Thursday, April 21, 2011

No taxes, no passport

I know this has been discussed and rejected in the past, but it looks like Congress may again consider going after international tax dodgers. While it's admittedly a press release put out by an expat tax service, the claim is that a March 2011 report by the GAO recommends withholding the passports of tax dodgers.

If this goes through, it could be interesting. It's estimated that there are over 5 million Americans living abroad. Quite a few of them have likely stopped paying taxes. I wonder how many might be impacted?

While some of this mess is undoubtedly for taxes incurred while living in the US, much of it's also for taxes incurred while living abroad. Yes, it sucks that the US is the only developed nation to tax its citizens overseas (in fact, the only other nation I know taxes their expats is Eritrea and it was being considered for Zimbabwe). Nice company the US is keeping there.

I do find this particularly worrisome because the US has not had a stellar track record in being reasonable in this area and expats are always an easy target for politician's ire. Further, as I understand it, the US tax courts do not allow you to challenge a tax assessment until you've paid the assessment. Thus, I wonder if people could find themselves in the position of having their passports confiscated because the IRS mistakenly thinks they're delinquent.  If you live and work overseas and are visiting in the US, this could destroy you financially.


  1. This type of bullshit is why I'm probably dropping US passport next year or so. I don't mind paying US taxes on any money over there that earns me income: that's just fair. But they have no business asking me to file taxes (everyone hates doing taxes, and now I'm doing it twice) to report what I earn over here, and then possibly tax that (not that I'll ever, ever, ever earn that much... it's just the principle)! The nerve. Since I'm never using Embassy services or anything else, I'm doing work for no benefit. If I can keep two passports, fine; if not, the American one is the one I'm dropping.

  2. @Stomme poes: as I understand it, you're here in the Netherlands. If you acquire your Dutch citizenship via staying here long enough on a work permit, the Netherlands will require you to drop your US citizenship. However, I believe you can maintain dual nationality if you acquire Dutch citizenship via marriage.

    That being said, the US refuses to count expats on the census (thus denying us representation in our state of last residency) and up to a third of our votes are not counted. We don't impact voting patterns, so why should they care? And on top of that, many Americans have no sympathy towards us, assuming that if we left we're somehow not patriotic (I've seen this on message boards a few times). When I get French citizenship, I'm unsure what I'll be doing. A lot of that will depend on what impact it will have on my daughter.

  3. I agree that the fact that foreign income is taxable for US citizens, for the lack of a better word, sucks. However, based on my understanding of tax rules, it is in no way double taxation.

    Effectively, one ends up paying the greater of the two tax liabilities, either the US tax liability, or the foreign country's. Actually, that simplification makes it sound worse than it is in reality, since the first $90k or so of foreign income can be excluded from the US calculation.

    I don't see anything inherently unjust with this scheme, unless one considers the requirement to file a return every year an undue burden in exchange for the benefits of US citizenship.

  4. @Raul: it's unjust for a variety of reasons. First, note that the $90K exemption you mentioned only applies to earned income. That's a rather precise definition under the IRS rules. If you have income from other sources, you're going to get double-taxed. You can read more from AARO's position paper on this topic. Also consider that for expats:

    * We're not counted on the census, thus losing representation
    * Up to a third of our ballots are not counted in elections, thus losing representation
    * We're denied access to the Medicare we've paid into all our lives (unless we're retired military)
    * If retired, we receive smaller Social Security benefits, though we've paid them all our lives
    * We're sometimes getting denied bank accounts because foreign banks are tired of being hassled by the IRS regarding FBAR violations.

    If you're an expat, it's easy for politicians to take cheap shots at you. No one really cares about us and people generally aren't aware of some of the difficulties involved. It's bad enough more and more American expats are renouncing their citizenship. It's still not a huge number doing it, but there's also a large gulf between those considering it and those doing it. It's becoming a burden for some and I've met a few Americans who are considering it.

  5. There are several erroneous claims being made here. I'll address ones I can off the top of my head.

    Yes, you can contest your tax assessment in Tax Court without paying. But if you want the trial in a District Court, you have to pay. Most people want to go to District Court because it is not a tax court and so they are not as sophisticated and will be more likely to buy a load of crap being sold by your tax attorney.

    And Raul has already addressed the claims of double taxation to no avail. Raul needs to learn that when someone uses dogwhistle language like "double taxation", you are dealing with a crank.

    This one even claims they are not counted in the census and thus are denied representation. Representation where? Are we going to have overseas congressional districts for American living abroad? Tell that to the citizens of Washington DC. That will get a bitter laugh.

  6. @Anonymous: you could at least have the courage to sign your name when you make start insulting people.

    You could also read through AARO's position papers and find out what's really going on here. If close to 2% of Americans live abroad (as is estimated by the State Department), then that's representation which should be counted on the census because we still are represented in the last jurisdiction which we lived in the USA. The census information is used for myriad purposes in the US, including apportionment of seats in the House of Representatives. Thus, since we're not counted (and you can't assume an even distribution of states from which we come), seats in the House are not apportioned correctly. Thus, we are denied representation that the Census was designed to enable.

    While you might have a reasonable difference of opinion about this, the fact remains that without a census, we don't know the scope of the problem and it's hardly unreasonable for me, as an expat, to want to correct this situation.

    And as for the "crank" comment, you might want to do some research before you sound like a fool (hence your choosing to remain anonymous). Double taxation is quite common for expats because the exemption is only for earned income. Got that? If you are over the exemption limit or you have significant income which is not considered "earned income" by the IRS, you get double-taxed.

  7. @Ovid: You are correct that the exemption applies only to earned income. However, there is no such qualifier (at least not one as narrow) for the foreign tax credit.

    Again, these are my opinions based on reading the US tax code, and I'm not a professional. I am someone who plans to move abroad in the next few years also, so these issues are important to me, and I want to understand them correctly. So if I am not understanding them well, then I welcome corrections.

    I read the AARO's position paper, and while I did not understand all the points, there didn't seem to be a justification or specifics for the claim that "Double taxation is more severe than ever." How severe is double taxation, typically? Also, on this point about the exclusion: "If the original amount allowed in 1962 had been systematically indexed to inflation, it would exceed $250,000 today. It only stands at $91,400." Which rate of inflation makes sense for the exclusion to be indexed to? The US? The foreign country's? Furthermore, why is inflation the correct benchmark for the exclusion limit? If I recall correctly from the On Point radio broadcast of April 18 on taxes, median incomes have risen scarcely since the 80s in the US, so I do not necessarily agree that inflation is the best benchmark.

    My reading of IRS publication 514, on the Foreign Tax Credit, indicates that the limit on exempted earned income is largely irrelevant anyway. If you exceed the limit, you get a tax credit toward your US tax owed for foreign taxes paid. For example, if you earn $300k abroad, assuming your foreign tax liability is roughly 15% of that, you will have a credit of $45k toward your US tax liability, which will be calculated for an income of $300k with the first $90k exempted, including deductions, etc... If your US tax bill his higher, you only owe the difference between the two bills. If it is lower, then you owe nothing, despite passing the exemption limit significantly.

    As to your points about the census and representation, that's more of a philosophical discussion, but I'll state my view on those points briefly. If one accepts that a government must be paid for, then one must also accept that denying representation for those who do not pay is not unjust.

  8. Disregard my comment regarding incomes and inflation. Median incomes have scarcely risen, when inflation is taken into account. In other words, median income has tracked inflation.

  9. Well I left a long comment here, agreeing with and elaborating on what Raul writes, but Blogger ate it.

    The gist is that you have three main options on the US tax return as an expat:

    1) Earned income exemption up to $90k
    2) Foreign tax credit
    3) Itemized deductions, deduct foreign tax

    There are rules like "you can't take option 1 if you've taken option 2 in the last 5 years, but not all of the last 5 years", so that it becomes an idiotic speculative Choose Your Own Adventure of what you think your financial situation will be in future. Option 2 is, however, always correct if you live in a country with a higher tax rate than the US, and it will at the very least avoid full double taxation.

    Having self-filed as a self-employed expat with capital gains income, more than once, I know way too damn much about this, and it still infuriates me how much effort or money must be spent on being charged the tax I legally owe, never mind the lack of good representation.