Why does the US tax expats?
August 2016
We live in a time when globalization defines the world in ways we’ve never seen before, and there has never before been an era when the economy has been more interconnected. With this new configuration comes new opportunities, such as chances to work abroad and advance one’s career in other countries. Some will ask the question ‘Why does the US tax Expats?’.
Becoming an expatriate, or expat, is a choice that many Americans make. While parts of the process of packing up your life and moving around the world are exciting and easy, there are several tough decisions to make as well. The key to a successful transition that works for you financially is to ensure you are informed about the unique financial and tax laws that American citizens living abroad must adhere to.
US expats can be found in all four corners of the globe, with Asia being an especially popular destination, where many settle in China (Beijing or Shenzhen), but also in Japan, South Korea, Malaysia, Vietnam or India, to name a few.
One interesting anomaly about being a US citizen living and working overseas is that they are still subject to very strict American tax laws. Namely, the United States is only one of two countries (the other is Eritrea in Africa) in the world that implement citizen-based taxation, rather than a residence-based system.
This law has several implications for American expats, some more serious than others. To understand citizen-based taxation, you have to go back 150 years in American history when Congress wanted to penalize Civil War draft dodgers living abroad. The law went through several changes and in 1916, it was deemed that income taxes would be paid by “every citizen of the United States, whether residing at home or abroad.”
The US is Serious About Their Tax Law
Despite many American citizens facing double taxation — when they are paying taxes in their country of residence and their country of citizenship — the debate usually focuses on how much earnable income should be made before double taxation kicks in. Currently, Americans are technically allowed to earn up to $106,000 before paying taxes, but since 2012 when a law called the Foreign Account Tax Compliance Act, or FACTA, that sum also includes things like savings and pension. For many people, especially those nearing retirement, that is not money they can afford to be taxed twice on.
No matter what you earn abroad, even if it is well below the granted $106,000 amount, American citizens must file their tax returns in the US every single year. On top of that, the US government puts the onus on banks abroad to identify and report which of their clients are American to US tax authorities or else face hefty fines. The penalty for failing to report American clients can be as high as 30% of all a bank’s dealings with the USA. As a result, many Americans living abroad are being denied bank accounts so that the bank doesn’t have to deal with the hassle, which creates a serious conundrum for people who simply want to live and access their money to do things like pay their bills.
Why The US Tax Expats
Many US citizens ask why they should be paying taxes to a country in which they are not using any of the goods or services that taxes provide like roads and schools. While the law was originally meant to deal with wealthy citizens hiding their money in offshore accounts and avoiding taxes altogether, the consequences of FACTA affect regular US citizens who are living and earning, and paying taxes, in other countries.
Since the stricter FACTA laws have come into place, there has been a rather dramatic increase in American citizens renouncing their citizenship as they feel forced into a position where they have no choice but to do so. But even that route is wrought with difficulty — since there is such a backlog of paperwork for renunciation, the fees to complete the process have gone up nearly 40 percent to over $2,000. Not only that, but everyone who renounces has their name published on the Federal Register, a move that many Americans feel shame over. The USA is arguably one of most patriotic nations in the world and renouncing one’s citizenship is a choice few make lightly, and it can come with a heavy emotional consequence.
Therefore, it’s important to take control of one’s finances and to make smart and informed decisions about where one’s income is going. Financial planning for expats is now a necessity more than ever, in order to learn what kind of investments can work for you and which can give you more autonomy over your income and your taxes.
Taking control of your finances by making informed decisions about things like offshore investing is one of the most important steps any expat can take. If you are looking for advice or information on the best investment opportunities, a financial planner for expats can help.
Bluestar AMG makes it their mission to help American expats find the path that is right for them and their particular financial situation. Contact Bluestar AMG right now for more information.
