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Thursday, September 6, 2012

How I Really Feel About Citizenship-Based Taxation

U.S. citizens and Green Card holders living abroad are waking up to the fact that their status and connections to the "Land of the Free" brings with it certain obligations.  If you've ever read The Moon is a Harsh Mistress, one of the great science-fiction classics by Robert Heinlein, you'll be familiar with the acronym "TANSTAAFL" which stands for "There ain't no such thing as a free lunch."

Citizenship is never a "free lunch."  All countries require certain things of their citizens and where there are rights, there are also duties and responsibilities.  American citizenship is turning to be a very expensive lunch indeed (a four course meal with wine AND cheese AND dessert) because the United States practices something that is often called "citizenship-based taxation."  That term is a bit misleading and should probably be renamed "worldwide taxation" because its scope includes people who are not citizens of the United States of America:  U.S. residents and immigrants like Green Card holders living in the U.S. or abroad.  Very briefly what the U.S. tax system requires is that all U.S. persons (wherever they live) report their personal financial information to the U.S. government, file tax returns and pay U.S. taxes on income or investments earned outside of the U.S. every single year.   No other country in the world besides Eritrea does this and it brings new meaning to the old term, "American Exceptionalism."

Most homeland Americans are blissfully unaware of these requirements which is probably normal since   they have absolutely no impact on them.  What is more disturbing is that until very recently most U.S. Persons (American citizens abroad, Green Card holders and U.S. residents) were also completely in the dark.  Overseas Exile has an excellent post about "Expat Alice."  This is a very typical story and I know people here in similar situations.  Even with the news reports I am still meeting people in Paris like the two American au pairs I encountered a few months ago who have been here for a couple of years working for French families.  They went sheet white when I explained it to them.  Yes, both should have been filing tax returns and FBAR's since they earned a yearly salary that was over the filing threshold and their parents had set them up with bank accounts here with sufficient money to rent studios and pay their tuition for French classes.  Even I, someone is more or less clued in, made my own filing error.  It had not occurred to me that my daughter who is a U.S. citizen, should have reported her own bank account in Canada.  I had to check but it was indeed over the reporting limit because we set her up (like the parents of the au pairs) with enough money to pay her tuition and living expenses.  I had to search our bank records from last year, convert the amounts from Euros to U.S. dollars, and then send all that information to my daughter so she could fill out her own FBAR thus adding yet one more piece of paper that the U.S. Treasury must process in 2012.

So, as you can see, this matter is of more than academic interest to me and it is a topic that I write about often.  Am I angry about it?  Absolutely.  Here I am working on a tax return with my accountant that is so thick I could use it to line my cat box even though not one dime of my income or my investments came from or was earned in the U.S.  I have an extension to file late but I still had to pay a few thousand dollars to the IRS earlier this year and now I'm paying for someone to help me navigate the bloated U.S. tax code so I can get the paperwork done.  That's pretty expensive cat litter, mes amis.  And just for information I am strictly middle-income and have a career as an IT manager which pays decent money but does not, and never will, put me in the millionaire category.

 A few months ago I sent out my FBAR which has all my private banking information on it:  my U.S. Social Security number, bank account numbers and balances right down to my daughter's savings account with all of a few hundred Euros in it and the checking account that I share with my French husband.

Yes, homelanders, I pay U.S. taxes though I have not lived in the U.S. for years.  But apparently many of you don't.  On top of all of the above, and to really add insult to injury, was some news I had from a family member who lives in the U.S. and has about the same income.  He did his U.S. taxes and was pleasantly surprised to discover that not only is he not paying a dime in Federal income taxes, he gets a refund* of around 4000 USD.  Imagine my surprise to discover that he is not alone.  According to this Huffington Post article around 46% of homeland Americans didn't pay any Federal income taxes in 2011.

How interesting.

So let me see if I have this straight:  someone who lives in the US and has about the same income as me and who benefits from all the government goodies like national parks, Social Security, interstate highways, schools and so on can get away with not paying a dime even for the troops whereas someone like me who lives abroad and uses none of the benefits homeland citizens take for granted ends up with a hefty bill.

I understand that life is not necessarily fair and I am not someone who is against the idea of contributing to the well-being of my country of citizenship.  I am also aware that the reason many of these homeland Americans do not pay is because they are too damned poor to do so.  You have no idea how much I hate that and how ashamed it makes me to have to admit to it.

But at some point over the past 10 years homelanders ordered themselves up a four course meal at a fancy restaurant and put the bill on a Chinese credit card.  In retrospect this wasn't such a hot idea but at the time it was politically very popular to order up a filet mignon for some and to order a bottle of wine for those nice folks at the table on the other side of the restaurant who turned out to be non-drinkers and sent it back.  But it's a done deal and arguing over bad past decisions is a fruitless pastime.  In fact the national debate in this issue would be vastly improved if every American just accepted that everyone has some responsibility for how things shook out and that the most important thing now is to do the Next Right Thing.

To that end Americans abroad should be given a seat at the national table.  We may all be reduced to eating at Mickey D's but I'm cool with that.  Representative Carolyn B. Maloney of New York has put forward a very modest proposal for a commission that would start a dialogue between us. It would cost around 3 million dollars a year, a mere drop in the bucket compared to the overall federal budget - though I suppose if we asked a U.S. military contractor to cater it, it might cost quite a bit more than that.  The ACA and AARO are ready with some well researched material about how citizenship-based taxation and other homeland legislation effects us and does no good whatsoever for the homeland.

But don't you dare walk out of that restaurant and stiff us for the bill while mouthing platitudes about duty and responsibility and how we are all in this together.  Clearly that is not the case and one of these days if that doesn't change, we may be the ones walking and leaving you to do the dishes.

*In my original post I called the money my friend got back from the Federal government a "refund" and a reader asked for clarification.  To be precise, it was not a refund of taxes paid but rather a subsidy based on that person's deductions for children and mortgage interest.  It wasn't much of one but it still represented a kind of social assistance -  a bit like an indirect "les allocations familiales" in France.


bubblebustin said...

Thanks for making my day Victoria. I read this with a huge grin on my face. You have some fire in your belly, no more polite restraint. I believe you've really found your voice! This should be sent to every newspaper in the US! LOVE IT!
Please post this on Brock.

Raul said...

This is neither here nor there as far as worldwide taxation goes, but a refund of $4000 does not mean your friend paid no income taxes, unless your friend had less than $4000 withheld from his paychecks. I apologize if I misunderstood that, but it wasn't clear in your post.

Anonymous said...

Great article, but focuses only on the tax aspect. Makes it clear that the true purpose of an "Expat" is to pay the bills of a "Homelander".

And this doesn't even focus on all the other disabilities of being a U.S. citizen abroad

Victoria FERAUGE said...

bubblebustin, Thanks. Yeah, I kinda lost my temper yesterday. Will post at Brock this weekend - got a date at the hospital today.

Raul, Thanks for pointing it out. I should clarify. This person neither owed or paid U.S. taxes (had to do with a good but modest salary and all the deductions for kids and the mortgage on his house.) It was not as you point out a "refund" since he paid nothing. It was more of a (dare I say this?) a government subsidy. In fact it sounds an awful lot like an indirect form of a French government program called "allocations familiales" which is money the government gives directly to people who have kids.

For the record he wasn't thrilled about it either because he didn't ask for it and it does kind of imply that his family is "working poor" (and not middle class) and needs a boost to survive.

I'll look at the post again this afternoon and see if I can clarify.

Just me said...

The No Free Lunch is right on point. I call it paying the "rent" for the membership privilege. I don't state it as eloquently as you do, but said this on Jack's blog the other day...

For me, this is the new self evident reality: For Americans Abroad, or new Immigrants to America, it is now obvious that Citizenship means something different than it did prior to 2009.

With the 3 year IRS offshore jihad, insistence on enforcement of Citizenship taxation, FBAR, FATCA, E-trak and other data mining activities, you have a serious "RENT" decision to make. Is that U.S. person-hood classification, be it a greencard, work visa, or U.S Citizenship, (either by birth lottery or by immigration choice), now worth the worldwide "RENT" it costs for the "so called" benefit?

Maybe it does, and maybe it does NOT!. It is entirely in the world of an informed 'cost vs benefit' analysis now.

Anonymous said...

Please don't get wrong. I'm not trying to add more pain to your sorrow, but please make sure the IRS doesn't consider the money you set your daughter up with in Canada as a gift. If they do they you most probably should file the gift tax form if it was more than 13'000USD.

Hope you are doing O.K.

bubblebustin said...

@just me
The US government couldn't have build a better 'expatriation machine' if they'd planned it!

Victoria FERAUGE said...

@Just Me, I hadn't thought of it that way but, yes, that is a good way to look at it. For the past two years my "dues" are a little over 1500 USD. Is it worth it? Still contemplating my cost-benefit analysis.

@Unice Tell, Yikes! I hadn't though about that. Thanks for the heads-up. I'll look into it. Doing OK here. Thanks for asking.

@bubblebustin, Yep, is this design or just dumb luck? An implicit emigration policy that is so incoherent that it actually has different government agencies working at cross-purposes?

Anonymous said...

Can somebody clear this up for me? What exactly are the tax implications of renunciation, how far back can they ask you to comply (even if you owe nothing, but I'm sure' they'lol figure oput that you do) and do you really remain taxable for many years afterwards or risk not being able to return to visit the US ? Thanks

Victoria FERAUGE said...

Sorry to reply so tardily to your question, anonymous.

THE go to guy for this sort of thing is Phil Hodgen. His blog is here:

He has an entire section devoted to Expatriation and you can (and I strongly urge anyone with an interest in this topic to do so) sign up for his newsletter AND a special series (chapters from an ebook he is writing about expatriation and taxes). I've lost the link to the latter so if someone could pass it along I'd greatly appreciate it.

Anonymous said...

Thanks! Will do ! :-)