Shadow Raider brought this to our attention in a comment he made on the Ways and Means Committee Highlighting International Apsects of Tax Reform thread today.
Shadow Raider writes:
“The tax reform working groups of the Ways and Means Committee are discussing tax reform at full speed now, with hearings almost every day (nothing on international aspects yet, other than a hearing about trade with India). The committee announced that it is accepting formal comments from the public until April 15, and that those comments will be included in the final report by the Joint Committee on Taxation on May 6. The committee is even posting the comments on its website as they are sent (the only comment sent to the international group so far is about corporations). If many of us send comments about citizenship-based taxation, FATCA, FBAR etc., the subject should catch their attention.
Any person(s) and/or organization(s) wishing to submit comments can email firstname.lastname@example.org.
In the subject line of the email, please indicate “Comments: (name of) Tax Reform Working Group” (in our case, International Tax Reform Working Group).
Attach your submission as a Word document.
In addition to the Word document attachment, please include in the body of the email a contact name, physical address, phone number and email address.“
Thanks to Mark Twain for pointing out this should be prominently featured as a new thread of its own.
Here’s the relevant section from the the Joint Committee on Taxation report, pp. 521-522:
“3. U.S. citizens residing abroad
Numerous comments were received that relate to the taxation of U.S. citizens living abroad. These comments include the following recommendations:
• Repeal or revise the Foreign Account Tax Compliance Act (FATCA);
• Provide an unlimited foreign-earned income exclusion for permanent residents of a foreign country;
• Expand the foreign-earned income exclusion to include passive as well as earnedincome;
• Repeal the special rules on passive foreign investment companies;
• Repeal the provisions imposing tax responsibilities on those who expatriate by relinquishing U.S. citizenship or residency, including the ban on issuance of visas to expatriates who avoid payment of taxes;
• Adoption of residence-based taxation (see below);
• Residence-based taxation should not include a provision for imposing 30 percent withholding tax on U.S.-source pensions;
• Any move to residence-based taxation implies the need to eliminate the savings clause from new and existing tax treaties;
• Creation of a bipartisan commission responsible for studying the impact of Federal laws and policies on U.S. citizens living abroad, especially those provisions and administrative programs that require disclosure of financial information. The Commission would report to Congress with recommendations and submit a follow-up report on any remedial administrative response to the report.
The Working Group also received technical comments related to the computation of income tax when a portion of income is excluded under the foreign-earned income exclusion.
Adoption of residence-based taxation
Many comments proposed adopting a residence-based tax system to treat certain U.S. citizens domiciled abroad in the same manner as foreign persons, applying withholding taxes to U.S.-source income earned by such U.S. citizens and taxing effectively connected income as under the present law rules. The proponents of a residence-based tax system suggest the following elements:
• U.S. citizens that meet certain requirements could continue to be taxed under the rules of present law or could elect into residence-based taxation;
• U.S. citizens electing residence-based taxation are subject to a departure tax based on the unrealized capital gains on the value of assets on the date of departure;
• Departure tax is due only if certain thresholds of assets or income tax paid in recent years are met, and will not apply to U.S. real property, primary residence abroad, and retirement plans or pension funds;
• U.S. citizens who are compliant in the U.S. tax filings and have established residence abroad two years or more before the effective date of the proposal are exempt from the departure tax;
• U.S. citizens electing residence-based taxation are subject to the estate tax rules applicable to non-resident, non-citizens (i.e., U.S. assets, including real estate, securities, trusts, and partnerships in excess of $60,000 are subject to estate tax);
• The $60,000 estate tax exemption equivalent amount for estates of non-resident noncitizens should be increased;
• Implement a streamlined offshore voluntary disclosure initiative with no restrictions on eligibility:
o The proposed voluntary disclosure initiative is not under the administrative purview of the IRS criminal division;
o The proposed initiative
(1) requires three years of back tax reporting,
(2) eliminates the requirement to file the FBAR,
(3) eliminates all non-filing penalties for FBAR and Form 8938,
(4) eliminates any threat or risk of criminal prosecution,
(5) is open to all non-residents, with no ceiling threshold for the amount of taxes due, and
(6) is limited to payment of back taxes, interest and late filing penalties related to unpaid taxes associated with the three-year back-filing requirement.
notamused and CanuckDoc and anyone else who knows the in’s and out’s of filing for “Self Employed” US Persons living abroad,
There must be a lot of self employed persons affected.
CanuckDoc, do you have the document information you refer to for someone self employed in Canada?
This comment appeared at http://www.mainstreet.com/article/smart-spending/financial-considerations-expats?page=5.
@calgary411, That comment is not correct. The US social security tax is imposed on the employer, not on the employee. Therefore, US employers have to pay it, for work done in the US by anyone and for work done abroad by US citizens, while foreign employers have to pay it only for work done in the US by anyone. Totalization agreements change these rules, specifying that the employer only pays social security tax to the country where the work was done (with exceptions for temporary assignments). So US citizens working abroad for a foreign employer never have US social security deducted from their salary, and they don’t have to pay it themselves. In fact, it’s not even possible for them to do so, even if they wanted, because only employers can pay US social security (both the employer and employee parts).
For self-employment, the rules are the same, but considering that the person is also the employer, and US citizens are considered US employers. Therefore, US citizens are subject to US self-employment tax on work done abroad by themselves, in a country without a totalization agreement.
Yes, self-employed USPs abroad must pay S.S. and Medicare contributions, unless there is a totalization agreement AND they are paying into that S.S. plan in their country of residence. Here in Germany, for instance, self-employed do not have to pay into the govt. plan, so a USP can choose whether to pay into S.S. or (voluntarily) into the German plan.
Also note that when paying into S.S. quarterly advance estimated payments are required!
Thanks for the additional comment on this, notamused. It will help clarify for affected persons reading here.
Thanks, Shadow Raider.
Then, the form that CanuckDoc filed would have resulted from a totalization agreement that Canada has with the US for recognizing contributions to Canada. That Canadian contribution was made by CanuckDoc and recognized by filling out the specific form — which I hope everyone knows about. Thanks, too, for your comment here which will help the self-employed among those US Persons Abroad.