Americans Living Abroad Deserve a Simple, Fair Tax System

April 27, 2015

The United States is the only country in the developed world that taxes its citizens who live in foreign countries.

The U.S. taxes Americans abroad on worldwide income and requires them to file their taxes with the U.S., in addition to the country in which they reside. Though Americans abroad are exempt from U.S. taxes on their first $97,600 of foreign income to provide some relief, the tax is still without merit.

In a recent editorial, the editors at Bloomberg View made the point that it’s time to “End the American Expat Tax,” making the case that it’s complex, burdensome, unfair, and outdated:

The taxation of Americans abroad was designed to deter draft dodgers who fled the country to avoid fighting the Civil War more than 150 years ago. From the beginning, in other words, bad intentions were assumed. Yet hardly any of the estimated 7.6 million U.S. expatriates today are trying to evade taxes -- indeed, most pay more than they would at home. 

It's for the sake of fairness that other countries base the taxation of their citizens on residence. After all, why demand taxes of people who don't benefit from the proceeds -- who cannot use their countries' roads or schools or health care while living abroad? 

The tax also creates practical issues for Americans who live abroad, especially since the creation of the Foreign Account Tax Compliance Act in 2010:

The tax issue has come to a head since Congress, in 2010, introduced new reporting rules for all foreign financial institutions that hold the assets of U.S. citizens. The goal is to catch wealthy Americans in the U.S. who offshore their investments to evade tax, but expatriates get caught in the crosshairs. They have to report on their local bank accounts or face penalties. And because foreign banks don't want the U.S. reporting liabilities, some expatriates have trouble opening accounts at all. 

The result was a record number of 3,415 U.S. citizens renouncing their citizenship in 2014, the year after a record breaking year in 2013.

In the end, the tax creates a high cost for taxpayers and provides little benefit for government:

Expatriate taxation raises as little as 0.2 percent of federal tax revenue yet greatly complicates tax filing for Americans abroad. Congress should change the law -- perhaps as part of its nascent effort toward broader tax reform. In the meantime, the existing laws and regulations should be adjusted to end some of the most egregious injustices. 

The U.S. would be wise to follow the international norm and move to residence based taxation. It would greatly simplify the tax code and significantly limit the burden on Americans living abroad.

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