Tuesday, February 8, 2011

The Dilemma of our Daughter's Citizenship

A question for parents: imagine for your newborn child you're informed that you have the right to choose a potential of lifetime debt for your child in order to give her some benefits she may never enjoy. Would you do this? Would you do this if you found out that she can choose that lifetime of debt for herself when she's 18? Phrased like this, of course you wouldn't, but it's exactly the dilemma I'm facing now and it's the sort of dilemma parent's should never have to face.

As you no doubt know (assuming you read this blog), I am an American, my wife is French, and our daughter was born Saturday morning here in Amsterdam. Yesterday I registered our daughter's birth with Statsdeel West and our daughter now has an international birth certificate. If we remain in the Netherlands until she's 18, she may choose Dutch citizenship if she wishes. She automatically has French citizenship (via my wife) and I was told I have to register her birth with the US consulate and this registration will automatically give her US citizenship. That's where the problem arises. Update: it turns out that under US law, my daughter is automatically a US citizen. The question is actually whether or not I should register her and alert the US authorities to her existence.

The US is in dubious company here
Photo by http://www.kremlin.ru/
As I've pointed out previously in this blog, the practice of taxing citizens abroad is rare. In fact, it's rare enough that I've yet to see evidence that any country other than the United States does this. I hear conflicting reports of which countries do and do not tax citizens abroad. Aside from the US, the only country which is consistently mentioned is North Korea, but there is never a source. In fact, I cannot find any information linking back to source material to prove which countries do and do not tax citizens abroad. The short list of possible candidates appear to be:
  • North Korea
  • Libya
  • Eritrea
  • The Philippines
  • The former USSR
All things considered, that's a pretty sad list of countries to be in bed with. Not that I expect international tax experts to read this blog, but if anyone can provide any confirmation regarding which countries do and do not tax citizens abroad, I'd be most grateful. The closest authoritative source I've seen is an article from the Economist which states "Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live." Of course, they offer no source, either.

But getting back to the issue at hand, I've been reading quite a bit to find out if IRS international tax requirements apply to my daughter. Given that I can find no exemption whatsoever for my daughter's situation, should I choose her citizenship for her or should I let her choose it when she's 18? I live in Europe now and have no intention of moving back to the US, so that's not an issue while she's living with us, but by the time she's an adult, I've no idea how the law might change.

Tax Forms
She didn't ask for this
Photo by KOMUnews
Further, it turns out that the financial exemptions that citizens abroad receive on their US taxes only applies to earned income. Any "unearned" income can be taxed at the full rate, unless the US has a tax treaty with the country she resides in. She may be even be able to escape this by retaining her French citizenship and relinquishing her US citizenship because the US claims the right to potentially tax her for up to 10 years after giving up her citizenship the expatriation tax. As far as I know, the US is the only country which tries to impose income tax on foreigners living in other countries.

For those who think I'm worrying about nothing, not only did I previously mention a UK gentleman I know who discovered that he owes a huge amount of money to the US government because he happens to be a US citizen (apparently his father registered him at the US embassy after he was born, the same situation I'm facing). I'm also discovering that others are finding themselves in the same predicament.

Of course I want my daughter to have US citizenship, but do I really want to burden her with a tax obligation to a country she won't be raised in and may never live or work in?
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