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Tuesday, April 10, 2012

Tax Time for U.S. Persons

It was fun while it lasted but now it's time to put away the chocolate bunnies and start tackling the taxes.

We "U.S. Persons" (U.S. citizens, Green Card Holders) have not just one but two tax declarations to make:  one in our country of residence and the other to the U.S. government. We are required to declare everything we own (bank accounts, property investments) and everything we made even if we didn't make one dime of that money or have any assets in the U.S.  That is my situation - not one penny (or centime if you prefer) that I have in my host country (France) came from a U.S. source.  Doesn't matter, as a U.S. Person, I still have to file in the U.S. and pay taxes there even though my money did not come from the U.S., I have not lived or worked in the U.S. for many years and I do not benefit from any services provided by the U.S. government.  But these are the rules, folks, and I comply.

I will admit, however,  that I'm not happy about it.  Why?  Well, first of all it seems to defy basic fairness. I pay a lot of taxes already in my host country and that pays for the services I use:  healthcare, roads, public education, the army that defends me and my family here.  Given that I think the French government does a splendid job of delivering these services I have no complaints about the taxes I pay here, though they are probably higher then what I would pay in the U.S.  You get what you pay for.  Any money I send to the U.S. in taxes, however, is pure profit for the American government and represents a wealth transfer from France to the U.S.  Frankly I would feel a lot better about paying my U.S. taxes on top of the French ones if I had some concrete services here from the U.S. government.  Services tailored to the American Diaspora that, if nothing else, would soothe me psychologically.  See, my country still cares about me as a citizen and won't throw me to the wolves just because I live abroad.  Alas, there is nothing and I'm still trying to make my peace with that.

Another issue related to fairness is reports I'm getting from family and friends in the U.S. about their U.S. taxes.  I received a mail recently from a family member in the U.S. who was astonished because, after doing his U.S. taxes, he discovered that not only is he not paying any Federal taxes he is getting a 4000 USD bonus.    Now I do not begrudge this person his windfall but it did make me think.  Let's see, I'll be paying around 2000 USD this year.  Between the taxes I pay and the subsidy he's receiving, the U.S. government will be 2000 USD in the hole.  How in the heck are they planning to balance the Federal budget with a system like that?  I'm sure the situation is much more complicated than I'm making it out to be but, from my perspective, a tax system that allows nearly 50% of the people to avoid paying any taxes at all (or even get a subsidy) while struggling to manage a whopping budget deficit, isn't sustainable.  And somehow I just don't think chasing all those English teachers, translators, computer programmers and middle managers working abroad is going to make much difference in the end.

Nevertheless, this seems to be the plan these days so those of us who live abroad and have a U.S. connection must either comply or renounce.  A lot of people are renouncing and I have enormous sympathy for them and I am not about to second guess or judge their decision because I do understand where they are coming from.  For those who are trying desperately to comply with the U.S. tax and reporting requirements I'd like to offer a few suggestions for those still trying to figure out how.

Believe me, it's not easy.  I've already encountered my first barrier to compliance.  Since all my money and assets are here in France and the tax due dates are different here, I still haven't received all the information from my banks in order to start filling out tax forms.  There is no way I can meet the U.S. deadline of April 17 so I've had to file for an extension.  I will still have to pay an estimated tax on that date to avoid penalties but now I have until October 15 to actually file.

So my first suggestion for those of you who have just woken up to the U.S. tax and reporting requirements is:   do not panic and simply file for an extension.  Taxes for U.S. persons can be very complex and you don't want to be hasty and file "n'importe quoi."

My second suggestion is to get this book, Your U.S. Expat Taxes Simplified by David McKeegan.  It's a very good overview of how the U.S. tax system works for U.S. persons abroad.  If you are someone with a very simple situation (American au pair working in France with no other assets or income) this might be sufficient for you to be able to do your taxes yourself.  For everyone else, this will give you enough basic information to go out and start looking for a professional.

My third suggestion is to speak at least once with a professional U.S. tax preparer.  The U.S. tax code is a mighty beast and it is applied in strange and mysterious ways to people living outside the U.S. If you live in a city abroad with an IRS office (Paris, London, Frankfurt or Beijing) they can be very helpful in a limited way and sometimes they organize tax seminars with organizations like the AARO.  However, it's not enough because your situation is particular to you and only a competent professional can give you advice that is pertinent to you. These people are not cheap but, if you want to comply,  this is the only way I know of to do it.

Bonne chance!


8 comments:

Anonymous said...

Hi,
Suppose you were a French or Italian citizen who worked in the US for a long time before returning to your home country, I presume that you still have to pay the US for the property you have in your home country. That's sad - but how and why did the French or Italian government agree to it - to double tax its citizens? is n't it strange?

.K.

Victoria FERAUGE said...

Hi K, It is both sad and complicated. It's not just property is all unearned income (dividends, capital gains and so on) and income over a certain amount.

All countries have the right to assign duties to their citizens and make rules for their immigrants. They don't need to take the other country into account and usually dont. The US tax system is unusual but it is also admired by many states that would like to do the same thing. Think about how interesting it wold be for the Indian government or the French to be able to tax their citizens living outside those countries. The French president has a proposal to do just that. It used to be very hard if not impossible to do this but with FATCA and better information-sharing between nations, it is becoming much much easier and I think we will see more systems like this in the near future.

Just Me said...

Strange system indeed! Well described and little understood by those that don't experience it.

I too have filed for my extension as there is no way I can have it done due to the different fiscal tax year in NZ taxes as compared to the US calendar tax year. Also I do not get any bank statements in NZ based upon a calendar year, so that also slows things down.

The double double whammy in addition to the double taxation is when you have to go back and amend a US return to account for extra tax or unplanned credit I receive from NZ, after I have already filed that years US return.

What fun, eh? Is America a GREAT country or what? Only an Exceptional country could dream up this form of a tax torture equivalent of water boarding. I am gasping for breath! :)

Victoria FERAUGE said...

Hi Just Me: It *is* torturous and from the mail I get a lot of people in the US and outside of it don't quite understand why this system is the way it is. Even the folks at Turbo Tax who I called last year didn't understand it. I actually got into an argument with their support staff with two people telling me, "if you live and work outside the US you don't have to file." It was surreal. :-)

Victoria FERAUGE said...

And here is a very good article from Smart Money from someone who has "walked the walk" and understands how the tax system impacts overseas American citizens and green card holders.

http://www.smartmoney.com/taxes/income/10-things-i-hate-about-tax-day-1334094821191/#tabs

KenS said...

Hi Victoria,
If you live overseas more than 330 days each year, you can file a form 2555 which will allow you an exclusion on foreign earned income up to US$ 92,600 this year and if you were paid wages, there is no self-employment tax because you would have paid into the French retirement system. OR, if you paid French taxes, it might behoove you to use form 1116 Foreign Tax Credit which could reduce your US tax liability to zero. I've had it happen to clients here in Chile.
Regards,
Ken Shields

Victoria FERAUGE said...

Hi Ken,

Thank you so much for stopping by the Flophouse. You're absolutely right about the Foreign Earned Income Exclusion and the Tax credits.

For a very long time these things worked for me because I didn't make enough money here in France to go over them.

Over time though I've come perilously close. Salaries are high here since the cost of living is high too and then there is the exchange rate which can fluctuate a lot. Euros to dollars can be deadly if you want to stay under the cap.

What finally pushed me over into tax land, however, was capital gains. The exclusion is only for earned income - so if you sell stock or property there is tax to pay especially if these things are taxed differently in the host country. In some cases there are even host country taxes for which the IRS will not allow you a tax credit at all (CSG in France, for example).

This is why I finally got a pro to do my taxes. Last year my declaration was about a centimeter thick with all the forms under the sun (1040, 2555, 1116 and so on). I still paid and will pay again this year.

Nuts! :-)

All the best,

Victoria

Tim said...

Democrats Abroad appears to be taking a stronger stance against FATCA. Here is a link to the latest news on it.

http://isaacbrocksociety.com/2012/04/13/update-democrats-abroad-canada-annual-general-meeting-reports-on-fbarfatca-task-force-15/