Tuesday, February 14, 2012

The far-reaching damage of Rep. Tierney's bill

Amongst non-expats, there appears to be some misunderstanding about the serious nature of Representative John Tierney's attempt to bankrupt expats.  Expats have first-hand knowledge of the damage this will cause, but Tierney doesn't seem to understand. This is frustrating as hell because I like Tierney. I like his politics and I support many of the causes he stands behind. The problem is that he's dead wrong on this one. I'm hoping he just doesn't understand the full implications of this bill and will change his mind when he does (side note: he opposed SOPA. There's some meta-irony going on here).

Some people are claiming that the US tax treaties will protect us, but they won't. Victoria Ferauge wrote about paying US taxes on a French bought with a French loan and paid for with a French salary and there was no tax treaty or Foreign Earned Income Exemption to protect her.

Many expats live in Argentina
Photo by Pablo D. Flores
But look at that tax treaty list. Count them. Only a third of the countries in the world even have tax treaties with the US. There's actually a decent-sized US expat community in Argentina and you'll note that Argentina is not on the tax treaty list. Americans have a 35% income tax in Argentina. If Tierney's bill passes and they have a modest US income, their tax rate could easily exceed 60%. Tierney will bankrupt them.

But consider a far, far worse scenario: Dubai.

Dubai is an emirate in the United Arab Emirates (UAE). Here are a few interesting facts about them.

So you're in Dubai, you have some debt, Tierney's bill passes and all of a sudden, your income drops dramatically. They take your passport and you are never leaving Dubai. You don't have the option of returning to the US. You can't take citizenship in Dubai to escape the US debt. You're trapped. It's happening in Dubai today; with Tierney's bill, it will only be more frequent (I've read of one couple in Dubai whose children can't go to school because the couple can't afford it but their passports were seized).

Representative Tierney genuinely seems like a nice person, but he's going to hurt Americans the world over with this one.


  1. You'll still be (partly) protected by the US' unilateral foreign tax credit (Internal Revenue Code Section 901). The real kicker for most people is not going to be the actual tax increase, but the increase in tax preparation costs. Instead of using Form 2555 and writing zeroes all the way down their Form 1040, you'll have to figure out your full US taxes like you lived in the US, then use Form 1116 to see what you can offset with foreign taxes already paid. Of course this means the US will not raise anything near $5 billion per year, but tax accountants are going to love it.

    The oil industry is generally a big supporter of the FEIE --- because their American staff are located in countries which get all their money from oil taxes and so have minimal or no income taxes, so they cannot benefit at all from Section 901 foreign tax credits. Unsurprisingly, every so often an opponent of the oil industry comes along to attack the FEIE. I think something similar might be behind Chuck Grassley's hatred of it (he's from Iowa and is a big supporter of subsidies for corn ethanol).

    1. Actually, no you won't. If you read the bill, the foreign tax credit is transformed into a tax deduction. You take the foreign tax off your income and then calculate your US tax on the remainder of your income. So you are fully double taxed with no hope of relief on 70 to 85% of your income. Low income families abroad would be fully taxed by the US since they often pay no local income tax but would probably meet minimum levels for income tax in the US. It is an extremely cruel law.

    2. I am not sure if you are thinking of a different bill. The full text of HR 2495 is here:

      The only provisions of that bill which affect the FTC are in Section 601, regarding "dual-capacity taxpayers" (basically, companies which pay royalties to a foreign government in exchange for the right to extract natural resources). It doesn't have any other provision to transform the FTC into a tax deduction. If you did hear about such a bill please let everyone know because that would REALLY be a disaster.

      Anyway HR 2495 fortunately seems to have been left to die in committee, but Congresscritters have a way of trying to tack their bad ideas on the end of every bill that comes along until they can get them passed by accident (this is how Grassley got "stacking" into TIPRA back in 2006).

  2. Eric - you are absolutely right about the tax accountants. I got a mail a few days ago from mine (very nice lady by the way and I do appreciate her efforts) saying it was tax time and we needed to start preparing NOW. Just lovely. My French spouse actually suggested that just take what she did last year and do it myself. Uh, the problem is that I don't understand what she did and for someone who didn't do anything terribly complicated my tax return for 2010 is a monster - quite thick and full of forms I never even heard of. Really disheartening and it's not going to get better because there is yet another form to added to that 1040. Tierney's bill is just another kick in the teeth.

  3. I notice that the bill was referred to Ways and Means more than seven months ago. Is it still under consideration, or did it die in committee? I would like to know the status before I fire off a letter.

    1. I would very much like to know that myself. It would be a relief to find out it was buried in committee.

  4. It seems that John Tierney still wants to double-tax the working middle class abroad:


    I posted some issues that the American middle class abroad face on his Facebook page, but the posts got deleted and I got blocked from providing him with further updates on the matter. It seems that the individual is rather unfriendly towards the American middle class that found work abroad.

    1. Fortunately, that's the bill I referred to. It looks like it will never get out of committee.