Update April 13, 2022 …
Here is yet a seventh way – the treatment of gifts as capital gains – that the Biden Green book would impact Americans Abroad
As long as the United States employs citizenship taxation any proposed changes to the US tax system will have an impact (some intended and some unintended) on Americans abroad.
The Biden Green Book for fiscal year 2023, released on March 28, 2022, contains a number of proposals to both increase tax rates and increase the tax base by increasing the number of activities that are taxable events. Generally the proposals include a number of provisions to create and enhance taxation on both income from capital and capital itself. These provisions continue to generate discussion in the mainstream media including: The New York Times, Washington Post and Wall Street Journal. This is certain to generate much discussion in the tax compliance community.
The 2023 Green Book is available here.
Much will be written about how the proposals would affect resident Americans. Far less will be written about how the proposals would affect Americans abroad. The US rules of citizenship taxation steal from Americans abroad (and the countries where they reside) in hundreds of ways. Some are intended and foreseeable. Others are the unintended consequences that result from tax changes that apply to people who are not considered in the political process.
Significantly the Green Book does not suggest a move away from US citizenship taxation toward resident taxation as embraced by the rest of the world. In their totality, the proposals (particularly those that create income realization events when a gift is made) suggest a worsening of the situation for Americans abroad. That said, one proposal “might” (depending on Treasury) allow for the relaxation for the 877A Exit Tax rules, for a narrow group of Americans abroad under certain circumstances.
The purpose of this post is to identify six ways (and I assure you that there are more) that the Green Book would impact Americans abroad. The “Group Of Six” includes:
1. Raising The Corporate Tax Rate To 28 percent – Creating Subpart F Income and Making More Americans Abroad GILTI – Page 2
Verdict: This will have the effect of increasing the number of Americans abroad subject to taxation on income earned by their small corporations but not received by them personally.
2. An increase in the Corporate rate would increase the GILTI rate (suggesting to 20 percent) – Page 2
Verdict: More Americans abroad will be GILTI and will possibly (depending on a combination of country specific factors and their specific circumstances) be subject to GILTI taxes at a higher rate).
3. Reducing Phantom Gains And Losses: Simplify Foreign Exchange Rate And Loss Rules For Individuals And Exchange Rate Rules For Individuals – Page 90
Verdict: This in interesting. While reinforcing that Americans abroad are tethered to the US dollar it does suggest a recognition of the unfairness of how the phantom gain rules harm the purchase and sale of residential real estate outside the USA). Imagine how this would interact with the proposed rules converting gifts to taxable capital gains?
4. Strengthening FATCA: Provide For Information Reporting by Certain Financial Institutions and Digital Asset Brokers For the Exchange Of information – Page 97
Verdict: This is an attempt to reinforce the core principles of FATCA which are about the identification of US citizens outside the United States.
5. Expatriation – The Stick: Extend The Statute Of Limitations For Auditing Expatriates To Three Years From The Date From Which 8854 Should Have Been Filed (Possibly Forever) – Page 87
Verdict: This is theoretically very bad. It means that those who renounce without filing Form 8854 would be subject to a lifetime of risk. Practically speaking these provisions are not understood on the retail level. Hence, I doubt this will influence many people.
6. Expatriation – The Carrot: Exempting Certain Dual Citizen Expatriates From The Exit Tax – Page 87
Verdict: This is good news for the narrow group of people impacted by this – mainly “Accidental Americans”. It is bad news for the rest because the existing rules will continue to apply to those “who are left behind”.
I assure you that the Green Book contains a large number of ways that Americans abroad will be impacted. I will leave it to others to add to this list.
The principle is:
Citizenship taxation can steal from Americans abroad at least a thousand ways. If you can understand even one hundred of them you are doing well!
Summary: Once again this shows how all proposed changes to US tax law impact Americans abroad in a world of citizenship taxation. There is nothing in this that suggests a move toward residence taxation. There are few crumbs which might make citizenship taxation easier to live with (example relaxing phantom gains). But, on balance these provisions are a “doubling down” on the problems of citizenship taxation. The provision to allow easier expatriation for “Accidental Americans” does nothing to make life easier for the rest.
If you have seen enough you can stop here. For those who want more of the details and explanation, continue on …