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.