Tuesday, July 8, 2008

The improper taxation of US expatriates

Typically, who pays income tax where is based on residence. The only country that I know of that does not follow this principle is the United States. As a US citizen (or green card holder), you have to pay income tax to the IRS wherever you live, and on your worldwide income.

Fortunately, many expatriates are able to benefit from some tax treaties between the US and their country of residence: they can deduct their foreign taxes, in principle. But this is by far not the case for everyone. But if you do not live where your taxes are used, what do you get in return for your taxes?

Depending where you live, the US offers protection: an embassy where one can find refuge, or repatriation to the US in case of serious trouble. This sounds like some insurance policy. If it were offered on the free market, such a policy would, however, be dirt cheap for most expatriates, for example those in Canada. This seems like a pure tax grab to me.

Note 1: many countries bill their citizens for repatriation service. Not Canada, which lead to some debates after the last war in South Lebanon. Some people were quite unhappy about subsidizing others living in dangerous places.

Note 2: an obvious solution for expatriates to avoid paying US taxes is to renounce citizenship. It is, however, illegal doing so for tax reason. And in a sly move, the Heroes Act of 2008 which increased benefits to veterans and their survivors also included a provision that anyone giving one's citizenship up voluntarily would be taxed on all assets as if their were sold.


T-Bone said...

Yeah, it's odd that the US is the only country that taxes expatriates. But I'm confused about how the whole international tax accounting stuff works. If a foreigner invests in a US company, do they pay US capital gains taxes? If I were to move outside of the US and continue working for my company, would I have to pay income taxes to the US, the new country, or both? Or is that a case where I can pay both, but subtract my US payments from my new country's tax bill if they have one of those agreements between the countries?

Vilfredo said...

If I am not mistaken, as an expatriate, you have to pay taxes both in your country of residence and the US. There is a substantial basic income credit for US taxes, though. Depending on the tax treaty, you can deduct taxes paid to one country from the taxable income for the other country.

Gonzo said...

Some US states require filing of taxes even after leaving the state if there is no "follow-up" US state. California for example.

T-Bone said...

It may be unfair in many cases to tax an expatriate while they are taxed by their current country of residence as well, but I think it's a race to the bottom if people could live abroad for tax evasion purposes. If they did not have to pay taxes abroad, it would be legalized tax evasion.

I'd prefer if they could tax people abroad only if they move abroad for tax advantages. But I'm not sure how that could be determined. I guess they decided the next best thing that was workable was to tax all citizens, and criminalize the act of giving up citizenship for tax purposes.

Vilfredo said...

Interesting point, T-bone. But then, why would one want to become a US citizen if there is a chance of living abroad in the future?

And what about US citizens born abroad and who have never lived in the US. Why would they have to pay US taxes? Why should they be criminalized if they renounce their citizenship.