Financial planning for Americans abroad

What follows is a comment I wrote to the above article on November 17, 2015

John Richardson wrote:

Thanks very much for this article. It is a good start for people who are considering moving from the United States and for the large number of Americans living outside the United States who were unaware of their U.S. tax requirements.

I have six broad comments:

1. You have described SOME of these rules. You have made no effort to explain what the rules mean in the life of a “U.S. tax compliant Expat”, who is ALSO subject to the tax rules of another nation. In general, the U.S. tax rules punish anything that is either (1) foreign to the USA (which includes the retirement and investment options in other nations) and (2) involves tax deferral (the cornerstone of retirement planning). I also point out that depending on the country of residence and whether it has a “Totalization Agreement”, expats may also be subject to “U.S.Self Employment” taxes.This can be particularly punishing for those who live in countries with exceedingly high marginal tax rates.

2. The only way to avoid the harsh U.S. tax rules (penalties and reporting requirements) that apply to most non-U.S. investments is to restrict investing and retirement planning to:

A. Shares of individual stocks
B. Interest bearing instruments (bank accounts, etc)
C. Real estate

3. Non-U.S. pensions: As you point out, the U.S. Internal Revenue Code does NOT treat “foreign pensions” the same way that it treats U.S. pensions (in other words they are not really pensions). Therefore, without treaty relief, there is (incredibly) no way for an Expat to have all (or any) of the benefits of a pension outside the U.S.

4. What about warning Americans abroad about the dangers of carrying on business through a corporation. There is huge potential for double taxation and the requirement of the dangerous and expensive Form 5471.

5. Was your omission (except for one sentence) of the draconian and invasive reporting requirements deliberate? As a tax preparer you know that a significant part of every Expat tax return includes significant disclosure of information that is foreign to the USA, but local to the expat. Do homeland Americans have to report their local bank accounts to the IRS? Why should expats? Don’t forget the draconian penalties for failure to disclose.

6. This of course assumes that Americans abroad are able to keep bank accounts. Because of FATCA, those with a U.S. birthplace are having trouble opening and retaining basic bank accounts.

Thanks again for a helpful article which describes what the rules say. But, you made no attempt to describe what the rules actually mean. The effect of the rules is that it is now almost impossible for Americans expats to both be U.S. tax compliant and live outside the United States.