As part of their newly-published paper on “Options for Reducing the Deficit“, the Congressional Budget Office has suggested, as Option 12 (at page 130), to “Include All Income That U.S. Citizens Earn Abroad in Taxable Income” — in other words, to eliminate the Foreign Earned Income Exclusion and Foreign Housing Deduction. They estimate that this would bring in US$33.3 billion over the next five years, and US$88.5 billion by 2023 — roughly an order of magnitude more than the US$8.7 billion that FATCA is expected to reap in the course of a decade.
This is the third proposal this year to eliminate the FEIE. Eight months ago, the Congressional Progressive Caucus derided the FEIE as the “Foreign Earned Income Loophole” and claimed that eliminating it would raise US$71 billion over ten years (not clear whether they include the FHD in that number). Days before that, when Dennis Ross (R-FL) presented his own hilariously hypocritical plan to kill the FEIE so that corporations could enjoy territorial taxation, the Joint Committee on Taxation estimated that cutting both the FEIE and the FHD would raise US$36.3 billion over five years. CBO states that they are are using the JCT’s new estimates as updated for 2014.
As previously pointed out, the JCT estimates seem to assume that the “cost” of the FEIE is the foregone tax on all of the excluded income by U.S. Persons who file form 2555 — 415,519 excluding an average of $62,147 each, according to 2010 data — when in reality, if the FEIE were eliminated, many of them would simply switch to using the more-complicated Foreign Tax Credit, incurring higher tax preparation costs, but offering no corresponding benefit to the U.S. Treasury. Bizarrely, CBO acknowledges this prospect in their report, but doesn’t adjust their estimates to account for it:
U.S. citizens who live in other countries must file an individual U.S. tax return each year, but several provisions of the tax code reduce their U.S. tax liability. First, those citizens may exclude from taxation some of the income they earn abroad: up to $97,600 for single filers and up to $195,200 for joint filers in calendar year 2013. (Those amounts are adjusted, or indexed, for inflation.) Second, under certain circumstances, U.S. citizens living abroad can also claim an exclusion or deduction for any allowance their employers provide for housing in a foreign country. Those two tax provisions—combined with the personal exemptions and deductions available to taxpayers living in either the United States or other countries—mean that U.S. citizens who reside abroad and earn over $100,000 (or, in the case of married U.S. citizens living abroad, over $200,000) may not incur any U.S. income tax liability, even if they pay no taxes to the country in which they live. Third, if those citizens pay taxes to the country in which they live, they can receive a credit on their U.S. taxes for foreign taxes paid on any income above the U.S. exclusion amount. As a result, most U.S. tax filers who live abroad do not have any U.S. tax liability.
This option would retain the credit for taxes paid to foreign governments but would require U.S. citizens living overseas to include all of the income they earned abroad, including housing allowances, in their adjusted gross income. (Adjusted gross income includes income from all sources not specifically excluded by the tax code, minus certain deductions.) As a result, U.S. citizens living in countries with lower tax rates than those in the United States would tend to owe more—and, in some cases, potentially much more—in U.S. taxes than under current law, while U.S. citizens residing in countries with higher tax rates would generally continue not to owe U.S. taxes on their earned income. The staff of the Joint Committee on Taxation estimates that implementing such a change would increase revenues by $89 billion over the 2014–2023 period.
(Of course, there are far more than 415,519 Americans residing abroad, but contrary to the assumptions behind FATCA and similar laws, no one actually knows if these non-filers are earning much income at all, nor what portion of them live in low-tax countries and what portion live in high-tax countries. If non-filers are on average more like average residents of their countries, and are living in the more typical destinations for Americans abroad such as Canada, Mexico, and Western Europe — and less like the Middle East corporate assignees with Big 4 assistance who are the most likely to be aware of their U.S. filing requirements — then the U.S. is going to find very slim pickings from the pockets of its newly FEIE-less diaspora, especially in comparison to the cost of hunting down all these non-filers and processing their paperwork.)
The Congressional Budget Office goes on to demonstrate that — like far too many Homelanders — they do not understand the difference between moving overseas and renouncing citizenship:
One rationale for eliminating the partial exclusion for foreign earnings is related to a certain concept of equity—that U.S. citizens with comparable income should incur similar tax liabilities, regardless of where they live. Under the option, people could not move to low-tax foreign countries to escape U.S. tax liability while retaining the benefits of U.S. citizenship. (To discourage U.S. citizens from moving abroad to avoid taxes, the Heroes Earnings Assistance and Relief Tax Act of 2008 instituted a significant “expatriation tax” on the net worth of wealthy taxpayers who renounce their U.S. citizenship for any reason.)
As repeatedly noted by Brockers, this “expatriation tax” applies not just to “wealthy taxpayers” but anyone who cannot certify under penalty of perjury on Form 8854 that they filed every single one of the ridiculous paperwork messes the Homeland imposes on Americans abroad in the name of “horizontal equity”. And it is already the case under current law that people cannot “escape U.S. tax liability while retaining the benefits of U.S. citizenship” — if you live in a foreign country and receive unemployment or disability payments from them (funded out of high taxes you paid in prior years), the U.S. considers that “unearned income” and taxes you on it without any FEIE.
On the bright side, unlike every time they previously brought up the FEIE, at least Congress admits:
However, the United States is the only member of the Organisation for Economic Co-operation and Development that taxes the income of its citizens on a worldwide basis; therefore, eliminating the exemption for income earned abroad would move the United States further out of alignment with the rest of the world in terms of the tax treatment of foreign-earned income. Another argument for not making this change is that U.S. citizens who live in other countries do not receive all of the same services from the U.S. government that are available domestically, and they may receive fewer services from the low-tax countries in which they reside.
The fact that they point this out at all is a certain measure of progress compared to last year, and is doubtless in no small part thanks to Shadow Raider’s ongoing efforts to educate Congressional staffers on the uniqueness of the U.S.’ system of citizenship-based taxation.
Well, the sooner they get this exclusion eliminated the better, as that will assure that the only Americans abroad are short term tourist and soldiers. Americans will be safer that way and the amount of passport renewal caseload will diminish saving more money. Great idea. Win win. Come home to the motherland dear expat and get on the government teat with everyone else, or just willingly pay a LOT more tax to support those that are living there and signing up for ObamaCare subsidies. It is the patriotic thing to do.
All they’re worried about is moving “further out of alignment with the rest of the world in terms of the tax treatment of foreign-earned income”, when a move to RBT would make all of this a non-issue. They keep trying to make the unworkable work, and add oil to America’s diaspora destroying machine.
My guess is that we might see some change sometime next year, depending on how Americans abroad are going to organize and complain, when hundred of thousands non filers are going to be reported by the countries who already signed IGAs.
I really wonder how they’ll react: Ignore the letters from the IRS and not go back to the US? Rush to the consulates/embassies to renounce? Protest in front of them?
Depending on their reaction, we might see a change towards RBT.
This is not good for individuals with disabilities in Canada. They are allowed an additional tax credit of approximately $7000 on top of the (not sure what it is exactly), say $11,000 basic exemption. That means the first $18,000 of an individual with disabilities income in Canada would go virtually untaxed by the Canadian federal government. This tax credit is designed to lend a helping hand to Canadians in need. Without the FEIE, any taxes they save in Canada on their earned income would go directly to the IRS.
This means that disabled Canadian citizens who are also “US persons” would not be allowed to take advantage of the benefits designed to help them!!!!!
@To all, I am optimistic that ultimately, the US will move towards RBT. The snow ball effect…;)
How can one be optimistic when congress is continuing to try to push this through- repeatedly- and the US debt is rising by millions every hour? Things are getting worse, not better. And America is still searching for ways to solve the debt problem elsewhere, without having to burdon homelanders too much.
One more reason for those who can, to renounce or relinquish their US citizenship, if they’re planning on spending the rest of their lives living outside the US, where they are now. If this goes through, and if the US continues to cling to citizenship-based taxation, the only affordable choices for US expats will be to give up their lives where they now live and move back to the US, or to ditch their US citizenship and commit fully and solely to living where they now live. There won’t be any middle ground, except for the ueber-rich and the very-well connected.
The real problem remains for “accidental” (I prefer “involuntary”) Americans who had the horrible misfortune of being born in the US but never have spent a day of their adult lives living, studying or working in the US, and being claimed as US tax slaves by the IRS and outed by the banks and our government if an IGA is signed. Particularly given the draconian tax-filing and penalty implications for renouncing something you never asserted and never thought you had in the first place, never mind ever wanted. This whole thing is utterly medieval and unworthy of a country that claims to be the land of the free, the home of the brave, and the shining city on the hill. Which is (and likely has always been, or for quite some time now) utter BS, but is now painfully obvious to all who are aware of this situation.
I am worried by the prospect of the change described on page 126. The inclusion of growth of life insurance in taxable income. This could well cause my wife’s UK endowment mortgage to start hitting the PFIC rubbish.
Currently it being tax free protects us from this and we can’t do anything with it until 2018. Being US persons means the company pretty much refuses to do anything but tell use the payout is in 2018.
Of course it depends on how they do it.
Some of the stuff in the list has no chance of passing. For example raising the corporate tax rate when even Obama wants to lower it.
Wow, seems to be going from bad to worse. So glad I signed off on my relinquishment a few days ago, expats now have no choice but to break free from this insanity and never look back.
“U.S. citizens who live in other countries do not receive all of the same services from the U.S. government that are available domestically, and they may receive fewer services from the low-tax countries in which they reside.”
At least somebody in congress is starting to get it. Taxation without representation or access to public goods and services is just plain tyranny.
Keep up the good fight ShadowRaider!
@schubert1975
i agree. It is absolutely perfidious.
After WW2, America was booming BECAUSE Germany and Japan were in ashes. There was no competition. So everybody bought american cars and tvs. Now America has to face up to the fact that there is strong competition, and it must change at the roots to be able to compete and export their products.
Killing off all the expats is not the way to help exports. But if one continues to feel omnipotent, then internal change wont be an option – finding ways to collect money from others will.
It is absolutely horrific that somebody who sits in Washington DC can sit down and make a law saying ” We are going to take this and then we are going to take that from expats and as our scapegoats they deserve to be punished” and there is nobody to contradict them. Its like being left at their mercy: will they be benevolent towards expats or not? Should we say pretty please or beg? We have no say whatsoever in their decisions over the fate of expats altogether. Who really wants to remain in such a precarious situation? To be left at the whim of others?
Someone in DC is dying for the Bluebooks to continue to be handed in. Insanity.
The Foreign Earned Income Exclusion is the only life preserver expats have.
Some (most) of the boneheads in Congress just can’t control themselves in thinking up new ways to screw expats.
They dont care. They just dont care. They are drowning and they couldnt give a hoot where the money comes from.
The only thing that could matter is if Canada realizes what a HUGE chunk of tax revenue they are handing over to America and how seriously this will impact their own treasury. I`m thinking Canada can wave all its social services good bye if they let America reep the benefits of such a large portion of their population.
“The staff of the Joint Committee on Taxation estimates that implementing such a change would increase revenues by $89 billion over the 2014–2023 period.”
I’ve said it before, but my estimate is that it would raise $450 a head. Once. Then no more forever.
I’m so happy I’m waiting for my CLN but am worried for my children – I don’t know how long it will take for them to wake up to what’s going on.
@schubert, you talk about involuntary Americans who had the bad fortune to be born there. What about people like my children, who have never spent a moment of their life inside the US and can’t comprehend that this might affect them in any way? They are exposed merely because of the citizenship of their parents.
I agree that those that don’t renounce will just use the foreign tax income exclusion (which I
dodid already, living in a high tax country. Or rather my accountant does it, I look at the calculations and can’t make head nor tail of them.@shunrata
I didn’t mention those born in Canada (or in another country) of US parents, because unless they’ve taken out US passports as adults or in some other way exercised US citizenship, I don’t see how the US can identify them. Their birthplaces are foreign (to the US), their passports are foreign (to the US), their passports only show their birthplace and not that of their parents, and their banks have no way of knowing where their parents were born. And if you think there will be outrage and charter challenges in Canada if banks start asking people for birthplaces, you haven’t seen anything yet, if they try to ask for parental birthplaces. That gets squarely into the discrimination pioneered by the Nazis in their Nuremburg laws of 1933, where Jewish parentage or grand-parentage even got you tagged as less-than-German and singled out for discrimination and (later) worse things. I can’t believe any country, never mind Canada, would permit that.
Some parents years ago may have registered their children at birth with a US consulate, but as far as I know, that was to give parents a piece of paper that would make it easier for the kids to assert US citizenship as adults (without having to get a copy of the parents’ birth certificates). I doubt very much that State Department has a computerized database of those registrations, never mind any legal authority to share that with IRS or banks, never mind any interest in playing that game. Nor do I believe that any Canadian court would uphold any claim against such persons who were born Canadian citizens on Canadian soil and have never had anything to do with the US. Effectively those folks can fly safely “under the radar,” as long as they don’t cross the border in the company of their parents (whereupon a border guard might connect the dots and record something on their computer system), as far as I can see anyway.
Those folks are at very low risk, if any. It’s the ones with the US birthplace that are going to have a problem, if the banks ask for a passport or a birth certificate. Also when crossing the US border on a non-US passport showing a US birthplace, absent a CLN to accompany it, they may be a problem.
Anyone who in spite of the above has asserted or claimed US citizenship, though, is going to have a problem, but it’s the same problem as folks born in the US at that point. At this stage I don’t see any need for anyone born in Canada of US parents to get a CLN, unless they have as adults had a US passport, green card, or have ever filed tax returns to the IRS.
But I’m not a lawyer, this isn’t legal advice, and if in doubt, suggest your kids get legal advice if they’re adults.
And for your kids’ sake, don’t register them with the US, if you haven’t already. Don’t go there, and urge them not to go there either.
…or hold any accounts in trust for them, previously identified in a US FBAR.
Isn’t that highly discriminatory that the US would not enforce that all US citizens be discriminated against?
I predict that if passed, The follow on result of that added tax will be lots more renouncements of American citizenship. They when they see they are losing tax revenue due to renouncements of citizenship they will crack down and make it much harder or nearly impossible to renounce US citizenship.
@yitzi,
That would be a clear violation of Article 15 of the Universal Declaration of Human Rights and would set the grounds for a very clear lawsuit against the US government.
US Tax Law is already a violation of Article 13 of the Universal Declaration of Human Rights. Hence, when renouncing, all should declare that they are doing so on humanitarian grounds.
@ Schweiz-Amerikaner
The Americans have no interest in violations of human rights except for when it suits them. Witness the human rights of those whom the Americans choose to make drone strikes on, or declaring war against in the name of going after weapons of mass destructions that don’t exist.
No governmental body in the world stands up to the violations made by the Americans against people who are not it’s citizens so how much less will anyone complain of violations on American Citizens?
@schubert
When my children were born in the 70’s and 80’s we registered them at the embassy, no one dreamed that being a US citizen would ever have such negative ramifications. They were born in and are natural citizens of a country with a lousy passport, so they have all used US passports for travel.
My son took out a loan for his business, they asked him if he is a US citizen and had him sign a W-9. The banks have anyone opening an account sign that they are not US citizens, or W-9 again.
They are not big fish, especially at this stage in their lives. However, they will show up on the IRS radar at some point, if this insanity continues. They’ve never filed US tax returns and think I’m a little nuts if I talk to them about it.
It’s estimated there are a few hundred thousand US citizens living in Israel, and as far as I can tell the vast majority of them aren’t paying attention to this issue at all, or are even aware of it. I know people of my age group who file – these are people who grew up in the US and moved as adults – but don’t know of a single one of their locally born children who has.
I would love it if somehow the US govt would go over to RBT, or they would decide to stop thinking expats are going to solve all their financial problems, and my kids could live peaceful lives and conclude that their mother was just weird all the time for worrying about it. It’s a case where I would be very happy to be wrong!
Many cannot wait for RBT if it ever comes to be implemented.
I too think they will make it harder to renounce/relinquish. They’ll never admit FATCA “is a bad law” as was said on the CBC program. Never. They will continue to slam and demean expats for a very long time. I cannot see that changing. If you can get out, I’d say get out now. They don’t want us as their citizens anyway unless it’s to fine and fee to death and our children too. Anything you’ve ever done for them is utterly ignored and will continue to be. For those who cannot get out, I have the deepest empathy.
There’s just no good reason for a long term expat to keep their citizenship anymore.
RBT is never going to happen. Never.
Imagine a bank with its doors wide open, and all you have to do is stroll inside and help yourself. And no police, no law, nobody there to stop you. You can just serve yourself and take it- and if it is not enough you can simply demand more with nobody to stop you.