Updated with a poll at the end.
Wayne State law prof article reveals interesting attitude toward #FBAR #FATCA and #Americansabroad https://t.co/9QfEjdxr6z
— U.S. Citizen Abroad (@USCitizenAbroad) November 26, 2015
Thanks to Trish Moon for her “work in progress” documenting the history of the “FBAR Fundraiser” and how President Obama, Secretary Geithner and Commissioner Shulman launched their assault on those they considered U.S. taxable property U.S. citizens abroad. The post referenced in the above tweet references a blog post by Wayne State Law Professor Linda Beale which reveals much about the “Homelander Mindset” towards these matters. Professor Beale has been he subject of previous discussion at Brock.
As we consider how to explain our position to Homelanders, I strongly suggest reading some of her posts and comments. She (like many Homelanders) appears to be unable to conceive that there is a world outside the United States. Because of the strength of her convictions (ill conceived or not) it’s important to understand her positions.
For example:
Wayne State Law Prof Linda Beale explains why the FEIE is unfair to Homelanders https://t.co/G8ZDGJdkhZ – Time for #Homelanderreachout
— U.S. Citizen Abroad (@USCitizenAbroad) November 26, 2015
Mike Citizenship carries both benefits and responsibilities. So renounce. Fine with me. But til you do, all I ask is that you comply with the law. As for the exclusion for foreign earned income, one could easily see how the person staying at home could find it unfair that someone from their company working broad for 2-3 years and earning the same or more in gross income from the firm would pay taxes on a very small portion of that. Like the “active business exception” to offshoring company assets, the exclusion acts as an incentive to encourage working abroad and results in tax discrimination against those who don’t do so.
I would be interested in how to best counter the argument that the FEIE (Foreign Earned Income Exclusion) discriminates against Homeland Americans because they can’t exclude part of their income.
Is the answer the same as that suggested by many Homelanders:
Well, the same laws apply to everybody. If you don’t like it then you can move abroad too. Just don’t let the door hit you on the way out.
By the way, I have just discovered that Wayne State has a new faculty member – Senator Carl Levin himself. Understand that this provides the best opportunity for dialogue that there ever was. This is great news and the possibilities are endless.
Update:
See the comment below that asks the question:
Should Americans abroad take the position that the FEIE be abolished?
The FEIE is way more generous than the tax treaties require. Each year I have to sit in a spreadsheet to calculate the portion of income from foreign ETFs that is foreign, the portion of my qualified dividends that is foreign, the buckets that the income falls in (passive, general etc). You have to fight with form 1116 every year if you’re an investor who has actually saved the money you earned. Every year I offset 100% my foreign taxes paid against US income.
All this is to stop my foreign dividend taxes offsetting say US income or capital gains taxes.
The FEIE is a realization that the rules are way too complicated, It’s a realization that only rich people should be made to do this crap, like many other things.
Do they really think that there are no income taxes but American income taxes? I’m rapidly coming to the conclusion that many people unthinkingly assume that this is the case.
Most homelanders think americans abroad don’t pay taxes in the country where they live !
In exchange for services…
Duh how can that be, we’re american…
Sadly the truth we’re fighting against.
They live in a bubble. Nothing exists outside their borders.
And such a sense of entitlement! I guess if you’ve been conditioned to believe that everyone owes you something and needs to pay your way, any opposition to that is viewed as taking money out of your pocket.
Apart from the enormous waste of time it takes to fill in Form ???? for the FEIE, the biggest problem is the income is ‘Earned.’. So it applies only basically to wages.
Left open to US taxation is passive income (interest, rent, dividends etc) and off course capital gains.
It comes back to one basic thought, if I live in the UK why should my next door neighbour only have to comply with 17,000 pages of UK tax code, and I both a ‘US person’ and EU resident citizen have to comply with an additional 70,000 pages of US tax code totalling to 87,000 pages?
For me I could care less if the FEIE was zero or unlimited. You still have to take time to fill in the BS IRS forms.
An EU court needs to address this issue.
Perhaps Professor Levin would like to face some American ex-pats abroad and explain to them in person why his FATCA legislation was a good move for them?
Perhaps some ex-pats should ring his office requesting to speak to him?
@All
I agree that Ms. Beale’s attitude is a bit (well extremely) offensive. That said, (don’t shoot me, but consider this):
After putting this post up, I have been thinking about this, and I am currently of the view that the FEIE should in fact be abolished (now hear me out before you attack).
Here are my reasons:
1. The existence of the FEIE allows Homelanders to argue that Americans abroad are given “Special treatment”. We do NOT want them to rely on this argument as we embark on a massive educational campaign.
2. The truth is that the FEIE is of benefit ONLY (I think) to Americans abroad who live in countries where the tax on “earned income” is at a lower rate than the U.S. tax rate on earned income. This would include the Middle East, Signapore, Hong Kong, ..
3. Americans abroad resident in ALL other countries are better off taking the Foreign Tax Credit. This allows them to build up credits that can be carried forward and could be of some use later.
4. Remember (as some have reminded us) that the FEIE does NOT apply to unearned income and is therefore of NO USE when you retire and are attempting to live off investment income.
To put it another way, it is possible that the FEIE will hurt Americans abroad in achieving a reasonable dialogue on “citizenship taxation”.
So, the question, it seems to me is:
Given that that the FEIE actually helps only a select group of Americans abroad AND it does allow for Homelanders to argue that Americans abroad are getting special treatment:
Should Americans abroad take the position that the FEIE be abolished?
FEIE undermines CBT. So do all the other special tax-related considerations given to US persons who live outside the US.
@Bubblebustin
Could you please elaborate a bit?
Also, I have not researched the history of the FEIE. Anybody with knowledge of this ….
Here is a very interesting discussion of the evolution of the taxation of Americans abroad by Andy Sundberg:
https://americansabroad.org/issues/taxation/history-us-taxes-abroad/
FEIE is okay for people temporarily working abroad, but not for long-term expats or emigrants.
Long-term expats and emigrants have non-US investment income and non-US retirement plans. FEIE provides no relief for such income or planning.
When it comes to long-term expats or emigrants, FEIE actually serves more to protect and prolong CBT than it does to provide relief.
@USCitizenAbroad
The best way to have a bad law repealed is to enforce it strictly.
– Lincoln
For various reasons, CBT is only now starting to be enforced strictly. What is the result? Record-breaking renunciations. I don’t care who you are, CBT makes it impossible for Americans to fully integrate with the rest of the world. They can do whatever they will to make things better or worse for us under CBT, but as long as the US requires a non-resident to even file an annual US tax return, most won’t. They can’t even get our mail to us. CBT is a joke. Not a funny one, but a joke. The rest of the world must be having a big chuckle. Rest assured that seeing how well it’s working for the US, they won’t try to emulate it – that is unless they too want to keep their citizens prisoners.
I have another favourite quote:
You can always count on Americans to do the right thing – after they’ve tried everything else.
– Churchill
It’s just a matter of time.
@bubblebustin “FEIE undermines CBT.”
This is one time I’m going to have to disagree with you, bubblebustin. The FEIE (form 2555) is one of the lynch pins that allows the continuance of CBT. Roger Conklin, bless him, must be turning in his grave.
Without FEIE, American business would struggle to find employees for overseas assignments in low tax countries. In order to compensate, American business would be required to offer significantly enhanced salaries and tax compensation packages to their employees. The result would be higher prices for the American consumer. Many key strategic countries have low tax rates. Self employment abroad (businesses owned by Americans) would dry up. Anyone who lurks on the professional tax sites is aware of the ‘tax free’ benefit for contractors in Iraq and Afghanistan, possibly the main enticement for being there. Foreign policy? (Not that I agree with it.)
Personally, I live in a higher tax country. I agree with USCitizenAbroad. Do away with the FEIE. It would result in an almighty outcry from the US owned businesses, as Roger Conklin often explained.
It would be unfair to those long term resident expats, and for that reason, I would hate to see it abolished.
FTC (1116) is the other lynch pin for the continuance of CBT. If someone wants to abolish the FEIE, why not include FTC. The reason is that Homelanders with foreign assets depend on FTCs, including Presidents (Obama book profits), Senators, and Congresspersons. Abolishing FTCs will never happen. FEIE is the easy target.
A typical narrow minded Homelander perspective of the real world.
@bubblebustin
Don’t get me wrong. I agree with you, CBT must be done away with, but until that time, we work with what we have.
OK, OAP, how about FEIE and FTC undermine the justification for CBT, that is if it’s justification is to generate revenue.
Over the years I have had homelanders tell me that a US citizen living in the EU does not pay taxes where they live because of US tax treaties so the feie exclusion is unfair
@bubblebustin “OK, OAP, how about FEIE and FTC undermine the justification for CBT”
Now that I can agree with.
If FEIE and FTCs were done away with, there would be no or few Americans abroad. Renunciations would be off the scale, and there would be fewer American company personnel abroad. “American” presence abroad would vanish. (Well, only no tax foreign countries might have Americans resident.) Of course, that may be the long term plan……do away with any Americans outside the Homeland.
CBT could not survive if FEIE and FTCs were abolished, …….that is, provided the US does want some US Citizens abroad.
@USCitizenAbroad
The FEIE was definitely introduced to make CBT workable in ways that served the interest of U.S. business. When the income tax was first introduced, there was no foreign tax credit and no foreign earned income exclusion. This made life nearly impossible for citizens abroad, but World War I started soon after that and the U.S. government wanted its citizens back home. After World War I the foreign tax credit came in, but Americans were still reluctant to go abroad and sell U.S. goods, so business groups fought for the total exclusion of foreign earnings. They explicitly supported continuing CBT on unearned income because they feared that wealthy Americans would moved their U.S. wealth abroad and live on unearned income without owing U.S. tax. American business groups were o.k. with Americans working abroad in jobs other than sales person, arguing that these would benefit the country by buying American goods.
By the early 1960s, the support of the Chamber of Commerce and similar groups had dropped off. A small number of wealthy American authors, actors and others with portable jobs had moved to favorable tax locations to lower their tax bill. That is why since 1962 the U.S. government has only allowed citizens abroad to exclude at best a fixed amount of FEIE. In the 1970s, a relatively unexperienced Congress and president (Carter), got rid of the FEIE, causing protests from groups ranging from salesmen to otherwise unemployable petroleum engineers working in the Middle East to churches with missionaries in low-income tax African countries. After the protest, the partial FEIE was restored, but CBT went from strength to strength.
Cook v Tate told us that the justification for taxing Americans abroad is because US citizenship benefits us everywhere, and that we should pay money for these benefits. But what if that taxation becomes our only disadvantage and the only way to free ourselves is to get rid of it’s justification? To me that sounds like taxation justifies citizenship, not the other way around. Rand Paul says if elected he would implement a flat and fair tax on income earned within the US. How would we then pay for our so-called benefits? What we have now is Taxation Based Citizenship, and ignores the fact that any benefits we enjoy are derived solely from that citizenship – not taxation.
I guess we don’t want citizenship justifying taxation either. They shouldn’t even be in the same sentence.
The Cook v Tait decision’s biggest flaw may have been to put a monetary value on our benefits as citizens. Our compatriots living in the US get exactly the same benefits for their taxes (remember it’s wherever we live) yet receive additional things like roads, schools, etc, etc. for no extra charge. All things being equal shouldn’t they be paying extra for these things?
I did a quick search on history of the FEIE and the first link was this paper:
http://works.bepress.com/context/ryan_borgmann/article/1000/type/native/viewcontent
Ignore the purpose of the paper and read section II. A.
“The first codified exclusion of income earned abroad was enacted in the United States two years after the Tait v. Cook decision, as part of the Revenue Act of 1926. It was found in the Tax Code as an item specifically excluded from the definition of gross income. Without any limitations, income earned by a United States citizen from income from sources outside the United States was excluded, so long as the individual was a bona fide nonresident for more than six months during the taxable year.”
So, if I’ve read this correctly and the author’s information is correct, it would suggest that from 1926 to the 1950s the US had de facto residence based taxation. Taxation was based on citizenship but the definition of “income” excluded foreign source income for non-residents. If only the 1926 Congress, who had the remarkable foresight to avoid the taxation of the foreign income non-resident US citizens, had amended the definition of “US person” for tax purposes as opposed to the definition of “income” … The right idea but the wrong execution.
FEIE protects CBT like SCE is meant to protect FATCA.
@USCitizenAbroad
I believe there are issues with this:
3. Americans abroad resident in ALL other countries are better off taking the Foreign Tax Credit. This allows them to build up credits that can be carried forward and could be of some use later.
Australia has a tax threshold of $AU18,200 while there is a minimum 10% tax rate in the US before deductions. I believe without FEIE that it would be possible that taxes are paid to the US (even though generally tax rates in Australia are way higher than the US above the threshold) if say you earn up towards $18,200. Think part time work, or part year.
Very nasty is how the tax treaty works to segregate taxes and credits tax by tax. For the statement in 3 above I believe there is no benefit to “building up credits” for earnings as these credits may not be used to extinguish tax liabilities for other types of taxes such as on pensions – as the tax treaties work to make sure tax is no higher for a particular category of tax than the highest rate of the the two countries in question. Tell me how I am wrong? Can these credits be carried from year to year?
Abroad on earnings I believe you have option of tax credit or taking the FEIE.
If you take the credits then you don’t take the FEIE? If you take the FEIE then that foreign income AND any foreign tax on that get excluded not credited, even if the foreign tax rate is way higher than the US rate. Then as you say carry forward, if you get retrenched and work a part year with earnings toward $AU18,200 then the credits on past earnings may be used against that?
Generally, agreed that FEIE is viewed as a loophole, and an obstacle to convincing of the righteousness of our cause. It comes up time and time again in the comment sections. So will we put the people from Singapore, Hong Kong, the MidEast under the bus? Another way is to answer back from the “fact check” section of the ADCT, press release on the issue including fact of the percentage and number of Americans who live in higher tax countries and that for them there is generally no benefit to FEIE.
If one truly believes in the righteousness of CBT, then I’m not sure how it’s possible to defend the FEIE.
@Edelweiss
Foreign source EARNED income, yes, but not foreign source UNEARNED income. Unearned income was always problematic because the U.S. political leaders worried about wealthy people moving abroad, taking their U.S. wealth with them, and not paying U.S. tax on it. It was people like the American on Downton Abbey they worried about. They also worried that Scottish-born industrialist Andrew Carnegie would return to Scotland.
There were some more minor moves to limit the exclusion of foreign income before 1950, such as the reinstatement of taxes on U.S. federal government employees in the 1930s, but it is pretty dull stuff.
The one person who had the reputation to pull off an argument for RBT was Herbert Hoover, the ultimate good American abroad. He saved so many from famine in Europe that even historians have believed the urban myth that the Finns coined the word hoover, meaning to help, in his honor. He had earned his fortune abroad, had foreign investments and owned a London-based business, but even he didn’t fight for the exemption of unearned income. Things were very different then, of course. There wasn’t much of a middle class and they didn’t have investments.