Americans abroad treated like US income tax cheats according to Bloomberg. The U.S. is unique in the way it taxes citizens working abroad. Its system is extremely bad for Americans living abroad.
An estimated 9 million American citizens living outside the U.S. face a us income tax nightmare those at home can’t imagine and none should ever suffer. The reason: The U.S. is one of only two countries in the world (the other is Eritrea) that taxes its citizens regardless of where they live.
American expats don’t necessarily owe the U.S. any tax: They can deduct taxes paid to host countries, which are often higher, or take an exemption. But they have to file returns and disclosures regardless, at a significant cost in accounting fees, nuisance and needless anxiety.
Draconian penalties for Americans living abroad
The rules are often unclear, and foreign employers and financial institutions don’t report the numbers in the way the Internal Revenue Service prefers. The penalties for even innocent mistakes can be draconian. The U.S. proceeds as though any citizen with a foreign bank account were a likely tax evader or money launderer.
Citizens with foreign assets must disclose them not only to the IRS but also to the Financial Crimes Enforcement Network.
Surprisingly enough, people who live and work abroad tend to acquire other overseas assets along the way. The IRS sees a plain-vanilla European mutual fund, for example, as a “passive foreign investment company,” and requires disclosures that are Kafkaesque.
The Obama-era Foreign Account Tax Compliance Act made things worse. It threatens foreign banks with drastic penalties if they fail to provide information on customers who are “U.S. persons” (citizens or green-card holders). As a result, many financial institutions simply refuse to serve Americans at all.
Owing to the original sin of citizen-based taxation, moreover, every tweak to American tax law seems to exacerbate the problem. President Donald Trump’s reform of 2017 added rules aimed at the overseas profits of U.S. companies.
The IRS now treats the American owner of a lemonade stand in Belgium like Google, forcing them to declare a new kind of income known as GILTI.
The original targets of this harsh regime were rich Americans living in the U.S. and stashing money in hidden offshore accounts. But hardened tax cheats developed new evasion strategies long ago.
Americans abroad victims of US income tax law
The victims are Americans citizens living abroad with ordinary incomes and no special tax expertise.
Americans living abroad include:
- “accidental Americans” who aren’t even aware of the rules — children born in the U.S. while their foreign parents happened to be visiting, for instance
- or people born and living abroad whose fathers were U.S. soldiers.
U.S. expats renounce their citizenship
Some U.S. expats renounce their citizenship, but few want to cut ties to their country, and for most the cost is prohibitive in any case. They should never be made to feel that it’s necessary.
At a minimum, the U.S. should simplify the rules for its expats and raise the balance thresholds so middle-income filers are exempt. But the best solution would be even simpler: Follow the example set by almost every other economy and base the personal us income tax on residency, not citizenship.
Americans Overseas helps Americans abroad with US income tax
We, the founders of Americans Overseas, were born in the Netherlands and obtained our American nationality through our (American) mother.
When we heard about the US tax system for the first time around 2013, we were in total disbelief (it can’t be true!), anger (how can they do this?), fear (am I going to get fines or pick up other problems?), and panic (what should I do?). It is (unfortunately) true that there is an additional American tax levy. But there’s no information from local government, and when approached, the consulate referred us to the IRS, and the IRS was impenetrable.
That’s why we started this initiative to help people from all over the world by providing proper information about the US tax system to avoid unnecessary panic, and offering help free of obligation and free of charge. If needed, we have a network of affordable professionals (accountants) who can help you with your tax obligations.
If you have more questions about the new relief program for America’s tax compliance law you can contact us at Americans Overseas.