cross-posted from Tax Connections
UPDATE February 2,2018
For more on how an expat can have higher U.S. taxes than a comparably situated Homeland American, please see here.
After the latest IRS Medic podcast, Tax Connections published a post by Anthony Parent.
Perhaps the most unifying statement of the post is:
A part of our interview that really stands out to me is when Attorney Richardson referred to the current system of global taxation and compliance as immoral.
John Richardson answers:
With the respect to the following excerpt as evidence of the “immorality”:
“Taxes due are usually nothing because of the foreign income exclusion and foreign tax credits or incredibly high because of that the type of income is one that was disfavored by Congress.”
Two general thoughts:
1. It is true that many Americans abroad do not have to send a check to the IRS to pay U.S. taxes. This does NOT necessarily mean that U.S. tax is not owing. Remember that FTCs are a mechanism to pay taxes that ARE ACTUALLY OWED. One pays a tax that would otherwise be owed by using the FTC. What is astonishing about the situation of Americans abroad is that:
Absent the tax mitigation provisions afforded by the FTC rules and the FEIE (“Foreign Earned Income Exclusion”), their U.S. tax bill might be higher than the tax bill of a comparably situated Homeland American!! In other words, the rules of the Internal Revenue Code operate so that Americans abroad (because they have a non-U.S. financial footprint) will have higher U.S. taxes than a comparably situated Homeland American.
A good example of this would be the sale of a principal residence. The fact that their mortgage is in foreign currency frequently means that Americans abroad would pay a tax on the sale of the principal residence even if there is no capital gain on the property.
2. Americans abroad are subject to all kinds of things that I would call “fake income”. Again this is due to the fact that they live outside the United States. I define “fake income” as income that is specifically created where there really isn’t any. Examples would include:
– phantom gains on foreign currency transactions (see the example of the discharge of the mortgage above)
– Subpart F income because they carry on business through small business corporations that are in their country of residence (but foreign to the USA)
– PFIC “taxation” (interpreted to apply to non-U.S. mutual funds)
– the consequences of using the “married filing separately” category (because they are frequently married to non-U.S. citizens)
– more expensive divorce (because of the rules governing marriage to a non-U.S. citizen)
– and probably more
The bottom line is this:
U.S. citizens who attempt to live outside the USA will be punished for it by the Internal Revenue Code.