (though you should not be surprised to learn that the US later changed the tax law to make the exception useless):
http://isaacbrocksociety.ca/2014/12/10/u-s-treasury-admits-people-dont-emigrate-to-high-tax-countries-to-avoid-u-s-tax/
@Eric: fascinating. Thank goodness for the source of info that this blog is.
And commiseration.
I am quite certain that the US would ridicule any attempt by another country to tax people living in the US.
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