Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation

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Prologue

This is the third of a series of posts focussing on the need to end US citizenship-based taxation (practised only by the USA) and move to a form of pure residence-based taxation (practised by the rest of the world). The first post was titled “Toward A Definition Of Residence-based Taxation For Americans Abroad“. The second post was titled “Toward A Movement For Residence-based Taxation For Americans Abroad“. This third post is “Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation“.

Why are some Americans Abroad not concerned about citizenship-based taxation? Why will many Americans Abroad continue to vote for the same political party that continues to damage them? What does this imply for unifying Americans Abroad in support of a movement toward residency-based taxation? This post will explore these issues.

In The Life Of Many Americans Abroad: Citizenship-based taxation is not a problem until it is!!

In our call of June 2, 2021, it become clear that there are many US citizens living outside the United States as tax residents of other countries who:

1. Are aware of US citizenship-based AKA Extraterritorial taxation; and

2. Are not particularly bothered by it. Although they may not like it, they experience it as (at most) a filing (albeit expensive) obligation.

How can this be?

To borrow from the language of a great speech …:

There are many Americans living outside the United States, who really don’t understand (or say they don’t) what is the great issue between citizenship-based taxation and residence-based taxation.

Citizenship-based taxation really doesn’t affect them (so they think). They use the Foreign Earned Income Exclusion (possibly when they are not entitled to), they have only employment income and they haven’t had a real problem with it. They claim that they never actually owe any US taxes (of course this assumes their returns are being prepared correctly). They don’t understand that generally the Foreign Earned Income Exclusion will not solve the problems of US citizenship-based taxation. Worse yet, many believe that the Foreign Earned Income Exclusion exempts them from the requirement to file US taxes. They don’t understand that they must file to claim the exemption!

They may be right. They may be wrong. But, they must understand that their problem free life is probably temporary because:

Citizenship-based taxation is not a problem until it is!!

At the moment that it becomes a problem, it will NOT be a small problem!

Here are six ways citizenship-based taxation which was NOT a problem can become a problem:

The Known Knowns:

1. OMG – You haven’t been filing correctly under the existing rules. I didn’t know that my non-US mutual fund was a PFIC.

2. OMG – I have been filing all these years and I didn’t realize that the USA imposed capital gains tax on the sale of my principal residence. I just sold my house!!

3. OMG – They have just enacted a new law affecting Americans abroad! You mean that I have to pay a transition tax. A retroactive tax on the past profits in my small business corporation and current tax on the current undistributed profits in that corporation. I’m not GILTI of anything!

4. OMG – Treasury gave an interpretation to the GILTI regulations which has been a big help to me. You mean to say that Senator Wyden is now proposing legislation to reverse this Treasury interpretation?

The Known Unknowns:

5. OMG – What about the “known unknowns”? I know about the possibility of the Elizabeth Warren Wealth tax. What is unknown is whether it might pass and how it might eventually affect me.

The Unknown Unknowns:

6. OMG – What about the “unknown unknowns”? I can’t even imagine all the ways that Congress could harm Americans abroad. I can’t even imagine what might be. It’s already almost impossible to live outside the United States in a FATCA and FBAR world.

It’s as though being a US citizen means that I have a disability that makes it impossible to file taxes as an American abroad and plan for my retirement under my main tax system.

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Yet, many of those same Americans abroad who are not overly upset by US citizenship taxation appear to be aware that others have been severely damaged by it.

It’s like: Well, I know some people have been hurt. But, I haven’t been hurt so there really isn’t a big problem here. No reason to actively oppose this. No reason to question the support for my political party. No reason to change my voting patterns. And absolutely NO REASON AT ALL to question the premise that a country that I don’t live in should be able to govern my life in the country I do live in.

There is only one solution to the problem of US citizenship-based taxation AKA the extraterritorial tax regime!!

(The extraterritorial tax regime is a tax regime that is more punitive than the tax regime imposed on resident Americans!)

Abolish citizenship-based taxation and move to a form of “pure” residence-based taxation. Pure Residence-based taxation is the ONLY way to save you from being subject to Internal Revenue Code. No citizenship-based taxation with carveouts for certain kinds of people! Pure residence-based taxation for ALL Americans abroad!

US citizenship cannot and should not be used as a basis for tax residency in the United States (or anywhere else).

Citizenship-based taxation is not a problem until it is!!

The only thing that can save Americans abroad from the US extraterritorial is a shift to pure residence-based taxation!

John Richardson – Follow me on Twitter @Expatriationlaw

4 thoughts on “Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation”

  1. Jackie pruskin

    Thank you John. The message about RBT is getting louder, the situation more pressing thanks to you and all those who want significant change for the better for Americans who live in countries outside the borders of the USA. Movement forward must continue.

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  3. Juan Valdez

    I agree, but Americans culturally don’t connect well with those are suffering. This is a dangerous place to be in. For instance, some Amerikans continue to believe George Floyd failed to obey cop commands and deserved his fate even though he was restrained. The govt has spent the last few centuries entrenching the belief Floyd’s type are unworthy citizens. Most Amerikans don’t want to be bothered because Floyd’s community problems are not theirs.

    I recommend people get behind all the lawsuits and to start one of their own. Jury trials where the govt is the defendant are our only option. Letter writing, voting, etc., are a waste of time. The most troubling is Amerikans overseas voted in the last election without making our demands clear and gave us the people who crafted FATCA and also luv CBT. Insane.

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    1. Surie

      Sorry, but the results of the election before that got us Transition tax/GILTI. The rapaciousness of the US government toward expats is bipartisan.

      Reply ↓

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