American Expats’ Tax Liability in the US

Posted on 29. Mar, 2011 by in beyond LatAm, latin america

I spent last summer in America. One day listening to NPR, I heard an amazing story on American expats renouncing their US citizenship. Here are some choice quotes on the phenomenon:

More American Expatriates Give Up Citizenship (NY Times):

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship …

There were 235 renunciations in 2008 and 743 [in 2009]. Waiting periods to meet with consular officers to formalize renunciations have grown …

I didn’t know that, as an American, I have to pay taxes on what I earn here. Obviously I pay for income I generate Stateside with an extensive list of tax calculators and estimators, but it was news to me that I have to pay taxes on teaching English down here. It sounds outrageous, and it is, that I have to pay taxes on the one million pesos or so a month I make teaching English in Colombia.

Here’s another choice quote from the NY Times piece:

American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad.

A major point of the NPR story was that it discourages Americans to branch out of our own borders. In a globalized world, that doesn’t make for a competitive nation.

As it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.

Fortunately there’s a movement to reverse this backwards ass policy. These quotes from the Wall Street Journal piece, Taxes on Overseas Income Take Center Stage at House Hearing:

U.S. multinationals pressed their case for exempting all foreign profits from U.S. tax at a Thursday House hearing, as a congressional debate over corporate taxes got off to a contentious start.

This article focuses more on American corporations’ earnings, not individuals’, but it’s the same concept. American firms are put at a disadvantage against foreign competition.

“We’re not talking about a tax break. What we’re talking about is paying the same as our foreign-based competition,” [Proctor & Gamble CEO Robert] McDonald said …

“Clearly, the tax code is too complex, too costly, and takes too much time to comply with,” [MI Republican Congressman David] Camp said. “I don’t think this can be, nor should it be, a partisan exercise” …

Democrats and Republicans on the panel were in agreement Thursday that the tax code is too complicated and needs to be simplified.

Even if you’re anti-corporate or anti-big business, you have to recognize that American companies losing out to foreign competition will result in less American jobs. Look at the American auto industry.

Here’s another piece on the subject in TIME, Why More U.S. Expatriates Are Turning In Their Passports:

502 expatriates renounced U.S. citizenship or permanent residency in the fourth quarter of 2009 — more than double the number of expatriations in all of 2008. And these figures don’t include the hundreds — some experts say thousands — of applications languishing in various U.S. consulates and embassies around the world, waiting to be processed. While a small number of Americans hand in their passports each year for political reasons, the new surge in permanent expatriations is mainly because of taxes …

The U.S. is the only industrialized nation that taxes its overseas citizens, subjecting them to taxation in both their country of citizenship and country of residence.

I doubt Americans in Colombia or anywhere in Latin America are renouncing their citizenship. I bet it’s happening in countries like UK, Australia, Switzerland, etc. But still…

I’m proud of being American, and I’m proud of my country. But there are still things that make me wonder what the hell is wrong with those people. What do you think? What could possibly be the argument for taxing money I make here?

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14 Responses to “American Expats’ Tax Liability in the US”

  1. alex

    29. Mar, 2011

    Wow, Im dumbfounded as well…I gulped for a minute there but I realized after I get my citizenship I might be able to bypass that bullshit….how are things going out there? New pad?

  2. Viking

    29. Mar, 2011

    Hi Colin;

    I think you are jumping the gun a bit.

    First, the first $90K are exempt. (This number has grown much more
    slowly than the cap of social security tax base over the last 15
    years. )

    Secondly, if you live in a country with equal to or higher tax rate
    than the US, you will never have to pay anything, as you get a dollar
    for dollar credit for tax paid abroad.

    But if you do live abroad, and the country happens to have a tax rate
    of say 10%, and the US happens to have a federal marginal rate of 25%,
    you will have to pay a 15% extra marginal rate by the time you have
    made enough that your credit for tax paid abroad has been exhausted.

    Say you made $160K, and the local tax rate is 10%. You have paid $16K
    to your host country. Your liability is 25% of $70K ($160K – $90K) =
    $17500. With credit for $16K, that amounts to $1500 to the feds.

    depending on the local tax rate, the payment to the feds will kick at
    any income from $90K or higher, depending on the local tax rate.

    One key, is that if you end up getting high income abroad, you want to
    have last US residency (and driver’s license) in a state without
    income tax, like Texas or Washington.

  3. Colin

    29. Mar, 2011

    @ alex – pad’s lovely 🙂

    @ Viking – Foreign exemption only applies if you spend less than 30 days inside the States. I spent more than that in 2010. But thanks for all the other info!

  4. Viking

    29. Mar, 2011

    That’s another change, it used to be sufficient to spend 6 months + 1
    day abroad to qualify 🙁

  5. David

    30. Mar, 2011

    Can I just point out that only the US and the philipines do this.
    If I as a UK citizen were to go to Colombia and earn £1million (1.5 millionUSD) per year – I would pay no tax to my Government.

  6. Mike

    30. Mar, 2011

    The core issue is that the United States is a very insular country. The idea that we even HAVE expats is something most people cannot conceive of. Then you combine that with the old maxim about squeaky wheels and grease, the outcomes get insane.

    Mike

  7. matthew

    30. Mar, 2011

    I’m looking into becoming canadian. but im also thinking i want to live there instead of peru but at least they wouldnt tax me on what i make here. When I have some spare money to get the paperwork started It’ll probably be in motion. Their system is funny though. you get points based on many things, french speaking, career, having canadian family. if I get citizenship you can be sure what my next step will be

  8. El Pantera Del Norte

    31. Mar, 2011

    Really? You didn’t know anything about this? I thought you had a Masters in Business? Shocking.

  9. Mark

    31. Mar, 2011

    I lived in Bermuda for three years. The tiny island is one of the world’s leading tax havens, second only to the Cayman Islands. It’s a UK dependent territory, but it’s only about 500 miles off the coast of North Carolina.

    Bermuda is home to some of the biggest American multinationals, like AIG, Citigroup, and hundreds of others who have offices there solely to avoid paying corporate taxes in the homeland. But with such a large US corporate presence, in the three years I was there, I only met about 4 Americans who actually lived and worked on the island. Why? For the reasons mentioned in this article.

    The big American offshore companies are staffed primarily by Canadians and Brits. If you can’t convince educated Americans to pay income tax twice for the privilege of accounting and auditing for companies that pay almost no tax at all, you’ve got to find people elsewhere. The only time you find Americans on the island is when throngs of then stream off the docked cruise ships in the peak tourist season.

    Canadians would be in the same boat as Americans, but we have something called Foreign Residency Status, meaning we can live, work, and pay taxes overseas, without having to pay it back home. All we have to do is fill out a four-page document online, print it off, and mail it to the nearest gov’t office.

    Just thought I throw my (non-taxed) 2 cents in,
    Mark

    PS: Matthew, if you’re thinking of becoming Canadian to avoid taxes, you’re in for a rude awakening. That average income tax rate for someone earning between $40,000-$60,000 a year is about 35-40 percent. But at least you’ll have access to universal healthcare!

  10. Steph

    11. Apr, 2011

    Frustrating, definitely. Ugh, don’t get me started on being a US citizen abroad… that could go in so many directions… Great post.

  11. JJ

    13. Apr, 2011

    Just curious, is that 1 million pesos per month your only income?

  12. Matt

    20. Jun, 2011

    While they will figure a way to get you to pay tax on your meager pay in Colombia, large tax loop holes, and incentives let ExxonMobile pay nothing in taxes to the federal government. It’s amazing. Can’t wait to leave, and go some place that is crazy and fun…not just crazy and annoying.

  13. Bill

    22. Dec, 2011

    Our Government (US) is intent on taxing the peasants to death.
    We have become the new USSR, as the Russians have noted (See op-eds in Pravda in about the last year; can’t reference because I found it via surfing, but I think FredOnEverything.net might’ve been the source.)
    Also, it’s been said the US has at max another 10 years before the SHTF. At that point, I think many of us gringos will find that while anyone can get INTO the US from Mexico….
    Not a single one of us will be able to get OUT.

    After all, that would be a tax loss, and the point you made & missed at the same time, that corporations are looking to NOT pay US taxes on income abroad? they do NOT want to have that privilege conferred on their workers – ONLY on the corporation itself.

    Why play the game when you can control the whole thing: the field, the refs, the ball, the rules, the teams, the media? Make them all play together and keep the peons divided and diverse….
    And for those who think tinfoil-hat-conspiracy – there’s no NEED for an actual conspiracy if all the key players think the same way. Rich and powerful are a different mentality from even UPPER middle class. If you EARN $1Mil/year, plus investments of even $1Mil/year, you’re in a completely different class of people, a different way of viewing the world. Even at $500K…. Even at $250K… And you don’t understand the painful percentages of income that go straight from the paycheck to the gaping maws of our modern world – Verizon, AT&T, Bank of America et al. I’m in the top 10% of earners myself – I earn over $70K. And THAT puts me in the top 10%! WTF? (for the record, I am NOT in the top 5%.) But I have costs, too – a mortgage, a family, cars, food, cell phones, taxes, etc.
    I see the world in terms of making the mortgage payment and paying off all the bills.
    If I earned $1Mil/year, I’d see it in terms of starting a new business, playing golf, watching my stocks, etc. And it’s not a “fat cat” thing, there’s an entire mindset that has to go with it, or the millionaires are quickly hustling again. (Easier to spend than earn.) Brewsters Millions this ain’t.

    But, if you have a media Mil with a law enforcement Mil and a legislator Mil and an industiral Mil… they ALL get wealthier when they work together, and at Mils, it starts to add up fast! The legislator helps the manufacturer, the enforcer helps both, the legislator grants the enforcer more power, the media covers the enforcer’s abuse of power and the crimes at the same time… And the Mils get wealthier, while those of us in the trenches get fleeced left, right and center: Freedoms changed / denied / re-written, improper sentences handed down, abuses of power, abuse of our labor, abuse of our time, and a media that talks about how we’re lazy (not enough time in the office) and at the same time berates us for not spending enough (weak economy) and at the same time highlights how the poor womynz are discrimated against, and how the “Wealthy” (they include me) aren’t paying our “fair share”, yet they do NOT report on the costs absorbed by me in incarcerating people for “smuggling contraband” (Drugs, cigarettes, alcohol), or using person recreational drugs, or engaging in (more honest) sex-for-cash, etc, etc, etc.
    And kicker is – when it’s one of the Mils who gets caught – it’s a media circus and there’s never much report on the SENTENCING…. Because were I to do the same thing, I’d get 75 years, say – while the Mil gets 7.5. (7 and a half, but periods don’t show up well.) and it may be MONTHS instead of years. B.N. Clinton Impeachment; “W” bullshit; Carter; Reagan; Nixon; FDR…. You see the trend yet? ain’t new, dudes….

    And a LOT of Americans can’t even afford to leave, so… it’s going to get UGLY.

  14. Colin

    22. Dec, 2011

    Bill, so aside from Obama’s exorbitant spending, do you support his going after millionaire loopholes?

    See this video: http://www.youtube.com/watch?v=cgbJ-Fs1ikA

    Also, here’s a recent article on how billionaires shelter their assets from taxes:
    http://www.nytimes.com/2011/11/27/business/estee-lauder-heirs-tax-strategies-typify-advantages-for-wealthy.html?pagewanted=all

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