Citizenship and Taxes

Citizenship not only confers certain rights, it also entails responsibilities:  military service, for example, as well as voting, jury duty and taxes.

While all of the above are pretty common overall, each state has its particularities about how and where these duties are to be discharged. They are worth looking into before you decide to request citizenship in a state.  Are you prepared, for example, to perform military service or put yourself under the jurisdiction of that state's inheritance laws?  It is also worth looking into if you marry a citizen of another country - the citizenship requirements of your spouse or the laws of his/her country may impact you even though you are not a citizen of that state yourself.

One of the little-known responsibilities of being an American citizen is the requirement to report and potentially pay U.S. taxes on world-wide income.  I learned recently how little-known and poorly understood this requirement is when I called a very well-known U.S.-based software company and asked if their very popular tax software was compatible with the reporting requirements for Americans overseas.  I actually got into an argument with the otherwise helpful sales staff when they tried to tell me that there was no requirement for me to report my income if it was all earned outside the U.S. (not true!)  I've heard similar things from friends and family both inside and outside the U.S. who are genuinely shocked to hear that this is a requirement for all Americans abroad (people teaching English or working in restaurants or as secretaries, just to give a few examples) and not just people who have high incomes and enjoy fabulous international careers as investment bankers or stock brokers.  If you are still not convinced, have a quick look at the US IRS (Internal Revenue Service) website here.

Why are so many people unfamiliar with this requirement?  Well, for one thing, it is unusual.  Many countries have territorial tax systems where you only pay taxes on income earned in that country.  These countries don't bother trying to figure out if someone made money somewhere else.  Costs money, for one thing and requires knowledgeable and sophisticated tax office staff.

Another reason is that it seems counter-intuitive to a lot of people living abroad.  After all, having paid French or German or Japanese taxes locally, it just doesn't occur to most Americans that there is also something to do on the U.S. side.  For some, it is downright controversial - having paid their taxes in their country of residence, they think it is unfair to have to file in two places.  See the American Citizens Abroad website for articles like this one to get an idea of the tone of the debate.

Finally, a lot of Americans abroad, in my experience, don't make a lot of money.  They have gone for the adventure and have taken regular (even low-paying jobs) just for the experience of living in a foreign country and learning a new language and culture.  The idea that their meager salaries might be of interest to the U.S. government is a big surprise to them.

Frankly if you are an average person with a regular salary working abroad, there are plenty of exemptions and deductions designed to avoid making you pay taxes twice (in the country of residence and the US). But in order to take advantage of that, you have to file.

I won't get into the debate over whether or not all this is reasonable or unreasonable.  It is one of the requirements of US citizenship.  Other countries have other citizenship duties like military service.  France, for example, has its own reporting requirements - French citizens must report all foreign bank accounts and there is a stiff fine for those who fail to comply.

If you live in a democratic nation-state like the U.S., it seems to me that the best way to make your opinion about laws like this heard is to actively participate in the American political process even if you don't reside in the U.S.  In other words, stay up-to-date with the legislation, write your elected representatives if you have something to say, and, above all, vote!