Monday, October 10, 2011

Double taxation of US expatriates

I've been called a "crank" for using words like "double taxation", something which amuses me to no end because I've actually read the laws in question and know what I'm talking about, unlike some individuals who think I'm a crank. One person, going by the name of "Raul" (who did not call me a crank), politely disagreed that Americans are subject to double taxation while abroad while someone who bravely hid behind a cloak of anonymity chose to write the following:
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.
Never mind that I have firsthand knowledge of people who owe a lot of money due to double taxation. Clearly I'm a crank for even using that term, as is Ronald Sokol, an attorney qualified to practice law in the United States and France who also discusses the issue the US's double taxation laws in this New York Times piece. Interestingly, while Mr. Sokol mentions that only one other country in the world does this, I think he would have made a stronger point if he mentioned that this other country is cash-strapped Eritrea.

So be aware of the law in this area and think carefully about what you want to do. The United States is chasing after countries to report tax dodgers and if you fall behind in your paperwork, you might be in trouble.


  1. I don't have a problem with the US taxing its expatriate citizens with high incomes. It makes sense to keep the wealthy from establishing themselves in tax haven countries to avoid US income tax. That seems pretty fair. Also, being a US citizen has all sorts of benefits, so it makes sense to make it difficult for people to avoid paying the taxes that allow the government to provide those benefits.

    On a practical level, the important bit for US expatriates to remember is to file tax returns regularly to benefit the statute of limitations on tax filings. The limitation clock starts when you file, so if you end up sending in a load of back returns upon your return to the US, the clock starts at that point.

    Most European countries have double taxation (DT) treaties with the US that cover many different kinds of income. They are intended to promote trade by taxing people and companies only once--when they file their personal income or company tax. The US has that famous policy of only charging tax on income above a certain limit. The limit changes every now and again, but seems to increase in line with inflation.

    I really don't have a problem with the US taxing its expatriate citizens, which is what the current system

  2. I've filed in good faith every year that I have worked in Europe, however given that my income generally always fallen under the Foreign Earned Income Exclusion limit, actually paying taxes hasn't been an issue.

    What alarms me however is the Foreign Bank Account Reporting (FBAR) which (as I understand) requires us to report any bank accounts, retirement funds or whatever with a certain amount. I've wondered if I have a joint account with my German wife, if I'd have to pay taxes on her earnings as well.

  3. I hope you will continue to indulge me and my polite disagreement. :)

    For the average person with only earned income in the typical range, I do not believe it is fair to say one is being taxed twice on that income. On the other hand, for larger incomes or for those with other income sources, navigating the US tax code to figure out one's liability becomes more complex. One might argue that this is an undue burden, although the privileges of being in that situation cannot be ignored either.

    In the end, I believe the net effect of the US tax code is that one pays only the greater tax rate, not the sum of the two rates. As I said before, I welcome a tax lawyer's or accountant's interpretation of these laws..

    Since this is a blog about expatriation, I don't find Sokol's hypothetical example to be altogether pertinent, but I have to agree that the application of tax laws as outlined in that hypothetical example would be indefensible, whether the person is privileged or not.

  4. @Raul: thanks for your comment. If you changed that hypothetical example to a person with a British mother and an American father, it's far from hypothetical. As I mentioned about one person I know in this situation, he was advised by his lawyer that he owed a considerable sum to the US, though he does not have a US passport and has never lived or worked there.

    That being said, he was registered at birth at a US embassy, but he's never taken the trouble to bring his situation to the attention of the IRS, so he will likely never be caught. Still, given that no other country (other than Eritrea) does this, it makes one wonder why the US does. (Note: I understand that Israel also taxes expats, but they can simply declare a change of residency to get this to stop).

    The more I read about this topic, the more I'm finding out that Americans are being impacted by it. They typically are older Americans who are shifting their income from earned income to other sources. As they near retirement, they can't afford to pay these taxes twice and the income exemption is only for earned income. Here's another story (Time Magazine) explaining about people being impacted by this. The problem isn't going to impact many younger, salaried workers, but it catches up with you after a time. If you just want to live abroad for a short time, you're probably OK. If you want to move overseas permanently, you have some serious thinking to do.

    (And I just heard from an individual who moved from the US two decades ago and only just found out that he owes two decades worth of back taxes. He's not very happy.)

  5. @Raul: Oh, and I forgot to mention that I'm very happy to have people disagree with me :) It's when they call me a crank that I get cranky.

    In fact, the only comments I've ever deleted from this blog have been spam (sigh) and two comments which inappropriately used profanity.

  6. Third try posting this comment, due to bloody Safari wiping the bloody form when I accidentally navigate away...

    @Raul: the net effect of the taxation treaties is that one pays, not the greater of the two rates, but the greater of the two rates separately in each category of income. So if I'm in the UK and have £60k income + £8k capital gains, I would get charged British (higher) rates on the income, and American (higher) rates on the capital gains (as the UK has an £8k exemption that the US does not respect.) This is more than a singly-taxed American or Brit would have to pay, overall.

  7. Great Post. I follow your blog periodically. I just launched my own expatriate tax return service at

  8. @Damon who said "Also, being a US citizen has all sorts of benefits, so it makes sense to make it difficult for people to avoid paying the taxes that allow the government to provide those benefits"

    I've lived outside the USA for over 20 years now and I am unlikely to reside in the States again. I have no material US assets and live in a higher tax country. I fail to see what specific benefits I receive from the USA yet I must spend over 40 hours a year completing tax forms in an effort to remain compliant with ever complicated tax laws.

    My children, who were born overseas, are soon to be adults and will be faced with this tax compliance burden the remainder of their lives if they choose to keep their US citizenship.

    No other conunty in the world treats its citizens abroad as harshly as the US does. Recent US tax laws aimed at money laundering and tax evasion are only making this compliance burden far more difficult plus some foreign and US financial institutions are now denying me service due to recent laws. I feel strongly that I am being discriminated against and fail to see the benefits you refer to.

  9. The tax treatment of US expatriates is simply terrible. US citizens who do not enjoy tax-equalized expat packages from their employers are largely uncompetitive in low-tax labor markets like Hong Kong or the Middle East, where salaries reflect low tax rates but are nevertheless adequate for citizens of other countries that do not have to file home-country returns. It is mean-spirited and economically counterproductive to have a tax policy that puts Americans at a disadvantage relative to citizens of every other country.

    Most American expats wonder what these “all sorts of benefits” for expat Americans would be relative to those enjoyed by, say, Britons and Australians, that justify this special rent attached to our citizenship and the heavy cost of filing. It is very unclear what they are. Citizens of most economically advanced countries will return to nationalized health care systems and heavily subsidized higher education for their children. Americans return and pay their own way (which I prefer; just let me keep my money so I afford it all). The rude treatment of my family at the airport and the exorbitant cost of US citizen services at the embassy also fail to impress.

    To those people who have “no problem” with taxing Americans abroad (i.e., helping themselves to the property of others), I offer some arguments against this abusive practice:

    1) There is nobody in Congress who could reasonably be considered sensitive to how a handful of long-gone expatriates from their district vote. Almost by definition, our concerns are wildly different from those of local residents. Congress has the power of the purse, but they don’t care what expats think. While we can vote, we are permanently gerrymandered out of political existence and, therefore, effectively disenfranchised. This taxation without representation affects millions of Americans who are simply treated as an ATM for the government and whose taxes are nothing more than transfer payments.

    2) A theoretical case: Imagine a country where all taxes are VAT or sales taxes. None of this would be counted as offsetting your US taxes, so you are doubly taxed on all income over the basic exemption. Other countries’ tax codes variously rely on local taxes, sales taxes, special surtaxes, and the private sector to provide services that might otherwise be funded with a national income tax. People living in jurisdictions where national income taxes are proportionally low relative to other funding sources get hosed.

    3) Foreign residents of the US pay US income taxes while there, so the IRS is double-dipping when it taxes US citizens overseas. Talk about greedy.

    4) Exchange rates only work against us. If you live somewhere like I do (Japan) where the currency is recently strong relative to the dollar, you suddenly seem much richer to the IRS. Unfortunately, the cost of such items as rent and education in the local market remains static. If the rate reverses, you eventually fall to, but never below, the floor represented by the full amount of your resident-country taxes. Whenever forex theoretically works in your favor, you actually save less because the tax take is higher, your expenses are the same, and any dollar-based incentive bonus you may receive is likely to be smaller. There is unlimited upside tax risk but finite downside benefit. You are never given back what was taken from you when the currency was strong.

    5) The basic exemption bears no relation to the cost of living in the country of residence. A person could live like a king in some locales while never hitting the exemption, while residents of costlier countries can live like paupers despite having broadly exceeded it. Residents of English-speaking countries may be able to send their children to public schools, while those in other areas could be paying the equivalent of a college tuition for kindergarten. Given the widely varying situations expats are in, the exemption is totally arbitrary.

  10. Anonymous has said it as it is! Americans living in European countries generally pay highter taxes than they would if they were living in the U.S. Sweden, Germany and UK are definitely tax havens. And for the argument that for that Europeans have 'socialized medicine" is ridiculous. Yes, people have decent health coverage but in Germany, for example, workers pay into a public or private insureance for it and in Sweden and UK, taxes are high to cover it. Nothing is free!

    And as Ovid mentioned retirement income from fund that one has paid into abroad heavily one's whole life, does not fall under the exemption because it is not considered earned income. A true injustice!

    US widows or widowers of a foreign spouse who receive the pensions of their deceasd foreign spouses are equally liable for US taxes although not one penny was earned in the US in 40 or 50 years! Here's where you can send in your stories: