NYT has an article noting that a sizable number of people every year give up their US citizenship for tax reasons. It seems like they are focused on Americans living in Europe, but I have met a few people in Japan who have at least considered this option. It does seem odd that the US is one of the few countries that tries to tax income earned abroad.
21 thoughts on “NYT on American expats renouncing citizenship”
This mirrors a very similar Time article from five days earlier.
I was resigned to filing Federal returns, especially since I never make enough to actually owe anything after the foreign income exclusion. But the FBAR and its newly stepped-up enforcement is far worse (if you have US$10k or more, in aggregate, outside the US you have to file a report separate from your normal tax return), especially since it seems most people haven’t even heard about it. I just found out myself in the Time article, and now I’m scrambling to figure out what to do.
Canada requires that you pay any income tax due minus what you paid in your local (country of residence) taxes unless you go through the process of declaring yourself a non-resident of Canada. I went through the process 10 or 12 years ago. If you don’t do it officially, you could be in for a big taxy surprise upon your return to Canada after living abroad. It wasn’t all that bad a process but you had to show that you had severed most connections to Canada and make a statement justifying any remaining connections (family, citizenship, bank loans, etc).
A lot of expatriation because of “inconvenience” is really tax dodging. Americans abroad here these stories coming from other country’s expats about how they don’t have to declare their earnings, and so Americans get it in their heads that that’s a wonderful tax dodge.
For the vast majority of overseas Americans, the $91,400 Foreign Earned Income Exclusion or FEIE (amount for single person) that covers their earnings. There is also a Foreign Housing Exclusion and a Foreign Tax Credit system for amounts that aren’t excluded. The exlcusion means you can subtract the income from your gross income for tax purposes. The credit means that if you paid tax on a dollar (dollar-equivalent) of income in your foreign country of residence, then you can use that money as an offset to the U.S. tax bill.
YOU HAVE TO FILE TO CLAIM THE EXCLUSION. This is the part that a lot of expats seem to miss, and I’m not sure why their ears work the way they do. (Or eyes, if it’s reading.) So they go around saying, “if you make under $80,000, you don’t have to file!” which is exactly wrong.
The group in Switzerland has a pretty strong presence on the internet, so it’s no surprise that Time and the New York Times picked them up for a story. Swtizerland is also the place where a lot of American tax cheating has occurred (UBS scandal as #1 in the news in recent times). So I imagine that few of the banks want to deal with Americans because one of their larger brethren banks was essentially a Swiss criminal syndicate operating in America.
Frodis mentions that Canada has a form to file to declare non-residency, or else Canada expects the difference in taxes to be paid upon return to Canada. (So that is, a Foreign Tax Credit.) I see this as materially no different than having to file, essentially, a “zero” return in the States in order to get the FEIE.
The F-BAR form is a different story, because a lot of people get caught unawares. They really need to walk that one back and think about how it can be modified so as to go after deliberate tax cheats and the drug money.
Australia also requires people to pay taxes if they live abroad if the catch on to you. My boss is Australian and won’t put money in a bank in his home country because any interest he generates there will draw attention to his not filing tax forms then he’ll have to deal with paying taxes (or at least filing) from here.
Americans have to make an awful lot over here to have to actually pay taxes (over $91,000 – possibly a shade more). Most of us don’t pay because of the foreign-income exclusion. We just have to fill out a form (which isn’t that hard) once a year. Big deal. It’s certainly not worth renouncing citizenship.
I don’t have a lot of sympathy for people who renounce citizenship PURELY as a tax dodge, but on the other hand, I do understand the argument of saying “I’m an immigrant to XXXXX, I’ve taken citizenship over here, I don’t plan to go back to the US, so why not just cut my ties, and stop having to deal with the IRS as a bonus?”
One thing that I REALLY wish both the Time and Times articles made clear is that you have to be a dual citizen to give up your US citizenship! You can’t declare yourself stateless – and as I understand it, if you even try to do so, the declaration is legally null and has no effect.
One other thing to remember is that US law does give immigration the right to refuse entry to persons judged to have renounced their US citizenship in order to avoid taxes. This is allegedly never enforced, but the fact that it CAN be is worth considering.
One last thing, the woman in the article who said “It’s taxation without representation.”
Does she not realize that there’s this system called “absentee voting” that allows expats to vote by mail? Geez. If we’re going to talk about “taxation without representation” how about the hundreds of thousands of DC natives who have to pay FULL taxes and still can’t vote in any congressional elections? (And to a lesser degree, the millions of Puerto Rico natives, although Puerto Rico residents aren’t subject to federal income tax.) I find that many times more offensive than some whiny rich expat having to go through a little extra paperwork to vote in their former district back in the US.
Australians only have to pay tax on foreign earned income if they are a “resident” of Australia. If an Australian lives outside of Australia for two years, they are not considered a resident for tax purposes.
However, any income, including bank interest, earned within Australia is taxable. Which is probably what is driving Orchid’s boss to keep his money in Japan. If he has been out of Australia for two years or more, they won’t touch his income earned in Japan.
But back to the topic at hand – renouncing citizenship solely to avoid having to file a form with the IRS is a bit much. On the other hand, I have never understood the logic of having to declare your income and assets to the US government if 100% of both are earned or maintained outside the US by someone who is resident in the country where they earned or keep that income or those assets, simply because the individual is a US citizen. If one is living overseas and maintains bank accounts, IRAs, property or what-have-you in the States then yes, that is income earned within the US and should be taxable by the US. But anything earned overseas – within FEIE limits or not, it is none of the US government’s business. And if you are married to a national of your country of residence, you’re apparently supposed to register them with the US government and get a taxpayer ID for them even if you file as “married filing separately”.
And if you win the lottery while overseas (or are just good at hoarding wealth), and then die, your non-American spouse is liable for US inheritance tax. Say what?
Basically, I guess I agree with Roy – if someone has permanently moved overseas, taken citizenship and settled down, and feels there is no benefit to maintaining US citizenship then more power to them.
LB, in defense of the US government – they will still kick some ass on your behalf.
@M-Bone – yes, but only if the US government decides it is in its own interests to do so. If not, fuggedaboutit. And they will also kick ass even if it is not in most people’s interests to do so.
To paraphrase a quote we used at times when I was in the Corps (about the Corps, originally): the government is like a giant fan. Stand behind it, it sucks. Stand in front of it, it blows. Stand beside it, and it doesn’t do a G-D thing for you.
Do other countries use the US system where taxpayers file with the government and self-declare what their taxable income is, subject to an audit? I had the impression that this system was fairly unique and could be the problem.
Given that the US requires people to declare their income to the IRS, I don’t see any way around requiring citizens living abroad to do this, especially if they might have income actually earned in the US through mutual funds and the like. I agree completely that the US should not tax the wages of one of its citizens who works in a salaried position in a private, non-US firm in another country. But I don’t see anyway to drop the requirement for this person to at least file, given the possibility that he may have some US generated income as well.
Ed: Well, Japan and the UK as the two examples I’m familiar with. (If you’re employed by a company, you generally don’t have to file, but I’ve been self-employed in both countries.) And the UK doesn’t require citizens abroad to pay taxes, or file. I’m registered with the UK tax people as resident overseas, because I pay my Type 2 NI contributions (that’s about 300 yen per week), to maintain my entitlement to a UK pension, unless the rules change, and I don’t need to file anything. I could, if I wanted to claim back the withholding tax on my UK bank account interest, but it’s really, really not worth it. Even the NI contributions are voluntary, but I think they’re worth it, since I might go back to the UK.
Canada, like the United States, relies on self-declared earnings information for tax purposes as well.
The idea of the voluntary system of tax assessment, the self-reporting, is so that you don’t have a government agency assessing income tax on you.
America of course has mandatory wage withholding, but this is not the same as an assessment.
I would much rather have the voluntary system rather than have a government agent deciding first-hand how much money I had made. Things are much better under the current system, where they get the second crack.
The trouble the expats are making with both non-filing and giving up citizenship for tax reasons, is that they are making it difficult for all the rest of us in that inevitable day when people back home start politicizing the issue. There are already proposals to screw around with the Section 911 (Foreign Earned Income Exclusion) again. And I can only imagine what new things Congress or an administrative bureaucracy will dream up. Maybe having to report income within so many months or returning to America, regardless if you filed over the years or not.
Yes, banking is a problem. Dealing with auto insurers for a car back home can be. Or getting a drivers license if you are only a domiciliary of a state. Plus people back home confuse NON-RESIDENT ALIENS (that is, resident aliens, green card holders, who are temporarily, but not indefinitely, overseas) with U.S. CITIZENS who are overseas. That one I can never figure out.
For me, I can’t see how I could be anything but an American. They’d have to pull that passport off me from my cold, dead hand.
The trouble the expats are making with both non-filing and giving up citizenship for tax reasons, is that they are making it difficult for all the rest of us in that inevitable day when people back home start politicizing the issue. There are already proposals to screw around with the Section 911 (Foreign Earned Income Exclusion) again.”
What proposal are you talking about? I’m not sure exactly what you mean. I kind of wonder how politicized this issue could really get, considering the US is already in the vast minority of countries that do tax expats. On the other hand, tax evasion by wealthy US citizens who aren’t really expats (i.e. they don’t really spend enough days out of the year outside of the country to legally qualify as an expat), but just pretending to be does seem to have become a minor controversy in recent years.
What proposal are you talking about?
Well, Roy, for example, the Wyden-Gregg bill, which is already getting some press attention as a bipartisan tax reform bill.
I leave it to the reader to do the deeper research, but if you visit Senator Wyden’s site: http://wyden.senate.gov/issues/Legislation/wyden-gregg/index.cfm , what the reader would find is that part of the “simplification” involves repealing Section 911 (the Foreign Earned Income Exclusion) and making expats solely rely on the Foreign Tax Credit.
The problem for American Japan expats would be that the tax credit is not as favorable in low income brackets than the income exlcusion. The Foreign Tax Credit (Section 901) does not let you claim a credit for such things as:
1) the 5% consumption tax here, used to raise national revenue
2) the pension, which under Shakai Hoken is substantially based on income
3) health insurance payments, which are mandatory and substantially based on income.
So what happens if Section 911 (the Foreign Earned Income Exclusion) goes away, you have to rely on a credit just for the small amount of pure national tax that is charged. If it’s less than what the income tax bill would be in America, you have to pay the difference.
Since Japan’s tax income tax rates for just the national tax are more sharply progressive than in America, it means that a lot of Eikaiwa teachers here, for example, would also end up with a bill to Uncle Sammy. Just because some Senator doesn’t understand that taxes affect relative prices.
Threats to Section 911 are very real. In the Carter Administration, Congress screwed around with it, by creating a new Section 913 that tried to equalize the tax difference depending on each and every foreign country. It was a disaster.
So the best thing is simply to keep Section 911. But like I say, there are always these proposals to do away with the exemption. If the 4,000,000 eligible people filed with it, rather than the mere 300,000 or so, they’d be less tempted to screw with it.
[One correction: I’m sure you meant to type “tries to tax FOREIGN income earned WHILE LIVING abroad”. In many countries (including Japan *), all income earned, foreign or domestic, is taxable if you’re a resident.]
Not sure if 500 people a quarter counts as a “sizable number.”
Even if we say for argument that all 500 renounced for the purpose of not paying U.S. taxes and we’re labeling them (again, for sake of argument) tax cheats, when compared with the amount of Americans that cheat on their taxes (estimated to be about 30 to 40% of all 309 million Americans), this seems like a tiny fraction of a drop in the bucket. In reality, the vast majority of those who renounce their U.S. citizenship do so because they have very strong ties to another country. The number of those 500 that are doing so purely for financial motive is very small. This is probably because there’s no guarantee that renouncing your citizenship will get you out of U.S. tax obligations. And anybody that makes enough money that renouncing for financial motive looks like a good trade-off for their U.S. passport is going to be scrutinized very, very carefully by the U.S. during the renunciation process. ** If you aren’t scrutinized by the U.S. and you’re renouncing for mostly tax reasons, it probably means your tax obligations are considered petty by U.S. standards (and you’re an idiot for renouncing).
* Expats living in Japan are on the hook for income earned abroad (be it the United States or anywhere else) after five (non-continuous within a decade) years in Japan (which according to the Japan tax code classifies you as a “permanent resident,” regardless of what your visa status is). More info:
** That overseas embassy (especially the U.S. Embassy in Tokyo) that one’s renouncing their citizenship at always has a few IRS agents stationed, and they get so few renunciation attempts and (rich JP) expats to keep tabs on that I’m sure they’ll have plenty of time to carefully first hand review one’s financial situation overseas.
Eido, I am not sure if the Times or the poster feels the list is substantially, or even a majority, people who have a tax motive. That’s what my worry is when I read one of those MSM pieces—that people back home are going to get the wrong idea.
But I do think that people who talk about “inconvenience” of keeping their American citizenship by-and-large have a money angle.
You are no doubt right that the Federal Register list is overwhelmingly those who feel a greater attachment to the place that they moved to. For example, years back, there were always a sizable number of Japanese names on the list. Presumably, these were Americans born to Japanese parents in America who wanted to claim their right to Japanese citizenship. Since, in principle, Japan wants its citizens to only have one citizenship, this requires the American to give up the American citizenship.
Hoofin: I agree, and I wrote that comment not as a retort to Adamu — as I suspect he’s on the same page as us wrt why most people really renounce their U.S. citizenship.
I suspect that the Times reporter was going for Tea Party eyeballs with that article. It’s tax month in the States & the teabaggers are the meme of the hour, so they know an article that makes people think “Wow, U.S. taxes are so out of control that people are giving up their passports to the number one country in the world!” is going to score some cheap eyeballs.
Slate’s Press Box column did a good job of pointing out how completely BS this article is.
Two main points:
1) an article on the same subject apparently used the SAME anonymous source for a lame quote a couple of years earlier.
2) there isn’t even a trend! The year on year total went up for the past couple of years, but that level of fluctuation is normal, and there were more people giving up their citizenship in the mid-90s!
Liberal good, conservative bad
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