An expat advocacy organization is urging the U.S. Congress to set up a taxation system that can free overseas Americans from the current citizenship-based system.
The proposal is an optional system under which overseas Americans will not have to pay U.S. taxes on foreign earnings. They still would have to pay taxes on income from U.S. sources.
The organization, American Citizens Abroad, notes that the United States and the tiny African state of Eritrea are the only two nations to require citizens-based taxation.
“While other developed countries tax their residents on their worldwide income, they do not tax their citizens who have formally established residence outside their national borders,” said the organization. “Some countries have various procedures for the transition phase when citizens move abroad. Others have no transition requirements.” The American Citizens Abroad proposal is similar to the Canadian system and provides for transition requirements, the organization said.
U.S. workers overseas for 2011 are entitled to a $95,000 annual exemption from earned income. But they still have to pay Social Security and Medicare charges on the income. U.S. citizens are fully taxed on higher overseas incomes, unearned income like dividends and capital gains overseas.
American Citizens Abroad proposes a one-time $500 fee paid by overseas Americans to choose this new system. They would have to be up-to-date with all their U.S. taxes. There are an estimated 6.2 to 7 million U.S. citizens living overseas.
The organization says its plan would result in far less paperwork at the U.S. Internal Revenue Service and also would increase the competitiveness of U.S. workers overseas. It estimated an additional $35 billion in U.S. revenue over 10 years due to export income and job creation as a result of work by overseas Americans.
More importantly for expats, the proposal would eliminate all the current paperwork over foreign income and bank accounts that U.S. citizens overseas now must file.
“U.S. business people and entrepreneurs working
overseas will be more competitive, no longer subject to U.S. Social Security and Medicare in addition to contributions to foreign social systems and double tax reporting,” said the organization. “Without tax discrimination or signature authority limitation, foreign partnerships will be greatly facilitated.”
The system is similar to that now enjoyed by non-resident aliens who have U.S. income. For most Americans abroad, the Americans abroad taxation election form is the last IRS or Treasury form to be filed during their lifetime, said the organization.
The organization said that IRS enforcement of reports of foreign bank accounts and the passage of the Foreign Account Tax Compliance Act, known as FATCA, have devastating impacts, adding:
“American citizens abroad are now being systematically excluded from overseas banking relationships, pension funds, insurance policies, business ventures, and joint bank accounts and home ownership with a foreign spouse. The combination and incompatibilities of FATCA and citizenship-based taxation are so toxic that it is forcing increasing numbers of Americans to renounce their citizenship.
“Citizenship-based taxation is a human rights issue, as it unduly punishes U.S. citizens working and living worldwide. Ironically, the United States condemned Eritrea in December 2011 at the United Nations for its citizenship-based taxation.”
The heavily footnoted 25-page proposal is on the association’s Web site. Both it and the Association of American Residents Overseas maintain lobbying efforts in Washington and frequently work together.