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Interesting article in the Wall Street Journal: http://online.wsj.com/article/SB1000142412788732345510457901...

I was particularly surprised to note the complexities of US taxes for citizens living abroad. For example, even though income below $100K/year is exempt, one still must file a tax return.

And there can be penalties for failing to file forms that far exceed the taxes owed. Consider this:

Bryan Skarlatos, a New York partner with law firm Kostelanetz & Fink who has handled hundreds of offshore accounts cases, says the total includes more than a dozen in which the tax and interest owed on offshore accounts was less than $20,000. Yet the IRS assessed penalties of more than $1 million, he says. The IRS declined to comment.
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I'm fine with people renouncing US citizenship to avoid US taxes. However, I want them banned from ever setting foot on US soil again. Seems a fair trade-off.
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I'm fine with people renouncing US citizenship to avoid US taxes. However, I want them banned from ever setting foot on US soil again. Seems a fair trade-off.

I suggest you actually read the article before making these knee jerk comments. It's about the difficulty of complying with tax law from overseas, the lack of co-operation from foreign institutions to allow you to do so, and the heavy penalties and fines these people have experienced while attempting to comply with the US tax law.

In 2004, Congress imposed severe penalties—up to $100,000 or 50% of the account, whichever is greater, per year—on U.S. taxpayers who choose not to tell the IRS about foreign financial accounts totaling $10,000 or more.

Critics point out that this penalty is for not filing a form, not for evading taxes. Bryan Skarlatos, a New York partner with law firm Kostelanetz & Fink who has handled hundreds of offshore accounts cases, says the total includes more than a dozen in which the tax and interest owed on offshore accounts was less than $20,000. Yet the IRS assessed penalties of more than $1 million, he says. The IRS declined to comment.


These people have taken their choice to work and live elsewhere, and are conflicted over the need to relinquish their US citizenship to avoid crushing fines for things over which they have little control.

I came very close to marrying and living overseas. This administrative horror would have followed me as well, forcing me to choose between my pride in being American and potential ruin for my family. It is a horrible and unnecessary choice to force people into.

IP
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These people have taken their choice to work and live elsewhere, and are conflicted over the need to relinquish their US citizenship to avoid crushing fines for things over which they have little control.

Huh? They have little control over filing a return and reporting foreign accounts? The one thing in the article that evoked some sympathy from me is the growing reluctance of foreign financial institutions to do business with US citizens. It's especially bothersome for the poor, beleaguered Swiss banks, which have long prided themselves on being a safe place for war criminals, despots who have looted their homelands, and perpetrators of genocide to hide their assets.

Phil
Rule Your Retirement Home Fool
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These people have taken their choice to work and live elsewhere, and are conflicted over the need to relinquish their US citizenship to avoid crushing fines for things over which they have little control.

I came very close to marrying and living overseas. This administrative horror would have followed me as well, forcing me to choose between my pride in being American and potential ruin for my family. It is a horrible and unnecessary choice to force people into.


This seems unnecessarily alarmist. My daughter worked and lived in the UK as a military spouse. Potential ruin ? Seriously ?
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Huh? They have little control over filing a return and reporting foreign accounts? The one thing in the article that evoked some sympathy from me is the growing reluctance of foreign financial institutions to do business with US citizens.

What I read in the article was that many of these people had filed a return, but not a specific document that was required to accompany the return. And that it was difficult to get the institutions to provide the documents they needed to file with the return. So yes, I would call that pretty much out of their control, and I would consider the penalties for failure to include those supporting docs cruel and unusual punishment.

IP
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What I read in the article was that many of these people had filed a return, but not a specific document that was required to accompany the return. And that it was difficult to get the institutions to provide the documents they needed to file with the return. So yes, I would call that pretty much out of their control, and I would consider the penalties for failure to include those supporting docs cruel and unusual punishment.
=================================
If that's what you read, it's not correct. There are actually two forms that may required to report foreign bank accounts.
1. TDF 90.22-1, or FBAR, for Foreign Bank Account Report. This is NOT part of a tax return, but is filed separately. It is due June 30, and is filed with the Treasury Dept. in Detroit, not an IRS office. It must be RECEIVED by June 30. There are no extensions available, but they will listen to excuses for late filing. At least they don't assess penalties, or ignore the excuses, whichever. The threshold filing requirement is relatively low, foreign account balances of $10,000.

What's irksome about this form is that it's due June 30, before the tax return, for people with extensions. And many people with complicated investments don't get their K-1s until Sept. 15. So we get their tax return info. in September (or Oct., God forbid.) And then we find out there's one or more new foreign financial accounts.

2. IRS Form 8938, which IS part of a tax return, but it's only been required the last two years. The filing requirements are higher, and depend on your filing status and whether you're in or out of the country.

There are no supporting documents required that you need to provide with either. All you need are account numbers and maximum balances for the year. That's it, to my knowledge. For foreign securities accounts, or securities directly owned, it's a little more involved, but if you're doing international investments on your own you should be expected to have the sort of info. that's required.

But the duplicate reporting is definitely overkill.

Bill
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The one thing in the article that evoked some sympathy from me is the growing reluctance of foreign financial institutions to do business with US citizens. It's especially bothersome for the poor, beleaguered Swiss banks, which have long prided themselves on being a safe place for war criminals, despots who have looted their homelands, and perpetrators of genocide to hide their assets.

I heard from one US citizen living in Switzerland that his bank closed his account and that he found it impossible to open another one. Its kind of hard to live without a bank account. Last I heard he was renouncing his citizenship, and he said a great many of his friends were doing likewise. And of course the embassy was putting them through hell to do so.
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These people have taken their choice to work and live elsewhere, and are conflicted over the need to relinquish their US citizenship to avoid crushing fines for things over which they have little control.


Well, at the risk of stating the obvious, such people might consider complying with the US tax rules, filing the required documents, and paying their fair share like the rest of us do. Why is this such a problem?

And if having accounts in foreign countries causes problems with documentation, here is another thought, keep your accounts in a US bank.

I agree with the earlier comment, someone who renounces citizenship for tax purposes is unworthy of citizenship in this country, good riddance, just don't ever ask to be welcomed back.
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Well, at the risk of stating the obvious, such people might consider complying with the US tax rules, filing the required documents, and paying their fair share like the rest of us do. Why is this such a problem?

I suspect it is a problem because, since they live and work in a foreign country, they're not getting much in the way of value or services for their tax dollars.

And if having accounts in foreign countries causes problems with documentation, here is another thought, keep your accounts in a US bank.

That doesn't work for people living in a foreign country. You cannot spend US dollars in a foreign country. You can only spend their currency. You also get paid in the foreign currency, and you can't get that to a US bank or keep it there.

I agree with the earlier comment, someone who renounces citizenship for tax purposes is unworthy of citizenship in this country, good riddance, just don't ever ask to be welcomed back.

Why? If someone is living in another country and wishes to have that citizenship, then they should be treated like any other citizen from that country in terms of being able to visit the US.

Do you think that people who come here and get US citizenship are banned from ever returning to the country of their birth to visit? I doubt that very much, and don't think it should be any different for a US citizen who becomes a citizen of another country.
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Well, at the risk of stating the obvious, such people might consider complying with the US tax rules, filing the required documents, and paying their fair share like the rest of us do. Why is this such a problem?

I am a (naturalized) U.S. citizen living in the USA. But I have an annuity from a Swiss insurance company that pays me a pittance each year. If they would issue me a 1099-R, I would have no problem. I do choose to pay my tax due on this. But it is not easy because the Swiss Insurance company does not issue 1099-R forms.

So I try to make TaxAct give me a blank 1099-R form and it does that, but unless I give the Swiss insurance company's EID, I cannot get TaxAct to accept it. And the Swiss insurance company has no US EID.

I know what I do. Each year I e-mail the Swiss insurance company and ask what portion of the payment is a return of principle, and what portion is interest. I put the interest into 'other income' on the 1040 someplace. Then TaxAct complains that, since it is over $400, my return will be held up by the IRS and I am likely to be audited. The IRS does not seem upset by this procedure. They take what they think is their fare share, and never bother me. As far as I can tell (I file electronically) they do not hold up processing my return, and if they audit me, they do it with no participation from me.

But I think it is a problem to comply with the law even in what seems to me to be a very simple situation. Actually, if I managed to file a 1099-R for this, it would probably make trouble, since the Swiss insurance company files nothing with the IRS.
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Do you think that people who come here and get US citizenship are banned from ever returning to the country of their birth to visit? I doubt that very much, and don't think it should be any different for a US citizen who becomes a citizen of another country.

I was born in France and at the time, both of my parents were French citizens.
When I was about 21, I became a U.S. citizen, mainly because I needed a Secret security clearance for my job. When I became a U.S.citizen, I had to make an oath about lots of things, including that I renounced my former citizenship.

But under French law, I cannot renounce my French citizenship. Once French, always French. So technically, I am a dual national. I have never voted in a French election. On the other hand, it was somewhat of a problem avoiding French military service because I was a U.S. citizen living in the U.S., but the French do not recognize that. The French even sent me a free one-way ticket good on the French (steamship) Line or Air France to go to France, and good on SNCF to get to Pau (major paratroop training site, like Ft. Dix in USA). I chose not to take advantage of this generous offer.
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JeanDavid,
Are you allowed to return to France? Is there compulsory military service in France? If so weren't you technically a draft dodger?
RTN
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I'm fine with people renouncing US citizenship to avoid US taxes. However, I want them banned from ever setting foot on US soil again. Seems a fair trade-off.

Maybe it would help to understand why Americans live overseas and what kind of situation the tax laws put them into.

I am American and I live in Europe, and I've been living in Europe for 6 years. I basically consider myself to be living abroad indefinitely.

Why do I live here? Because my wife is French and I saw an opportunity to build a business selling American-made product to oil refineries (which is what I did in the U.S. before moving). Basically, I was working for a small company selling a niche product in the U.S. and having a great deal of success. The manufacturer of the product (a Fortune 500 company) was completely unable to sell it in Europe--i.e. sales of $0. They asked if we would be interested, so I agreed to start a new company to sell the product over here. Now, we are very successful in Europe, which has created manufacturing jobs in the U.S. and a couple of sales jobs in Europe.

Most of the Americans I've met who live "permanently" in Europe are here for similar reasons--marriage or they started a business over here. Sure, there are some ultra-rich people who hide out in Switzerland. I've never met them.

Now, for the tax burden. First, you should be aware that we need to pay taxes in the country where we work. These taxes are generally higher than U.S. taxes to begin with. For Americans who are retired abroad and live off of investment income, they need to pay local taxes as well as U.S. taxes on all capital gains. The socialists in France just raised the capital gains tax rate on foreign income to 60% or something like that. (So much for my retirement in Provence.)

Americans living permanently overseas also need to pay U.S. income tax on income above $100,000/year ($190,000 filing jointly). You might think this is a generous exemption. However, the U.S. is the only nation on earth which imposes this burden upon its own expatriates. Iran does not do this. China does not do this. Russia does not do this. Even the French don't do it (although the new socialist government would like to).

What do we get for these taxes? Does our contribution count towards our Social Security when we get old? Can we take exemptions for 401k plans or IRA's? No. No. No.

Furthermore, until the last 2 years, the requirements were unclear. You had to know the requirement. No one sends you a letter with the forms to fill out. Nowhere was it written on the standard tax return documents. I tried to get a professional tax preparation firm to file my taxes. They wanted $2500! I have a relatively simple tax situation, so I told them to shove it. Fortunately, last year TurboTax built in the forms for reporting foreign bank accounts.

The U.S. laws actually make it worse. Americans cannot have investment accounts overseas. Or, they can, but the only two things which are accepted investments are cash and U.S. Treasuries. So, my investments still reside in U.S. dollars in my U.S. account; however, when I need the money, I will be at the mercy of an exchange rate which has fluctuated from 0.85 to 1.6 $/Euro over the past 12 years. Hopefully if I ever need the money, the exchange will be in my favor.

There are also several banks which refuse to open accounts for Americans because of the burden the American government puts on them. During the financial crisis, this was a real pain because we had two different accounts (one for the business, one for personal) and both banks were at risk of going under. There were some smaller local banks which were secure and did not have exposure to the housing bubble debt. We tried to move some money into one of the banks--just because we wanted some cash somewhere we'd be able to access in the worst case scenario. They refused to open accounts for Americans.

So, under what scenario would I renounce my citizenship? Fast forward 15-20 years. I'm currently in my mid-40's. If I stay here for another decade, every year I work here gets reported on my Social Security statement as $0. As stated, I can also not participate in 401k or IRA savings plans (except by using after-tax money in an IRA). Meanwhile, I will be qualifying for some kind of European pension, albeit very small because I will not have 40 years of work over here. I will, however, have full health care coverage for life under the socialized medicine in Europe. I've never looked into whether or not I will qualify for Medicare in the U.S. when I turn 65.

But, if things go well, somewhere in the far future, I should be able to sell my company or start extracting a very large salary to boost my private savings. If American law makes it impossible for me to extract the money without paying punitive taxes (i.e. 70% when you add the European income tax plus the U.S. tax) and they make it impossible for me to invest locally--because all of my retirement expenses will be in Euros, I would have to consider renouncing citizenship. This would simply be because it would be the only way for me to benefit from all of the work and risk I have taken over decades and be able to retire.

It is not a decision I think anyone takes lightly. Even according to the article in the OP, there were about 1800 citizens who renounced in 2012 our of an estimated 7.2 million Americans living abroad.

However, anyone who thinks the laws they have put in place over the past decade do not make it a challenge living abroad are simply unaware of the laws which have been put in place.
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Are you allowed to return to France? Is there compulsory military service in France? If so weren't you technically a draft dodger?

I am allowed to return to France, and I have done it many times.
There is (was) compulsory military service in France.

While I have not kept up with French law, at the time that mattered to me, all male French citizens had to report for military service at age 18 for 18 months of compulsory military service. But at the time, the French were getting rid of their colonies. First, because the UN required it, and second, because the expense (mainly military) of maintaining them was way more than the benefits of keeping them. So they were out of Viet Nam, our of ALgeria, out of Tunisia, out of Morocco, out of the French Congo, etc. (A lesson the US still has not learned. We do not technically have colonies other than part of Cuba and Puerto Rico, but we are serious neocolonialists throughout the world with all our military bases located in foreign countries, to our enormous financial costs.) This greatly reduced their need for the large military they formerly maintained.

So while their draft law remained in place, they kept tightening the physical standards so as to disqualify as many men from military service as they could. They signed a treaty with the US so that French nationals living in the US could fulfill their military service in the US military. I did that by registering for the US draft, which I had to do anyway as a male resident (I had an immigration visa) in the US. And I got out of that because I was a student majoring in electrical engineering, and later in math. By the time I graduated, they ended student deferments, but I had a job at a small defense contractor and worked on anti-submarine warfare and stuff like that, so I got an occupational deferment. When they stopped those deferments, I was over 26, and they tended not to draft people over that age because they did not make good soldiers. Except doctors, but fortunately, I was not a doctor. Once deferred, I was eligible to be drafted until I was 35, but they did not want me.
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The one thing in the article that evoked some sympathy from me is the growing reluctance of foreign financial institutions to do business with US citizens.


Indeed, because the US does its best to roll out their rules all over the world and enlist everyone else as involuntary deputy sheriffs.

Many banks do not find it worthwhile incurring all the admin and compliance risks (read: huge penalties if they get something slightly wrong) tied to dealing with US clients.


It's especially bothersome for the poor, beleaguered Swiss banks, which have long prided themselves on being a safe place for war criminals, despots who have looted their homelands, and perpetrators of genocide to hide their assets.


Luckily that has been reigned in so someone else can keep their top spot:

You're a billionaire but you don't want anyone, least of all the taxman, to know. What do you do? Head for a palm-fringed island paradise or a snow-covered Alpine micro-state?

Wrong. The world's most opaque jurisdictions – the ones that will best shield you and your cash from the light – are mostly in the heart of the most sophisticated and powerful global financial centres.

London, Luxembourg and Zurich are in the top five most secretive jurisdictions, according the first comprehensive index of financial transparency ever compiled.

Yet top of the pile, beating the British Virgin Islands, Belize or Liechtenstein as the best place to hide wealth, is Delaware. ...



http://www.theguardian.com/business/2009/nov/01/delaware-lea...

http://www.theglobalist.com/bidens-delaware-making-swiss-ban...
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saunafool: "The U.S. laws actually make it worse. Americans cannot have investment accounts overseas. Or, they can, but the only two things which are accepted investments are cash and U.S. Treasuries.

. . .

If American law makes it impossible for me to extract the money without paying punitive taxes (i.e. 70% when you add the European income tax plus the U.S. tax) and they make it impossible for me to invest locally--because all of my retirement expenses will be in Euros, I would have to consider renouncing citizenship."


I am neither a tax pro nor af ormer expatriate, but neither statement above sounds correct to me. And with regard to the latter statement, the US gives a credt for foreign taxes paid.

http://www.irs.gov/taxtopics/tc856.html

http://www.irs.gov/publications/p514/ar02.html

"You may claim the Foreign Tax Credit for taxes paid in a foreign country. However, you may not claim a tax credit for taxes paid on any income which has been excluded from US taxation using the foreign earned income exclusion or the foreign housing exclusion."

http://taxes.about.com/od/taxhelp/a/ForeignTaxCred.htm

And with respect to the first statement, see http://www.pwc.com/us/en/private-company-services/publicatio...

and http://world.time.com/2013/01/31/mister-taxman-why-some-amer...

Regards, JAFO
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Now, for the tax burden. First, you should be aware that we need to pay taxes in the country where we work. These taxes are generally higher than U.S. taxes to begin with. For Americans who are retired abroad and live off of investment income, they need to pay local taxes as well as U.S. taxes on all capital gains.

I can't comment on the foreign taxes, but to the extent you pay both foreign and US taxes on the same income, you get a credit on your US return for the foreign taxes paid. The credit effectively leaves you with the higher of either the US or the foreign tax on the income.

Americans living permanently overseas also need to pay U.S. income tax on income above $100,000/year ($190,000 filing jointly).

That income has to be earned income - income from working. And for a joint return it's approximately $100k for each spouse. If one spouse does not work, the exclusion is only $100k. If the earnings are greater than the exclusion, you've got double taxed income and the foreign tax credit as noted above will again apply.

Does our contribution count towards our Social Security when we get old?

If you're not paying Social Security taxes, you would not be earning credits towards Social Security benefits at retirement.

Can we take exemptions for 401k plans or IRA's?

Those are both "yes". Except that you'd have to have an employer who offers a 401k plan, which virtually no foreign employer would care to do. However, IRA contributions are definitely available. But you do have to have earned income in excess of the Foreign Earned Income Exclusion to take advantage of IRA contributions.

I tried to get a professional tax preparation firm to file my taxes. They wanted $2500! I have a relatively simple tax situation,

By definition, your US tax situation is not simple. It is amongst the most complex situations possible for individual tax payers. I consider myself to be a pretty competent tax professional, and I generally refuse to prepare returns for ex-pats because of the complexity. It's a highly specialized area of tax law, and one that the vast majority of tax preparers are not competent to prepare.

The U.S. laws actually make it worse. Americans cannot have investment accounts overseas.

If US citizens could not have investment accounts overseas, why are there two different forms which require the reporting of overseas investment accounts? I can't cite chapter and verse on this one, but my gut feeling is that your statement is not correct.

There are also several banks which refuse to open accounts for Americans because of the burden the American government puts on them.

That one is, to my understanding, a very real problem that a number of ex-pats have run into. The only consistent solution I've heard is to deal with banks that are willing to put up with the intrusiveness of the US government. There are not many, and I hazard a guess that they are mega-banks that already have a presence in the US. That would be banks such as Barclays and Credit Suisse. I would not expect them to provide very good service or to have low fees.

--Peter
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JeanDavid,
I am replying to you privately so that I will not continue an off subject on the board. Thank you so much for your reply. My husband retired from the US Army and served several joint UN tours so I am always interested in what other countries require of their citizens. Your reply was very interesting.
RTN
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For future reference, uncheck the Post this Reply to the Boards box if you want to do a private reply.
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Americans living permanently overseas also need to pay U.S. income tax on income above $100,000/year ($190,000 filing jointly).

If American law makes it impossible for me to extract the money without paying punitive taxes (i.e. 70% when you add the European income tax plus the U.S. tax)


As others on the thread have noted....The Foreign Tax Credit. Look it up.

-synchronicity, not in a very tolerant mood today.
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Thank you for this wonderful post, for details Americans need for living and working overseas including taxes. I am sending my daughter this info since she just spent a year in Panama teaching and now she is teaching in Vietnam. I doubt she would ever renounce her citizenship. She plans to return home permanently some day. But she needs to understand how it is going to affect her income, retirement and investments.

My daughter isn't teaching overseas to avoid taxes. She's avoiding teaching in the US that no longer cares to protect and support its teachers, where a majority of students don't appreciate learning, where many parents are not responsible for their own children, and some administrators are incompetent.
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Linda, I had to give you a rec for that. The reason's for DD's not teaching in the states, are the very reasons I stopped teaching.

Donna
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It's especially bothersome for the poor, beleaguered Swiss banks…

Of course you're being sarcastic, but consider financial institutions in poorer countries. If someone wanted to work for a charity in some poor African country, for example, they might face significant fines for doing so.

Americans living in the poorest countries are those most likely to have the most difficulty.
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