Advocacy to change the U.S. rules of “citizenship-based taxation” is going strong. For example, last week there was a delegation in Washington, DC. Americans Citizens abroad is active and working hard. Republicans Overseas through the efforts of Solomon Yue has been a leader. Democrats Abroad is starting to rise to the occasion.
Legislative change will require a “conversation” with the “powers to be” in DC. It is difficult for those who have not experienced the difficulties of complying with the U.S. tax code (as a “taxpayer abroad”), to understand the problem.
One of the responses frequently heard is:
“What’s the problem”. You can exempt about $100,000 USD per year under the Foreign Earned Income Exclusion.
Although true, as you know, the exclusion applies to “earned income” only. There are many sources of income that are (1) not earned income and (2) are not taxable in your country of residence and (3) are taxable in the USA.
In order to assist those who will be part of “the conversation” in DC, I would like to ask that you provide examples of how/why a U.S. citizen living in another country with income well below the $100,000 Foreign Earned Income Exclusion can end of paying tax to the United States.
I think that a number of focused examples could be very important. These examples could include things like phantom capital gains and U.S. taxation “kicking in” at a lower level of income than in your country of residence. Of course it would be great to be able to document and wide and diverse range of examples.
When if you comment, if you could provide reasonable detail and specify where you live. Also, if you have any knowledge of how a tax treaty might affect U.S. tax (recognising that tax treaties mostly do not assist individuals) it would be helpful.
Thanks in advance!
@Kelly, I think @KingOfTheRoad is referring to the idea that Mr USA & Mrs NRA (an average couple) own assets, including the family home together and when Mr USA passes away there will be a US tax event as if all of his assets had been sold and transferred to Mrs NRA. $250K of unrealised profit on the house will be exempt, but that’s not a lot if you’ve lived somewhere like Sydney or London for a long time and also when you consider other financial assets such as pensions that may be treated as distributed whilst Mrs NRA has no access to those funds yet. This is not the case if you are both US taxpayers. As I understand the issue (but happy to take corrections from all the knowledgeable people here).
There a lot of differences between the rules for capital gains on a main home (US) vs a principal residence (Canada). The timings, deductions available, etc are different, especially if you have converted a home to or from a residence to a rental property. There are also situations where you can designate a residence to be your principal residence in Canada (even if you don’t live in it) where it would not be considered your main home in the US. I can imagine multiple scenarios where an average or lower income home owner would owe more – sometimes substantially more – in taxes to the US than Canada.