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U.S. Citizenship Based Taxation: Unique or Outrageous?

Contributed by Lynne Swanson
December 16, 2013

United States occupies a unique position in the world. Well, almost unique. This distinction is shared with one other country. Eritrea.

Yet, at the United Nations, U.S. and other countries condemned the tiny African nation for their practice.

U.S. and Eritrea are the only two countries that tax based on both residence and citizenship. Other countries tax worldwide income of residents, but not citizens living elsewhere.

What If Other Countries Adopted American Citizenship and Tax Laws?

Here is how this would affect a few prominent Americans.

President Barack Obama was born in United States to an American mother and a Kenyan father. So, if Kenya had the same citizenship laws as United States, he would be a Kenyan citizen because of his father’s birthplace.

If Kenya matched citizenship tax laws with U.S., Obama would be required to file income tax returns to both United States and Kenya. With more than $10,000 in assets, this would include a comprehensive and invasive Foreign Bank Account Report (FBAR) to Kenya on all his bank accounts and other savings and investments--including joint accounts with Michelle and education savings for Malia and Sasha. For failing to do, Obama could face a penalty of the greater of 50% of the value of each account or $100,000.

"That’s outrageous," Obama would likely declare. "I didn’t even know. Why should I pay taxes to another country? I pay taxes here in United States where I live."

Following a typical U.S. Internal Revenue Service (IRS) approach, the response would probably be "Too bad. It was your responsibility to understand our laws even though you don’t live here."

Senator and Presidential Hopeful Ted Cruz was stunned recently to learn he is a Canadian citizen because he was born in Canada to an American mother and a Cuban father.

If Canada and Cuba applied the same citizenship income tax laws, Cruz would be required to file income tax returns to three countries—United States, Canada and Cuba. Again, these would require FBARs on all his assets, including those held with his wife Heidi and education savings for their two daughters.

Finally, Cruz and Obama would agree on something. "That’s outrageous. I didn’t know. Why should I pay taxes to another country?"

Canada and Cuba respond: "How could you not know? You’re a Harvard-educated lawyer."

Secretary of State John Kerry was born in United States to two American parents, making him all-American, right? But, wait. Kerry’s mother was born in France to two American parents.

So, if France had American citizenship and tax laws, Kerry would have French citizenship and reporting obligations to France--including any assets held with his wife, Teresa Heinz Kerry.

Now, things get complicated. Heinz-Kerry was born in Mozambique to Portuguese parents. This gives the couple reporting and tax obligations to United States, France, Mozambique and Portugal.

There is an earned income exemption, but these Americans exceed that threshold. There is a credit for taxes paid to a foreign government. United States taxes are lower than most of those these countries, so there would be taxes owing—plus those massive FBAR penalties.

Here Comes FATCA

Soon, Obama, Cruz and Kerry would face FATCA (Foreign Account Tax Compliance Act) demands. Their American banks would be required to report on all their accounts, transactions and other personal information or face harsh penalties. Just like United States is demanding of banks around the globe.

"That’s outrageous," the trio would scream. They’re right.

"I’ll renounce," each would declare. Following unique U.S. example, those countries could respond: "Not so fast."

File five years of complex tax returns requiring hugely expensive legal and accounting help. Tell us your net worth. Give us your FBARs. Pay us massive penalties. Hand over a huge exit tax.

Then, maybe we’ll let you go. But, we will declare you "tax cheats" and "traitors."

Real Lives, Real People

Those scenarios are fictional. But, they are very real for millions of people.

Some are Americans living abroad.  Among those are dual citizens with their country of residence and United States. Others are former Green card holders or naturalized Americans who returned to their homelands for family or personal reasons.

U.S. Consulates told many they were "permanently and irrevocably" relinquishing U.S. citizenship when they became citizens of other countries decades ago.

Some have lived their entire lives as citizens of other countries. "Accidental Americans" were simply born in United States while parents were studying or working there temporarily. Canadian "border babies"—many now in their 70s or 80s-- were born in United States because it was the nearest hospital.

The only connection to United States for some is one parent’s place of birth.

These people are collateral damage of United States Treasury and IRS determination to combat offshore tax evasion. The demands they face are "outrageous."

Like Obama, Cruz and Kerry, these people are living honest, productive lives. They are not tax cheats or tax evaders. They pay taxes where they live, work, earn an income, own homes and raise families.

Yet, IRS demands to know all about them and their finances—including invasive snooping into their legal bank accounts held with non-US spouses or for children born and raised outside United States.

IRS offers little overseas advice, but expects highly complex and convoluted filing. Many people live in countries with no qualified accountants or lawyers for help with filing. Some spend huge sums of money on accountants to file returns with nothing owing.

In fact, 82% who do file owe no taxes to U.S. This requires significant IRS resources for no revenue.

One "accidental American" stay at home mother with no income of her buys shoes and clothes for her children rather than spend thousands of dollars on an accountant to tell U.S. she owes no money to them.

A U.S. military veteran recently renounced U.S. citizenship to protect his Swiss family and his Swiss mortgage.

A professional woman in Europe had her long-established retirement account closed in the country where she lives, works and plans to retire simply because she is a "U.S. person."

Another woman worries IRS will try to seize funds she saved for her developmentally disabled son simply because she was born in United States 70 years ago. She recently renounced U.S. citizenship, but U.S. will not allow him to do so because he does not have the "mental capacity."

These are not isolated situations. They are reality for millions of people. .

Global Financial Chaos

What would happen if the whole world adopted U.S. citizenship based taxation and demanded financial records of any of its citizens living outside its borders?

Would United States cooperate? Would they provide information on naturalized American citizens or U.S. Green Card holders to Kenya, Canada, Cuba, France, Mozambique, Portugal or Eritrea? Of course not.

Add about 190 other nations worldwide to those few and it's easy to see it would create global financial chaos.

Time for Change

Put simply, citizenship-based taxation is "outrageous."

It’s time for change to join the rest of the planet and move to resident-based taxation. .

American Citizens Abroad (ACA), Association of Americans Resident Overseas (AARO) and have made reasonable, sensible comprehensive recommendations for reform. Will U.S. Congress listen? 

Lynne Swanson is a retired Human Resources Manager, writer and blogger. Born and raised in Pennsylvania, she has been a Canadian citizen for 40 years.


 

Tags: tax | United States | Kenya | law | France | Canada | Cuba | Mozambique | Eritrea | penalties | Other | Portugal | FATCA | education | Tax | retirement | Internal Revenue Service (IRS) | exit tax | investment | Citizenship | Compliance

 

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Thank you for this excellent article of this disgraceful situation.

I hope that as many people as possible get to read it; I hope you don't mind if I share it far and wide.

Perhaps these laws were brought in in good faith to catch tax cheats, but having seen the unintented consequences of them and the misery this is causing for huge numbers of decent, honest, Americans abroad, and to do nothing to help them, is disgusting and shameful.

The point made below about turning goodwill ambassadors for the USA into bad-will ambassadors is well made. I was born in the US and have lived all my life abroad, but I always felt a sort of good will towards country of my birth.

That good will is all gone, the US needs friends abroad and I am now firmly on the side of not-friends until someone in Washington has the spine to sort this out.

Tim on Tuesday, September 20, 2016

It's double standard. US wants to collect taxes who are on H1, Green card for income they are earning in their home land. so even if they are not US citizen they have to report their world wide income on US tax returns. so it's truly not citizen based tax system either. It's worst tax law in my opinion. GIve me tax if you live in US regardless of country of citizenship

Viral Shah on Monday, October 12, 2015

The US MUST move from Citizenship Based Taxation ('CBT') to the world standard of Residence Based Taxation ('RBT') without delay. CBT is unworkable and causing irreparable damage to those the US identifies as 'US Persons' who are living and working outside the US. Congress, the IRS and the President should be responsible and step up to change US tax law to the RBT. There are many examples of workable RBT systems - and the US can use Canada, the UK, Australia, Germany or France as examples/models.

Steve Klaus on Tuesday, April 21, 2015

Clumbia has now declared an interest in taxing the US assets of its diaspora and Ghana seems to be preparing to do the same. France is not alone in this move inching towards the US position. The US is likely to be vacuumed of assets if all other countries adopt US Style extra territorial taxation systems.

nervousinvestor on Tuesday, December 16, 2014

An Excellent article by Lynne Swanson. Thank you for holding a blazing torch of truth abd freedome .... in similar manner to the Statue of Liberty.

This is the tax side of the story. The other side is the horror of Tyranny and financial Berlin Walls being built to enslave and entrap people and to deny Constitutional rights in every country around the Globe - not JUST US Constitutional rights but the rights documented in the Charters of Rights and Freedoms which form part of the Constitutions of countries around the globe. The other side also includes the granting of the ability to Tyrants everywhere to target peope for victimization more precisely. FATCA and its prodginey GATCA must be repealed and stopped ... fast.

nervousinvestor on Tuesday, December 16, 2014

Re the last sentence, the Federation of American Womens Club Overseas is also a part of this advocacy group, and FAWCO is also the oldest and largest non-partisan organization representing private sector Americans abroad.

Anonymous on Saturday, March 22, 2014

Amen!

And by the way, France has ecided to emulate the US in the FBAR and FATCA respects and their citizens are becoing pariahs of the same sort. Here's hoping other ountries follow suit, so that it becomes unworkable!

Daniel on Monday, December 23, 2013

Excellent article! The United States of Crime can only get away with this because might makes right.

SwissTechie on Wednesday, December 18, 2013

If one is judged by the company they keep then Eritrea should really try to distance itself from the United States by adopting RBT. Then the U.S. can rightly claim that it is truly Exceptional. Good grief, what a joke the U.S. has become.

Deckard1138 on Wednesday, December 18, 2013

This is one of the best and informative articles I've ever seen. This really shows what the US government is doing to it's own people around the world. when we see Switzerland in turmoil both with US persons being kicked out of their banks and the whole countrie's financial system begging the IRS to stop the fines and penalties it has no right imposing on them, we know there will be trouble. This is a good model to show what other countries will experience with this forced US law. This is only the tip of the iceburg that will cripple any countrie's financial system. Thank you Lynne Swanson, in your honor, we hope others will become educated long before it's too late and we'll all be sorry.

Aboriginal on Wednesday, December 18, 2013

I think there are two different issues here that are being confused. Citizenship based taxation has always been a somewhat unique facet of US tax law but it wasn't really a problem until the US started overreaching and expecting the entire world to start enforcing a purely American law. There are existing cross border mechanisms--tax treaties--for enforcing tax matters across borders that have worked well, at least between the US and its allies, for decades. It is the apparently unilateral decision of the US to throw away decades of tax diplomacy--and not CBT by itself--that is the problem here IMHO.

David on Tuesday, December 17, 2013

Good job of showing how ridiculous the United States looks for its policy of citizenship-based taxation. These United States have become the laughing stock of the world.

PetrosT on Tuesday, December 17, 2013

Excellent article! If only this information could reach the 7 or so million "US Persons" around the globe who have never heard of FATCA, FBAR and CBT. We need to keep this discussion going, make people aware of the situation so that we can rally against it.

Marie on Tuesday, December 17, 2013

Well done and thank you! As an American who served my country but for family and work reasons have lived overseas now for almost 20 years, I feel the US has betrayed me and put me in the terrible situation of having to seriously consider renouncing my US citizenship. All because of now being hunted down like a dog by the US government for every penny (which has no connection at all to the US) and being treated as a pariah by my local banks because I was born in the USA. Citizenship based taxation and FATCA are causing horrible collateral damage to otherwise law abiding US Persons overseas and not achieving the objective to find real 'tax cheats' living in the USA with undisclosed overseas accounts. The most compasionate and logical solution is for the US to move to the world standard of residence based taxation.

Steve on Tuesday, December 17, 2013

Well written...

Andy Sundberg, Overseas American Academy, Geneva, Switzerland, wrote a similar piece back in 6 January 2012, asking the "What if" questions related to a hypothetical person who discovers several 'citizenships' and "U.S. style tax obligations and form filing demands he didn't know about. For readers reference, there is the link. http://bit.ly/15k7GP4

In our copy cat FATCA world now, heaven helps us if the other countries decide to mimic America's unique and oppressive practices.

Just Me on Monday, December 16, 2013

Very well written and well explained. This is truly a sad time for anyone born in the USA who left to live in other countries around the world. This USA law needs to be stopped before it is unleashed on the whole world leading to hatred and damage for the USA.

Mike on Monday, December 16, 2013

I love how eloquently Lynne Swanson explains citizenship-based taxation (CBT) using prominent Americans to illustrate its insanity. Well done!

Em R. on Monday, December 16, 2013

This article is well done and it's absolutely correct. The current citizenship-based taxation system of the United States is a huge economic ball and chain on the US, self-inflicted, which is damaging the community of Americans worldwide and turning many of them from good will ambassadors into bad will ambassadors (in the words of another good article on this subject). Americans overseas help increase US exports and exports create jobs in the United States. To allow this process, the US must absolutely move to a system of residence-based taxation like every other nation besides Eritrea.

Anne on Monday, December 16, 2013

 

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