Toward An Explanation For Why Some Americans Abroad Oppose Changes To Citizenship Taxation


This is the fourth 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“. The third post was “Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation“. This fourth post explains why some Americans Abroad actually OPPOSE changes to citizenship-based taxation.

My last post discussed those who were complacent about citizenship-based taxation. In other words people who are actually indifferent. Their indifference contributes to the difficulty in cultivating a strong movement in support of pure residence-based taxation.

The purpose of this post is to discuss those who actually support the current system of citizenship-based taxation because they fear any change will harm them. They are NOT indifferent. They support the current system fo citizenship-based taxation.

The group most resistant to change and most likely to support citizenship-based taxation is the group which is composed largely of “retirees abroad”. These are people who live outside the United States. Their income is US source income from passive sources. Their retirement funds come from the US financial and pension system. Examples include those who move outside the United States to lower cost jurisdictions. Because they are US citizens, their income from passive sources (US Social Security, US pensions) is not subject to withholding because they are US citizens. Their fear is that a move to “residence-based taxation” would mean that they would somehow become “nonresident aliens” and therefore become subject to higher US taxation on their US source retirement income. I do understand this concern and do believe that any changes should ensure that “retirees abroad” are not damaged by a move to residence-based taxation.

Fortunately, this is a problem that is well understood and can be easily addressed. But, some preliminary thoughts:

1. To date all residence-based taxation proposals have required an “opt in”. In other words, those who want to continue to be taxed under the rules of citizenship-based taxation can continue to be do.

2. There is nothing about a move to “residence-based taxation” that as a matter of logic means that retirees abroad would become nonresidents for all US tax purposes.

3. A move to residence-based taxation could go “hand in hand” with specific (and different) tax treatment of retirement/pension/Social Security income that is US source. (For example it would/could be removed from the FDAP regime.)

4. Even if they were to become nonresidents for US tax purposes, a feature of US tax treaties is that they typically include lower taxation and withholding rates on US source income for those who are nonresidents.

To put it another way, the concerns of retirees abroad are well known, easily addressed and should be addressed.

Every other country in the world has managed this problem. Surely the United States can too!

My personal opinion (and I do acknowledge this to be my opinion) is that the problem of taxation of US Social Security to Retirees Abroad should not interfere with the broader objective of achieving pure residence-based taxation for all the individuals subject to this injustice. (It is such an easy issue to address.)

Conclusion: Retirees abroad should enthusiastically join the fight for pure residence-based taxation!

For a better understanding of how the interests of different groups have the potential to divide Americans abroad rather than unite Americans abroad, please listen to the following podcast.

More to come …

John Richardson – Follow me on Twitter @Expatriationlaw

2 thoughts on “Toward An Explanation For Why Some Americans Abroad Oppose Changes To Citizenship Taxation

  1. Juan Valdez

    Any form of CBT guarantees the govt has a lock on your sovereignty, freedoms.

    What RBT advocates should understand is: You can lead a horse to the water but you can’t make it drink. Translation: CBT believers are fools and will always be fools. Ignore them.

  2. Juan Valdez

    From court perspective how would you argue the govt caused injury to your clients? Essentially, how would you counter the “lack of standing” argument the defendant (govt) would raise for a motion to dismiss?


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