cross-posted from citizenshipsolutions
originally published July 7, 2016
The Ownership and use of the U.S. Person which includes a Citizen as an Instrument of Foreign Policy
Part II – U.S. Citizens living abroad – “Life in the penalty box”
by John Richardson
I do NOT want to devote a major part of this post to this issue. The bottom line is this:
U.S. citizens living abroad are subject to ALL provisions of the Internal Revenue Code (and other U.S. laws – see below). The effect of this is to:
– subject them to double taxation on their incomes (the tax preparers and accountants who claim this is NOT true are dead wrong)
– deem all of their non-U.S. assets as “foreign” triggering numerous penalty provisions
– make it very difficult (in some cases impossible) for them to engage in normal financial planning – this is a “Buy American” provision
– make divorce (if they are married to a non-U.S. citizen potentially much more costly) – this a “Marry American” provision
– report the details of virtually all of their “non-U.S. activities” and investments to the IRS under threats of draconian penalties (this is what makes interaction with Americans “toxic” – see below)
In short, Americans abroad are NOT permitted to fully integrate into the societies where they live (and are often citizens). For more details on this see:
The above tweet references a post describing the difficulties. It includes the 10 Commandments imposed on U.S. citizens who attempt to live and outside the United States AND “commit personal finance abroad”.
Here are the ten commandments of “Living Clean” that apply to U.S.
citizens abroad. They are designed to ensure that:
if a U.S. citizen lives outside the United States that he lives according to the principle that:
“When in Rome, live as a Homelander” does, when elsewhere, live as they live elsewhere.
1. Thou shalt NOT have a bank or brokerage account outside the United States. If you do so, it must be reported to U.S. Financial Crimes on an annual basis. Failure to disclose is “Form Crime”. You may be fined an amount that is more than 300% of the value of the account.
2. Thou shalt NOT marry an “alien”. If you do so, you will have difficulty leaving your estate to him or her. Better to return to the Homeland to search for a suitable spouse.
3. Thou shalt ensure that your “alien” spouse agrees to be a U.S.
taxpayer. Failure to do so, will result in your having the punitive filing status of “married filing separately”. This will guarantee greater exposure to the Alternative Minimum Tax, the new 3.8% Obamacare surtax, higher tax brackets and lower thresholds for reporting (including FATCA Form 8938) requirements.
4. Thou shalt NOT believe that the sale of your principal residence is a “tax free capital gain”. In fact, the sale of your principal residence will trigger a 23.8% capital gain which means that your house cannot be used as a retirement investment.
5. Thou shalt NOT buy non-U.S. mutual funds. If you do, you will have your gains confiscated in the form of an “Excess Distribution” Tax. Buy American. Buy U.S. mutual funds.
6. Thou shalt buy ONLY “term insurance”. Any other form of “insurance that has cash value” will be treated as a sacred instrument of tax evasion. Furthermore, if you purchase a “foreign insurance policy” thou shalt pay a special excise tax.
7. Thou shalt NOT buy or participate in an RESP, RDSP, employer pension plan, or any other kind of retirement planning vehicle which will be considered to be a TAXABLE “Foreign Trust” (with all the attendant penalty laden reporting requirements).
8. Thou shalt neither be self-employed NOR carry on business through a non-U.S. (AKA “Foreign”) corporation. If you do, punitive taxes, deemed income, and expensive reporting requirements will descend on you.
9. Thou shalt NOT relinquish U.S. citizenship. In the event that you do, you may be subjected to an “Exit Tax” which applies to your “non-U.S.”
pension, “non-U.S.” assets, and assets that accumulated after you ceased to live in the United States. In addition, there are certain “Form People” who claim that you may be banished from the Homeland forever.
10. Thou shalt file, every year, file the following forms with the IRS:
1040 and all required schedules, FBAR, FATCA, 8938, 8965, 3520, 3520A,
709 (up to a maximum of up to about 45 forms). Understand that this will cost you thousands of dollars.
And this ladies and gentlemen, is why your problem is NOT “coming into U.S. tax compliance”. Your problem is “living as a tax compliant U.S.
citizen abroad”. It really can’t be done (if you want any kind of life).
Posts in this Series
Prologue – U.S. citizens are “subjects” to U.S. law wherever they may be in the world
Part I – The U.S. “Giveth” and the U.S. “Taketh” – How the U.S. uses “citizenship” as a weapon against individuals
Part II – – U.S. Citizens living abroad – “Life in the penalty box”
Part III – I’m a “Toxic American”, but it’s not my fault – How U.S. regulation makes “U.S. citizens undesirables in other nations
Part IV – The use of U.S. citizens as instruments of foreign policy
Part V – Why Americans abroad are renouncing U.S.
Part VI – The injustice of the S. 877A “Exit Tax” as applied to Americans abroad