My letter to congress

Note: Last month, I sent a letter to Senators Wyden and Merkley, and Congressman DeFazio, all Democrats. I have voted for these candidates in the past. I received no responses, or any evidence that it was even read. Sen Wyden's page appeared to reject the letter since I had the audacity to try to fill it in from outside the US, the others accepted it.

---- Sent August 21, 2014

I’m writing to you to express my frustration with the current IRS approach to taxation of nonresident US citizens. The current approach is a major concern for US citizens abroad. Over the last several years, rather than moving towards trying to improve the situation, the IRS seems to be actually making the situation worse. Many citizens abroad are reluctant to complain, due to concerns that they may be non-compliant with the IRS rules. I think the current situation is sufficiently broken that it needs congressional action to rectify it. The way the situation is today, I actually feel that without any action I will need to encourage my children to abandon their US citizenship. I’d like to explain to you the current situation for a nonresident US citizen, and suggest an alternative.

I’ve been living in Canada for the past 15 years, and have had Canadian citizenship for over a decade. I’m married to a Canadian citizen. I haven’t worked enough years in the US to qualify for either Social Security or Medicare. Current IRS rules require US citizens to file returns based on worldwide income annually, regardless of whether or not they are US residents. Note, that the only other nation with this requirement is Eritrea. The tax laws require this whether or not the citizen has ever worked in the US, and whether or not the citizen has any US based income. In my case, I’ve worked in the US for 5 years since graduation, and I do maintain some US based mutual funds. I’ve filed my returns every year as required.

As a nonresident, filing a US tax return is more complicated than you might think. The problem is that the US taxes on foreign accounts are designed to apply additional taxes, presumably to encourage domestic investment. While this may be reasonable for US residents, these rules pose major problems for Americans living outside the US.

For example, the Canadian equivalent of an IRA is called an RRSP. The IRS does not recognize being tax deferred however, and expects that any income, dividend, or capital gain distributed inside the RRSP be declared on each year’s tax return. Unfortunately, since the account isn’t considered taxable in Canada this information isn’t available. Most financial advisors recommend that US citizens living abroad do not contribute to mutual funds, since the tax treatment in the US makes proper filing extremely difficult & impose additional taxes. Of course, the fund companies that I’ve dealt with in the US, Vanguard, T. Rowe Price, and Fidelity, all prohibit investment from nonresidents. The investment vehicles that Canadians use for education and retirement savings, RRSPs, DPSPs, DCPCs, TFSAs, RRIFs, and RESPs are all unrecognized by the IRS and subject to additional filing requirements. If I purchase a house in Canada, the IRS considers it a foreign property and subject to additional tax rules when I sell. To me though, it isn’t a foreign property, it is my home. And that’s the key; a US resident who buys property in Canada is very different from a Canadian resident who does so.

 So, the US has put in place a filing requirement, but has also put in place rules that make compliance a nightmare, and impose improper treatment of the assets of non-residents.

Now the US has added FATCA and FBAR to attempt to track US citizens’ foreign accounts. Personally, I think that the US is within their rights to require citizens to disclose their foreign accounts, since a US citizen could decide to return at any time. However, the filing and tax requirements for non-resident US citizens do not seem to pass the fairness test. For someone living in a foreign country, complying with its tax rules, and using no US services why would the US government feel entitled to their tax money?

The upshot of this has been record numbers of US citizens renouncing their citizenship. The vast majority of these people renouncing their citizenship aren’t tax evaders; rather they are ordinary people who have decided that the burden of the current US tax rules have become too onerous. Online forums are full of discussions of US citizens contemplating renouncing. These aren’t rich tax-evaders, they are ordinary people caught trying to deal with an unfair tax code. Personally I would find it extremely upsetting to give up my US citizenship. I’ve voted in every election since leaving the US. I find it incredibly depressing that there are no voices in the US government trying to rectify this situation. Instead, there’s now legislation being proposed by Senators Schumer and Reed to permanently bar US citizens who renounce their citizenship from the US. Rather than address the problem, they are trying to punish people who are taking the only avenue left to them to deal with an unfair situation.

I have two children, aged 13 & 15. My daughter was born in Oregon, and has US citizenship by birth. She lived in the US until she was 6 months old. My son was born in Canada. The same rules that apply to me would apply to my children, regardless of whether they ever live or work in the US. I’ve always assumed that at some point they’d both likely live in the US. But with the current tax situation I believe the best course would be for them to renounce at age 18. Trust me, it is painful for me to write that, and yet I can’t willingly subject them to the rules that have been put in place.

Now, I want to add that I fully support the US trying to stop tax cheats, and clearly the rules in place are designed to do that. But, applying these rules to non-residents has created a nightmarish situation. It seems clear that there’s a simple solution to the current situation: moving to join the rest of the world in a residence based tax system. Clearly, the US doesn’t want people moving out of country to avoid a coming tax bill. Requiring US citizens to file taxes for 2-3 years after leaving the country would solve this problem.  The US could certainly continue to require a tax return from all citizens based on US income only. Under this requirement, I would still need to file taxes, but there would be a pathway open for me to stop short of giving up my US citizenship. This would fully solve the problem for people who were born in the US but never lived there.

It is also worth noting that the perception of the US in the rest of the world is suffering because of this.  Having lived in the US with a Canadian spouse and now as a US citizen in Canada, I can tell you that criticism of the US system is justified.

Finally, I’d like to include a quote from a policy paper released by Barack Obama in 2008:

Obama understands the special concerns and issues of Americans living abroad and

will seek to address these as president.

  

Strengthen Economic Security for Americans Abroad: Barack Obama believes that the U.S. government should pay close attention to how American citizens are treated in the private sector while they live and work abroad. Our government must work to ensure that overseas Americans have every chance to compete on a level playing field, and he will work with Americans abroad to identify and understand problems they may face as a result of U.S. government policies.

Candidate Obama recognized that there were problems. Sadly, President Obama is enacting policies to make the situation worse. Hopefully you will at least make an effort to rectify this situation.