This is a post that I wrote a few months ago for the Flophouse but never published. I guess I was feeling pretty desperate at the time and figured no one was listening so I put it aside. Given some of the comments I’ve read recently at U.S. and Canadian media websites, I decided to go ahead and post it at Isaac Brock. I know the folks here already know all this but the folks at home are still confused about who we are and just what the heck we are doing “over there.”. This is my experience based on living in both France and Japan.
If people in the U.S. have a rather negative view of illegal aliens, they seem to have an equally unflattering view of Americans abroad. To be quite blunt we are commonly characterized as rich tax cheats. Here are a few choice quotations from our elected representatives:
“If you’ve gotten your riches from America, you should pay your fair share of taxes. These expatriates are really like economic Benedict Arnolds.”
– Leslie Samuels, Assistant Secretary for tax policy, U.S. Department of the Treasury
“I hope that one day we will just publish the names of people that America has given so much to and that they care so little about that citizenship that they would flee in order to avoid taxes.”
– Rep. Charles Rangel (Dem., NY)
Ouch! As someone who makes considerably less money than the people cited above, who did pay American taxes in 2010 on top of her rather heavy French taxes, and who considers herself to be a very loyal American, that sort of rhetoric really hurts. The idea that I would “flee” the U.S. so I could have the privilege of paying higher taxes in France? That is just unbelievably funny.
If I may make a modest suggestion? Perhaps the people in Washington, D.C. should get out of their comfortable chairs and their plush offices and come out and talk to some of us and see for themselves how we live and what we are doing abroad. I think they would find it enlightening because what they would see in most cases are Americans working regular jobs and raising families just like Americans back home.
Hard data is nearly impossible to come by but, in my experience in Japan and France, Americans abroad tend to be concentrated in certain sectors like:
Arts and Entertainment – Musicians, for example, who are sharing American culture with the French by playing American music (blues, rock, jazz) in large and small towns all around France.
Education – This may be the largest group of Americans working in foreign countries. American are heavily concentrated in education: English as a Second Language programs, for example, or in English-speaking private and public schools and universities.
Retirees – These are Americans on fixed incomes who are trying to stretch their pensions by living abroad. In some cases they are former American military personnel who are married to locals and have decided to settle in the spouse’s country.
Subsidiaries of American Companies – These folks are sent by their American companies to work with subsidiaries in order to maintain a home office presence abroad. Their numbers are actually diminishing – the tax laws in the U.S. means that these folks risk double taxation and companies are finding it very expensive to send these people abroad. My personal experience has been that local people are very happy about this because it means more jobs for them as the Americans get sent home for cost reasons. And, frankly, as much as they may like Americans personally, the locals find it more comfortable doing business with less oversight from the parent company in the U.S.
And let’s not forget the American spouses of foreign nationals. When I first arrived in France in 1989 most Americans I met were women and most were full-time wives and mothers. That has dramatically changed in the last few years. American women are marrying French but they are not willing to give up their careers when they come to France. De-skilled and struggling to learn the language and integrate into the culture, many of them pick up work as translators, secretaries, English tutors and other low-paying jobs until they can speak French well enough to pursue work commensurate with their education and their ambitions. I’m also meeting more American men who have chosen to join their French wives in France as opposed to living in the U.S.
Last time I looked people in education or the arts are not extravagantly paid unless they happen to be stars and I can assure you that most of us are not that by any stretch of the imagination. As for the retirees, whether they are collecting Social Security or a military pension, they are on fixed incomes and are hardly “economic Benedict Arnolds.”
The Americans I know here in France are mostly middle or lower income and live in apartments or studios that even low-income Americans back home would consider modest. I even know one woman who taught English in France for many years and is now on disability following some serious medical problems – her income is a couple hundred euros a month and she lives in subsidized housing.
I’d like to invite our elected representatives or anyone running for public office on the state or federal level in the U.S. to come and talk to us. Remember there are over 6 million Americans abroad, many of us do vote and the large American expatriate communities are in some pretty interesting places: Mexico, Germany, Japan, UK, France…
Because, damn it, we are your constituents. And if you are going to make gross generalizations about how rich and disloyal we ostensibly are, I’d like you to have the courage to come here and say so directly to us in person.
yeah, ESL is a big one in Brazil. The overwhelming majority of Americans in Brazil that I know of, [have taught] or teach English. The pay averages $10/hour USD and most of them don’t even make enough to file a return in the US. I also think this is the group that “lasts” just a few years in Brazil and goes back because it’s a hard life. The response I get from this group is that they aren’t too intersted in renouncing / relinquishing because they don’t see much of a future here.
I don’t totally disagree with what the lawmakers in America say. If someone runs an investment fund, and makes billions in fees from Americans, then the polite things to do is to stay, as in the case of the Algers (Fred Alger and his brother). But the problem now is that we get lumped in there.** I have no riches, nor do I derive any benefit from anything related to America. **
Yes, I’m becoming ever more aware that my US citizenship is becoming a liability. To stay compliant, I will have ongoing accounting fees and some double taxation which will probably be around two thousand pounds every year.
There is another group of US citizens living abroad that hasn’t been mentioned. These are persons born abroad to one parent who a US citizen either legitimately or to an unmarried US citizen mother and a non-US father, or vice-versa. Such a person is a US citizen by birth. Even though this US person may speak no English, has never held a passport or never even once in his or her life stepped one foot into US territory, or even realized that under US citizenship laws this person is just as much a US citizen as the individual born in say Peoria who has never once left Illinois and as such is subject to the same US tax on his foreign income as US citizens resident within the US. If his foreign income is the equivalent of $9,130 or more, he must file a US tax return and is subject to US tax on that income. He may be able to exclude some foreign income from US taxation provided it is “earned” income, but there is no exclusion for passive income such as interest, dividends, rents, royalties or capital gains. He may also be able to claim a foreign tax credit for foreign income taxes, providing the foreign country levies an income tax. But if it does not have an income tax or a very low income tax but instead generates all or most of its tax revenues through value added, sales, transportation, personal property, wealth or a plethora of other kinds of taxes unknown in the US, none of these “other” taxes can be used either for foreign tax credits or are they deductible from income for US tax credits.
If the US citizen lives and earns income in a country whose tax system mirrors that of the US and its income tax rates are as high or higher than the US rates, such an individual, although he is required by US tax law to file US tax returns and other IRS tax forms and Treasury Department forms with respect to his foreign taxes and bank deposits in the country where he resides, he may end up owing zero in taxes to the IRS. He is totaly compliant even though he generates not even one penny in tax revenues for the US Treasury.
So what really is the purpose of taxing US citizens abroad? From the above example it certainly is not to generate tax revenues for the US Treasury. What then is its purpose? Pure and simple it is to fiscally punish US citizens who live and derive income when residing in a country whose tax system does not mirror our own. As far as I know it is not a crime for a US citizen to live in a country with a tax system different from the US system even though the taxes paid to the foreign government may well be far more than the US resident pays to the IRS, but in a different form?
This boils down to the fact that the taxation of US citizens living abroad is not primarily for the purpose of generating US tax revenues but instead is Sin Tax levied for the non-crime of living in a country with a tax system that is different from that of the US. How, pray tell, can Congressman Rangle or anybody else consider this as justification for taxing the income of US citizen living abroad?
This fact makes a mockery of the statements of Charlie Rangel and Leslie Samuels with respect to their obligation to pay US taxes because they accumulated there wealth living in the US or that they are economic Benedict Arnolds if they fail to pay US taxes.
So well put! 🙂
There’s another big category of Americans abroad — I don’t think you have so many of them in Europe or Canada, but there’s tons in Asia and probably some in Latin America as well — the migrants who got U.S. passports as an “insurance policy” against instability in their homelands or to give their kids a leg up in the college admissions race, but then came back home to keep living their old lives.
The U.S. public is mostly unaware of this phenomenon because they think no one ever leaves the Land of Milk and Honey. Iif they ever notice it, I bet it’ll just make them even more prejudiced against expats. In Canada a few years ago there after the evacuations from Lebanon, there was a huge debate about so-called “Canadians of convenience”. One of the Canadian commenters here can probably tell us more, but as I understand it that resulted in changes to the Canadian nationality laws to restrict transmission of Canadian citizenship-by-descent outside fo Canada.
Well, Kirsten Gillibrand did basically just that, and her political opponents immediately jumped on it as “sipping champagne, popping canapés, and filling her campaign coffers in the shadow of the Swiss Alps”. (Apologies to whomever I stole this story from, I believe it was one of the commenters on this blog. Full credit to you for finding this, whoever it was!).
http://genevalunch.com/editor-s-notepad/2012/01/11/campaigning-for-genevas-us-ex-pats-votes-viewed-as-luxury/
It would make more sense to pay a yearly fee to the US Government of 500 dollars per year to maintain the USC.
This would be far cheaper than the money I am going to spend on an Accountant to do my yearly tax returns in order to tell the IRS something that CRA and I already know…..ZERO OWING!
This 500 dollars per/A could then be offset as a deduction on your Canadian taxes, something like a ‘union dues’. where you would get a portion of it back (maybe tabulate it as a capital loss)
Since the Canadian government has really done nothing about this situation except pay lip service….they should also give extra credits for being a USC as we have extra reporting obligations re: FATCA.
The only thing (IMO) we should have to do is mail in our yearly Notice of Assessment to the IRS….our countries have a US-Canada tax treaty so why not expand on it. (I realize we mail it in anyway along with your 1040….but what I am saying is just mail in the NoA not the 1040).
Also…i feel that it is a slap in the face to CRA for us to have to’re-file’ additional returns to the US. Everyone knows that taxes here are higher in Canada…so what is the point?
The IRS obviously does not trust CRA or our Canadian FIs to do the right thing.
This should make the powers to be a bit angry IMHO.
@Roger, very true. When I tell people about this.. about the Americans born to US parents who have never been the US, they think I’m joking. All they have to do is look at the front page of the IRS website.
I’ve never done a breakdown by country, but I could understand a “sin tax” if the majority of countries had lower taxes than America, but I don’t think that is true for at least half of the places where Americans overseas live. At least here in Brazil, there is EVERY tax imaginebable, even a VAT-on-steroids (ICMS).
I think it’s punishment plain-and-simple for living abroad. They want us their to be under their control helping to prop-up their economy. Look at what happens if an American opens a business abroad. That’s DOUBLE the punishment! And that was pre-FATCA! Now with the FATCA and difficulty getting bank accounts, it’s even harder for someone to survive abroad.
Look at how difficult and expensive it is to renounce. The nearest consulate for me is about 5 hours away, and it costs money to go there. On top of that, you have to pay that $450 fee. I like this message I saw on the internet:
“All this really means is that being a US citizen today ain’t worth a dollar. I mean really, think about it. If it cost you 450 dollars to throw out an old refrigerator then how much value is left in that refrigerator? ZERO. Likewise if it cost you 450 bucks to get rid of your US citizenship then it must not be worth squat either.”
I agree with that. I think charging a fee is disgraceful to America. If America were really “The best country in the world” then nobody would ever want to leave.
@Mach7, after knowing how the US is, I wouldn’t pay $1 for US Citizenship. Ok, maybe I would pay if I were poor and looking to return there to collect welfare.
It amazes me to NO END how *WE* were brought up as children to be *honest*. But the government and the IRS do the exact opposite. The FATCA is bad enough, but this FBAR money grab is unethical and immoral. Moreover, the US Gov is notorious for changing the rules of the game halfway through and going back on their word.
I want nothing more to do with that place.
Mach7 You send a copy of your NOA to the IRS? Did someone tell you you are supposed to or do you just do it as extra proof you are a good canadian? Am I missing another rule? I have never heard of having to do that, although I would have no problem doing it especially if it would release me from all the other forms.
@CanukDoc
As far as I know (told) the IRS requires you to send the CRA Notice of Assessment along with your IRS 1040.
This is their confirmation that you paid the tax in a foreign country that you said you did.
Some might disagree with me on this point….and I cannot say for sure if this is “standard procedure” with the IRS, but my Accountant said it was something we had to do so I did it….I therefore attached a ‘back’ NoA with every back-filed 1040.
I think if you don’t do that, the worst that can happen is that the IRS requests the extra information….I wouldn’t sweat it if you didn’t attach…if it is really important they will send you a letter.
Yes geeez, I also lived in Brazil for 7 years and paid these Brazilian taxes through the nose. Brazil than had a variety of tax incentives which encouraged its taxpayers to do what that government considered was both in the Government’s and the taxpayer’s best interest. But whatever I could do to take advantatage of these incentives to lower my Brazilian income tax only served, dollar for dollar, to increase my US tax obligation. And back then you could claim a deduction for the rent you paid (but not mortgage interest) and the cost of sending your children to an English language school so they would qualify for admission to a US college or university when they graduated. But of course these items were not deductible for US tax purposes, nor were contributions to the church we attended or any other charities in Brazil, because they were not “US charitable organizations”.
It is a no-win situation for US citizens living abroad, because they have to be paid non-competitive compensation just to survive, let alone to end up with the same income after this double taxation as either Brazilians or foreign citizens from any other country living in Brazil. That’s why when the Tax Reform Act of 1976 drastically increased my US tax obligation, thus making my total Brazilian + US taxes 81% higher, as an American, than any other person in Brazil with my exact same income and family status, I decided to throw in the towel and return to the US. I was only 35 then and had marketable skills so I was able to start over from scratch in a new career back in the US. But being an American living abroad you never know from one day to the next what Congress will dream up and enact to totally destroy your ability to survive abroad as long as you retain your US citizenship. FATCA is the latest example. A few years back it was TIPRA, and what it might be tomorrow is anybobody’s guess. And worst of all you don’t learn about these tax law changes until they are enacted. The 1976 tax change was in fact made retroactive by nearly 10 months. How can anybody plan for something like that?
@Roger – THAT is exactly what I fear. That I can spend copious amounts of time trying to be compliant and then another rule will come along and by the time I’ve heard about it, digested it and figured out how to comply with it, it will be too late. How do I save for retirement under these circumstances or manage a career or try to start a business venture? I just feel like we are all on shifting sand and I’m starting to believe that this is a game I will never EVER win.
I’m 46 and while I would not mind working in another country (we loved Japan) , France is home and I just can’t see starting over somewhere else from scratch.
Mach 7. What you state is correct. You must supply the IRS with proof that you have indeed incurred the foreign tax that you are claiming as a foreign tax credit against your US tax obligation. Depending on where you live abroad you may have to also supply a copy of your foreign tax filing along with a true and correct English translation of original documents that are not in English. Should the IRS decide that it will conduct a face-to-face audit, you are obligated to travel at your own expense, with the required supporting documentation, to Washington DC for this audit
I was audited twice on tax my tax reurns from Brazil. In those days the IRS maintained an office in the US Consulate in Sao Paulo, where I flew from Rio with a suitcase full of documents, but that office has since been closed. The second audit was conducted on my very last tax return from Brazil, after I had returned to the US, so it was in Miami. For both audits I came out with more than I went in because in the meantime I discoverd legitimate deductions I had overlooked when I originally filed these returns. But I can assure you these audits are never a pleasant experience, even when you receive a refund as a result.
@Roger, this is quite interesting.
– I’m the same age you were;
– In the same country;
– With the same issues;
– 35 years later!
At least I’m trying avoid the actual *problems* that you went through by renouncing.
Geeez,
I thoroughly understand what you are going through and wish you the very best. One of my close friends who then edited the daily language newspaper, The Brazil Herald, published in Rio and delivered every morning to my door both when we lived in Rio and later in Sao Paulo, chose to renounce his US citizenship back then. His wife, like yours, was also Brazilan, but his Brazilian-born children all had US citizenship and passports, which they retained. After he sold the Brazil Herald, it was later discontined and shut down. One of the reasons was that the American community had been decimated by the Tax Reform Act of 1976, so their circulation dropped drastically.
One large US company subsidiary in Sao Paulo repatriated all but two of its 45 supervisory and management US staff. They were replaced by expatriates mostly from its European subsidaries, with one being transferred from Venezuela to Brazil. It was far less costy to repatriate their US citizen staff and ship them, their families and their personal beloning back to the US, and relocate their employees from Europe and Venezuela to Brazil with their families, than it would have been to reimburse their US employees for the cost of these additional taxes. As you know all such employer reimbursements are considered as taxable income to the affected employee by the IRS, so such costs continue to snowball each year reimbursing the tax that grows each year on the reimbursements for the prior year. Most of the Americans sent back home joined the ranks of the unemployed.
It was much easier to renounce citizenship then. He just went to the US Consulate in Rio for renunciation formalies and his renunciation was accomplished in just a few minutes. Subseqently he sold the newspaper and accepted appointment as Executive Secretary of the Interamerican Press Association, located in Miami, and was issued a US visa which allowed him, as a Brazilian citizen, to be gainfully employed in the US. That was over 30 years ago. We maintained contact for some years but he retired and I have since lost track of him.
But you will survive and do well in Brazil. I would probably still be there today had it not been for the Tax Reform Act of 1976 which forced hundreds of thousands of Americans overseas to either return home or renounce their US cizenship in order to survive living abroad. That is why the US today has a massive $720 billion trade deficit while almost all other high wage countries are greatly benefitting from job creating exports. Canada, by comparison, has an almost perfect balance in its foreign trade with an $0.8 billion deficit.
@Roger – I’ve lived my entire life in south-central Ontario. I’ve been to the US twice since the turn of the century, neither time for more than a week. If I hadn’t been foolish enough to get a US passport in my early 20s (USC parent) I’d be ignoring this entire issue. I find it very surreal to even try to think of myself as a ‘American abroad’ in any real sense.
Roger, wow, I hadn’t realized that the IRS could actually conduct face-to-face audits abroad. I would have thought that was very rare to happen. I had the impression that even correspondence audits were rare in these situations. I suppose we’re on US soil when in their embassies.
As for having to fly out at our own expense to Washington for an audit, that seems utterly outrageous. I’d like to think they’d only do this in an extreme situation where they could get millions out of someone. I’d have thought they’d have to extradite someone…can’t see how they can force someone to fly to the US unless it was for criminal charges.
I think it highly unlikely that it would come to a face-to-face audit…unless there is a substantial amount of money at stake.
However it is possible and plausible.
I am not giving anything back to the IRS with this next statement…but i have dealt with another US agency…the FAA.
I have found them extremely intimidating until you actually go one-on-one with them. Then they are the nicest people you have ever met.
I am hoping the IRS is the same way should that day (god forbid) ever come.
I’ve been told that the IRS are a lot more reasonable in person than in their official writing. I gather that many are privately dismayed but have their hands tied.
What does FAA stand for?
Actually the 3 face-to-face audits that I have experienced; the first in Chicago, the Second in Brazil and the third in Miami, have always be cordial and respectful. Of course since I make sure what I report and claim is documented before I submit my tax returns I have not felt that I had anything to fear. I have had one audit by mail which was not so pleasant because it takes many weeks before what you send it is reviewed and you have no opportunity to talk with the reviewer if they see things differently than you do. Because of the time involved on the last such audit it was just not worth the effort to protest a $26 charitable deduction where I knew I was correct but the mailorder auditor did not agree. So I let her have her way without taking it to court. It just was not worth it.
My daughter lived and worked for a large Accounting firm in Hong Kong for 6 years. She accompanied one of their US citizen clients who was being audited by an IRS agent who had traveled there for that purpose. That was before they changed the rules obligating citizens abroad to travel to Washington. She learned informally from the IRS auditor that traveled to Hong Kong that because of the travel costs involved that few on-site audits abroad were conducted. These were only where the stakes were thought to be very big. The audit was conducted on the premises of the US Consulate in Hong Kong. Such audits were always conducted at a US government facility to avoid the agents being exposed to possible arrest for attempting to enforce US laws in a foreign country where the US has no legal authority or authorization from the foreign government to do so.
She also learned that it was very difficult to arrange for such audits since in many countries, particularly “developing countries,” postal mail deliveries are not made to physical location addresses, so the only address the IRS has for taxpayers in such countries is a Post Office Box, or in some cases the General Delivery address for those who do not have post office boxes. Such persons apparently back then had a tendence to no respond to IRS notices that they would be visited for an Audit.
I don’t know, but suspect that with the current crackdown and much more attention being paid to the supossed billions of dollars in taxes the public is being led to believe is being evaded by US citizens hiding income producing assets abroad, that mail audits are likely to increase substantially.
Just a guess.
@Mona
FAA stands for the Federal Aviation Administration.
With respect to deductions…when we did my 6 past returns, i had many many more deductions that I could have used…but my Accountant basically said that they were not needed as the object of the “game” was to bring your tax owing to “zero”.
Having said this, (and I have no grounds to base this on), if one was “audited”, could the situation be that the IRS would be in a position to “owe” you thousands of dollars rather than dispute the 26 dollar charitable donation?
Again….I am not sure if you could even get any money from the IRS since you did not pay into there tax system (?)
Mach7,
Since I live in the US I did pay into the system, so as I recal this disallowed charitable deduction of $26 cost me about $5 in US taxes additional, so I just wrote a check and mailed it to the IRS.
With the earned income exclusion and with foreign tax credits that zero out the US tax obligation there is indeed no need to claim additional deductions. Keep it simple.
Roger:
Well, consulates (unlike embassies) are considered to be host country soil. But it wouldn’t surprise me at all if the British “overlooked” the IRS violating their sovereignty like this. The US media always tried to portray the British as bringing “freedom and democracy” to Hong Kong, but in reality they were colonial administrators who were constantly rolling over and playing lapdog for the Americans.
For another example of this, look at the godawful HK-US extradition treaty which the British rushed through in 1996, one year before they had to give up power here. It says HK has to extradite its own nationals (contrary to the law in the rest of China), has to extradite for fiscal offences even in the absence of dual criminality, and has no provision to refuse extradition just because the offence in question was not committed in the US.
Roger:
Well, consulates (unlike embassies) are considered to be host country soil. But it wouldn’t surprise me at all if the British “overlooked” the IRS violating their sovereignty like this. The US media always tried to portray the British as bringing “freedom and democracy” to Hong Kong, but in reality they were colonial administrators who were constantly rolling over and playing lapdog for the Americans.
For another example of this, look at the godawful HK-US extradition treaty which the British rushed through in 1996, one year before they had to give up power here. It says HK has to extradite its own nationals (contrary to the law in the rest of China), has to extradite for fiscal offences even in the absence of dual criminality, and has no provision to refuse extradition just because the offence in question was not committed in the US.