With a new administration in place in the new year, I’ll be watching to see whether President-elect Donald Trump’s team finally ends global taxation of individual American income. It is essential to fix this. Not only would it be sound fiscal policy, it would also prevent millions of law-abiding Americans living overseas from being treated like financial pariahs.
Trump seems to agree. “I support ending double taxation on Americans overseas,” he promised in a campaign statement. The problem is rooted in America’s bizarre global tax system.
Most people don’t realize it, but if you’re a U.S. citizen, the Internal Revenue Service (IRS) wants to know about every dollar and euro you earn, no matter where in the world you earn it. This isn’t a story about jet setters or Americans hiding money in overseas accounts. This is a tax that applies even if you haven’t lived here for decades and are paying your fair share in other countries. It’s like the IRS tracking you around the world and demanding every paycheck, bank account, or investment account.
Here’s how it works: If you live and work solely outside the United States, you must file a U.S. tax return reporting your income, foreign bank accounts over $10,000, retirement accounts, investments, and other financial details. You are responsible for paying U.S. taxes on income above a certain threshold and navigating complex forms and rules to avoid or minimize double taxation.
This is not only unfair, it’s deeply unfair. The United States is the only developed country that taxes people based on citizenship rather than residence. We are in terrible company. As Adam Michel of the Cato Institute I will write“Eritrea’s brutal dictatorship imposes a 2 percent tax on all foreigners, the only country that comes close.”
Double taxation most commonly occurs if you reside in a number of countries that do not have a tax treaty, or if you have a Section 911 exemption (currently up to $126,500 is exempt). or for income earned abroad that is not protected by other “admission of aliens” provisions. “It’s a tax credit to offset similar taxes paid to other governments,” Michel explains.
Common financial activities that have tax advantages in your country of residence (such as retirement accounts or home sales) can still give rise to U.S. tax liability. Americans living abroad essentially maintain two parallel tax lives and must shoulder higher burdens than U.S.-based taxpayers or taxpayers in their country of residence.
A better alternative is a territorial tax system based on the principle that income should be taxed where it is earned. Under such a system, if you are an American living and working in Singapore, the income you earn there will be taxed only in Singapore. Territorial taxation is a fundamental concept of sound tax policy, and the U.S. citizenship-based system violates it. In fact, President Trump’s 2017 tax reform changed taxation on companies worldwide to territorial taxation.
But the worst part is that banking has become significantly more difficult for many Americans abroad. Thanks to the misguided Foreign Account Tax Compliance Act (FATCA), foreign financial institutions often choose to deny service to U.S. citizens living abroad rather than deal with complex reporting requirements. Therefore, these individuals may face significant difficulties in opening bank accounts, obtaining mortgages, and participating in local investments and retirement plans.
In summary, Americans abroad must pay taxes in their country of residence, must declare and sometimes pay additional U.S. taxes on the same income, and typically receive few U.S. government services. Despite this, you cannot always expect adequate financial services. Some people facing these burdens have minimal ties to the United States.
Penalties for violations are highly disproportionate. A simple filing error can result in tens of thousands of dollars in penalties, even if no taxes are paid. The complexity makes it easy to make such mistakes, even with professional help.
The administration has the means to limit enforcement of FATCA, but a complete repeal would require a repeal by Congress. Of course, the best way forward would be for President Trump and Congress to work together.
On the fundamental issue of global taxation, the United States should join other developed countries in adopting a residence-based tax and reporting system. This would solve all of the aforementioned problems and stop treating solid citizens like criminals, while still maintaining the ability to tax U.S. residents on their worldwide income and combat real tax evasion. You can.
Such reforms would also ultimately save government resources wasted processing complex returns from Americans abroad who do not pay taxes. It would foster global mobility for American citizens, including many who promote American companies abroad, and increase the international competitiveness of American workers.
Copyright 2024 creators.com
