House Ways and Means Committee Discussing Tax Reform at Full Speed Now

56 thoughts on “House Ways and Means Committee Discussing Tax Reform at Full Speed Now”

1. 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;
   522
   • 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.

2. 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?

   I am self employed in Canada, but was able to opt out because the very first accountant I talked to when all this “stuff” started happening gave me a document that affirms, with the appropriate documentation, that I am covered by the Canadian equivalent. I just file it, changing the date, every year with my tax form and so far nobody has complained.

   This comment appeared at http://www.mainstreet.com/article/smart-spending/financial-considerations-expats?page=5.

   One point about individual taxation that is not stated in this article. If you are a US citizen working overseas for a business that is not employing you on a US company expatriate assignment where the company is responsible for your USA payroll taxes, you will probably have to pay Social Security and Medicare taxes yourself. That means paying both the employer and employee portions. Even though you may be able to exclude the first $97,600 plus approved housing costs from income subject to US income taxes, the exclusion for payroll taxes is 0. So that means you will pay payroll taxes of 15.3% on the first $117,000 of income and 2.9% on everything over $117,000. The tax rate could be a bit less if you are treated as being self-employed and are able to take a business deduction for what is normally the employer share of the taxes.

   About the only way out of this legally is if the country where you are living and working has a national retirement program that is accepted by the IRS through a treaty arrangement and you are actually making contributions to that program based on your earnings in that country. Even if you have a non-USA retirement program in the country where you live, if it isn’t one that is accepted by the IRS, you will still have to pay USA Social Security and Medicare payroll tax.

   Now, if you are not reporting your foreign income or your income is below the exclusion limit and you decide not to pay the Social Security and Medicare taxes either, then you won’t pay any US taxes. However, that is a high risk action, especially with the FACTA reporting requirements that give the US government information that would allow them to get access your foreign banking records. The penalties for failing to comply with FACTA are significant. The failure to pay US payroll taxes is even worse: jail time, criminal fines, repayment of the payroll taxes that should have been reported, plus tax compliance failure penalties up to 3X the original payroll taxes that should have been paid and interest on everything. And, if you don’t report, there is no statute of limitations on the US government’s ability to go after you, because you have essentially committed fraud and there is no statute of limitations on tax fraud.

   As the article points out, if you are planning to work overseas, you should get tax advice from a good tax lawyer or accountant who knows the tax regulations in both the USA and the country where you live. If you will be working of foreign assignment by a USA company, the company will probably take care of that for you, although you should remember that any actions the company takes on your taxes are designed to protect the company, not to protect you. If you will have your own business or work for a non-US company, then you have to get the tax advice on your own. One caution – If the person you contact recommends anything at all that seems to be not completely legal, find another advisor immediately. In the USA, if you get advice from a competent, authorized tax lawyer, accountant, or enrolled agent and the advice turns out to be wrong, you may be able to avoid some penalties or be able to get the advisor to pay the penalties. If you take bad tax advice from a lawyer or accountant in another country, you don’t have those protections. The IRS will come after you and only you for all taxes, fines, penalties, and interest.

3. @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.

4. @calgary411
   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!

5. Thanks for the additional comment on this, notamused. It will help clarify for affected persons reading here.

6. 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.