The Road To Tax Reform For Americans Abroad: Part 2 – Citizenship Taxation And The Seven Deadly Sins

Introduction

Life is full of rude awakenings. More and more people are experiencing their OMG moment …

This is Part 2 of the series. In Part 1, I identified that it is essential that individuals (and governments) unite to bring an end to the US tradition of “citizenship taxation”. “Citizenship taxation” – what a phrase. The words are not descriptive of anything. It clearly has something to do with some form of taxation. The inclusion of the word “citizenship” makes it sound almost patriotic. But maybe, not. Maybe it’s just part of what means to be a citizen. Since only the United States has citizenship taxation, perhaps taxation is what it means to be a US citizen. If so, then perhaps US citizenship should be called “taxation based citizenship”. The concept of citizenship means different things in different countries. Is this a statement that the essence and the meaning of US citizenship is taxation and only taxation?

Citizenship Taxation – Theory vs. Reality

A supporter of citizenship taxation is someone who THINKS about “citizenship taxation”. An opponent of citizenship taxation is anybody who has tried to LIVE under citizenship taxation.

https://www.citizenshiptaxation.ca

I guarantee you that there is not a single supporter of US citizenship taxation who actually understands it!

Toward An Understanding: Citizenship Taxation And The Seven Deadly Sins

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The Road To Tax Reform For Americans Abroad: Part 1 – The Problem Is The System And Not The Party

Introduction – The First Of A Series Of Short Posts

My name is John Richardson. I am a Toronto, Canada based lawyer. I am also a founding member of “SEAT” (“Stop Extraterritorial American Taxation”). I am an advocate for reforming the US laws which apply to US citizens who live outside the United States as permanent residents of other countries. The problems experienced by Americans abroad are at the “boiling point” and something must be done. This post is motivated by the following twitter thread which reveals the pain, desperation, anger and divisiveness experienced by Americans abroad:

This is the first of a series of short posts in which I will share my thoughts and suggestions for how to proceed. I welcome your comments both here and on twitter where I am @Expatriationlaw.

Blind Partisanship Is Not Productive

I want to state at the outset that I am an independent and am not a member of any political party. I have been and continue to be supportive of independent candidates in Canada (and anywhere else). I state this because during this series of posts, I will express sentiments that are critical of political parties. When I criticize the Democrats it’s not because I am a Republican. It’s because the Democrats are deserving of criticism (or vice-versa). Healthy democracies are dependent on accurate observations and objective analysis. Excessive partisanship is simply an excuse for reasoned analysis.

The Difficulty Of Living As A US Citizen Outside The United States

First, if you are a “retiree living abroad” where all of your income is US sourced this post is NOT for you. You are filing the same US tax return while “retiring abroad” that you would if you were living in the USA. You are probably filing tax returns ONLY in the USA. Therefore, the US citizenship tax regime does not impact you in the same way. This post is for those who live permanently outside the United States and your income sources, assets and retirement planning are associated with the tax systems of other countries (foreign to the United States).

Second, As permanent residents of other countries, US citizens are treated as BOTH tax residents of the United States and tax residents of the countries where they live. In other words, they are subject to the full force of two (often incompatible) tax systems. Think of it. US citizens living outside the United States are subject to the tax systems of two countries at the same time. Leaving aside the anxiety this induces, the time that it takes to comply, the heightened threats of penalties and the outrageous costs of compliance (think tax accountants and lawyers), this puts Americans abroad in a position where:

1. They are subjected to a tax system that is more punitive than the tax system imposed on US residents

2. They are often subject to double taxation (the foreign tax credit rules and the Foreign Earned Income Exclusion do not prevent many forms of double taxation)

3. The US tax rules prevent them from engaging in the normal financial planning and retirement opportunities (Canadian TFSA and UK ISAs are not tax free for US citizens)

4. In many countries, because and only because of their US citizenship they are prevented from maintaining the normal financial accounts they need to live in a normal way (this is the direct result of the 2010 Obama FATCA law)

The cumulative weight of these problems is that US citizens living outside the United States are being constructively forced to renounce their US citizenship in order to survive. But, it gets worse. Since June 16, 2008 certain Americans abroad who renounce US citizenship (“covered expatriates“) are forced to pay a special expatriation tax on their non-US assets to achieve this goal. (You can find a video of my discussing US citizenship renunciation here.)

Americans abroad are NOT renouncing because they don’t want to be Americans. They are renouncing because the US tax and regulatory regime is forcing them out of their US citizenship!

It’s The System Not The Parties

Regardless of which political party is in power, tax laws will continue to change.

As long as the United States employs citizenship-based taxation, changes in US tax laws will continue to have dramatic (sometimes intended and sometimes unintended) effects on Americans abroad. These negative effects and outcomes will continue regardless of which political party is in power.

For example:

The 2017 TCJA became law under the Republicans. The effects on Americans abroad were horrible. (Examples include: Transition Tax, GILTI, those using the “Married Filing Separately” category were required to file with zero income)

The 2010 FATCA law was enacted under the Democrats. The effects on Americans abroad were horrible. (Examples include: Form 8938, FATCA bank account closures, etc.)

Therefore, it is a mistake to bicker over which political party has done more or less damage to Americans abroad. As long as citizenship-based taxation continues and tax laws continue to evolve, whatever political party is in power will – by changing tax laws – continue to damage the lives and finances of Americans abroad.

Individual American Abroad Must Unite To Get This System Of Law Changed

Conclusion for today: The problem is the system! It’s not the political parties.

You have the right to vote. The question is not which party to vote for. The question is how can you most effectively use your vote to end US citizenship-based taxation and encourage FATCA repeal.

To be continued …

John Richardson – Follow me on Twitter @Expatriationlaw

Raymond James: A Permanent Investing Solution For Cross Border Individuals

Raymond James Crossing Borders Wealth Management Solutions

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Mr. LJ Eiben is a Financial Advisor at Raymond James.

The information in this podcast was obtained from sources RJA and believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views expressed are not necessarily those of Raymond James (USA) Ltd. Raymond James (USA) Ltd. (RJLU) advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered.

Raymond James (USA) Ltd. is a member of FINRA / SIPC

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Americans Abroad And Financial Planning In A FATCA And FBAR World – LJ Eiben

The Importance Of Financial And Retirement Planning – It’s Not Easy For Americans Abroad

Americans abroad are severely disabled by the US tax and regulatory regime. As a result they need to plan more carefully and they have fewer options that those who are not US citizens.

I reached out to LJ Eiben of Raymond James to discuss various aspects of the “US Citizenship Dilemma”. Both US Social Security and Canada Pension Plan are part of the equation. I first spoke with LJ in November of 2021 about US Social Security.

Here are three podcasts …

November 11, 2021 – US Social Security For Canadian Residents

January 26, 2022 – Canada Pension Plan And Old Age Security For Canadian Residents

February 4, 2022 – Raymond James: A Permanent Investing Solution For People With Lives And Investments In Both Canada And The US

2022 Financial Planning Facts For Tax Residents Of Canada

Have a look at the following …

2022 Financial Planning Facts ENG

Finally …

Required Disclaimer: The information contained in these slides was obtained from sources RJA and believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views expressed are not necessarily those of Raymond James (USA) Ltd. Raymond James (USA) Ltd. (RJLU) advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered.

Raymond James (USA) Ltd. is a member of FINRA / SIPC

John Richardson – Follow me on Twitter @Expatriationlaw

Airline and cruise ship employees: how income earned in international waters may lead to double taxation for (only) Americans abroad

Oliver Wagner, CPA and John Richardson – January 16, 2022

Americans abroad and the presumption of double taxation

Prologue: For whom the bell tolls …

Whether a US citizen lives in (and is a tax resident of) Mexico and works on a ship in international waters

Or Whether A US citizen lives in (and is a tax resident of) Holland and is an airline pilot …

That US citizen, because and only because of the combination of US citizenship-based taxation coupled with living outside the United States, is likely to be subject to double taxation. The following discussion explains why.

A Summary Podcast …

Part A: Introduction – About Citizenship-based Taxation
Part B: How the Internal Revenue Code is designed to mitigate the effects of double taxation in certain circumstances
Part C: Determining what is “foreign source” income
Part D: The problem of international waters …
Part E: The effect of sourcing to the US income earned in international waters by dual tax residents
Part F: Deducting “foreign taxes” paid – although income from international waters may not be foreign, it is still subject to the payment of “foreign taxes”
Part G: Can a US citizen living abroad be saved by a tax treaty? Maybe if he/she lives in Canada****
Part H: Conclusion and the need for “Pure Residence-Based Taxation”

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Considering renouncing US citizenship? Interesting discussion with Buffalo lawyer @JoeGrasmick

In 2018 I had a discussion with Buffalo Immigration Lawyer Joe Grasmick about a number of issues including renouncing US citizenship. The discussion was videoed as part of my “Retain Or Renounce” series. It was a very interesting and balanced discussion. (We also discussed some of the dos and don’ts of Green Card abandonment.)

I wanted to share Joe’s LinkedIn post today (December 31, 2021). His post reinforces the reality that (although Americans abroad are clearly suffering from the tax and regulatory regime) US citizenship does have value.

I completely agree with Joe that the consequences of renouncing US citizenship (notwithstanding the problems) should be fully understood and appreciated.

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Reflections Of An Expatriation Lawyer: From The Solemn Occasion of 1988 To The Non-event of 2021

Guest Post by UK based New York lawyer Diane Gelon

Diane is a London, UK based New York lawyer who specializes in issues affecting Americans abroad including renunciation. What follows are her thoughts on how the renunciation process has evolved since 1988. The message is that in 1988 the renunciation of US citizenship was a serious and solemn event that was taken very seriously by the US government (it was also free of charge). By 2021 it had become a routine matter, of little concern to the US government (and cost $2350). This is one more reason why the State Department should process renunciations of US citizenship through video conferencing!

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Over to Diane …

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The State Department Should Allow For US Citizenship Renunciations To Take Place By Video

This post has been co-authored by Diane Gelon* (see “Reflections Of An Expatriation Lawyer“) and John Richardson

Prologue

In September of 2021 the Paris based “Accidental Americans Association” filed a lawsuit against the US State Department. The lawsuit was brought in an attempt to force the State Department to allow individuals to renounce their US citizenship. (A prior lawsuit by the “Accidental Americans Association” was based on the excessive $2350 renunciation fee.)

The lawsuit is evidence of the extreme frustration that many Americans abroad are experiencing because they (1) are unable to renounce US citizenship and (2) justifiably feel that they are prisoners of the circumstances of their birth.

It was recently announced that “The US Department of State (DOS) is suspending in-person interview requirements at local consulates for a year for numerous non-immigrant work visa categories and their families (spouse and dependent children“. In London the US Embassy is conducting telephone meetings to deal with Social Security issues. (Prior to Covid this would have required an in person meeting at the Embassy.) The State Department is clearly reducing the number and kinds of services that require “in person” Consulate visits.

The purpose of this post is to argue that renunciations of US Citizenship need not take place through in person interviews at a US Embassy or Consulate. Rather renunciations of US citizenship can and should take place through video conferencing. The backlog in processing renunciations is explained as being related to the Covid-19 pandemic. A response to the pandemic has been that more and more legal proceedings are taking place through video conferencing. Both Canada and the UK (and certainly other countries) are conducing citizenship ceremonies by video, entire court cases are held via video conferencing, and documents can be witnessed and certified by video. We have discussed various aspects of this issue with each other over a long period of time as well as benefiting from discussions with Dubai based lawyer Virginia La Torre Jeker and Esquire Founder Jimmy Sexton.

There is no law that requires that renunciations of US citizenship take place inside a US Consulate or Embassy!

This post is composed of the following seven parts leading to the following conclusion:

Americans abroad and their representatives should pressure the State Department to use their statutory authority to allow renunciations by video conferencing. The State Department has the statutory authority to do so. The fact that the State Department does not currently allow renunciations through video conferencing doesn’t mean that it cannot allow renunciations through video conferencing!

Part I – Introduction: Why Americans Abroad Are Renouncing US Citizenship
Part II – An appointment to renounce US citizenship is hard to find
Part III – Why there is NO legal requirement that renunciation appointments must take place inside a US Embassy or Consulate
Part IV – The State Department website does not specifically state that renunciations must take place inside the US Consulate or Embassy
Part V – Americans abroad and their organizations must push the Biden administration to allow renunciations of US Citizenship through video conferencing
Part VI – Interesting Bobby Fisher anecdote supporting the view that renunciations are not required to take place inside US Consulates
Part VII – Diane Gelon and John Richardson update their November 29, 2020 podcast with a December 29, 2021 podcast

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Republicans Overseas Begins Its Support and Advocacy for Pure Residence-based Tax

This is an incredibly significant development. See the following posts on their Facebook site. They also have a new Twitter feed. Follow them at @RepOverseas.

Republicans Overseas position On What Pure Residence-based taxation means:

Tax Talk 1 – November 22, 2021

Tax Talk 2 – November 29, 2021

Tax Talk 3 – December 10, 2021

Tax Talk 4 – December 15, 2021

Tax Talk 5 – December 20, 2021

Tax Talk 6 – December 27 2021

Tax Talk 7 – January 3, 2022

Tax Talk 8 – January 21, 2022

Tax Talk – January 24, 2022