I am an American expat holding both American and Canadian citizenships. I live in Canada where I pay federal and provincial income taxes. America also requires me to file federal income taxes with them, the only country in the world with this requirement on its citizens, other than Eritrea, which America actually has condemned for this practice.
What does this mean? We need to consider a few other features, but for most of us, it simply means double the paperwork. It does for me, for now.
I get a FEIE (foreign earned income exclusion) of $97,000. I make less than that, so I get to write off all of my salary on my American tax return. Wow, you think. I wish I could do that. Remember, I live abroad and I pay taxes to Canada and New Brunswick. Your American rates are far lower. Don’t be happy for me.
Canada is a different country than America. I know most Americans have trouble with this concept, but that’s the way it is. Canada sets its own monetary policies and incentives for its residents – remember this word resident; it’s important. Because our taxes are higher, we also have generous tax savings incentives. I can invest in RRSPs, tax free savings accounts, company pensions, and other obscure vehicles depending on what’s hot with politicians at the time. Capital gains have been treated with favor as have dividends. Special deductions have existed for emerging market companies. I don’t know all the rules. Does anybody?
So when I’m done filing my Canadian mess – yes, it’s no fun here either – I then have to re-file with America. I cannot do it online because I live outside her border, so I download PDFs, fill them out as best I can, write off all my income, fill out RRSP waiver forms – I hope that’s what they are – and file zero taxes. I also file an FBAR (foreign bank and financial accounts) report. I have to list all financial accounts I have with a signing authority over. I have authority over all sorts of things – personal, child educational savings, and a charity organization. I have to file the account information and highest balance of the year of all these accounts.
Note 1: I wonder if I’m breaking Canadian law or professional accounting ethics rules by reporting a Canadian charity’s bank information and balances to the American government. If I am, what do I do?
Note 2: If this was done in America, there’d be revolution. Guns would fire at such a proposal.
Note 3: America already gets all of your financial data, so you do not have to file. Aren’t you happy you have such an all-seeing government?
I don’t own a business. If I did, it would be a bigger mess. They don’t get the FEIE. They have to claim the taxes they pay to Canada as a deduction. Ever do a business tax return? Ever have to do payroll filings? Yeah, fun. Now do it for two countries. I would never work as a contractor here, not through myself as a sole proprietorship. I’d at least incorporate and pay myself a salary. That way I could file corporately once , the easier individual form twice, and still maintain my FEIE. Fun. Not!
Some politicians in America – Raul Grijalva (D CA), John Tierney (D MA), and Mike Honda (D CA) – want to do away with the FEIE altogether. They see millions of us excluding huge sums of revenue and think it’s a loophole. Who knows how these politicians really think? Their analysis gives a number in the order of $71 billion in extra tax revenue over ten years. I don’t have their analysis, but I would bet $20 Canadian dollars that this is the expected total of the FEIE claimed.
Go back to my paragraph on business filers. If the FEIE disappeared, I would also claim foreign incomes taxes. I would replace the FEIE with the taxes I pay. I may not come out the same, though. This company pension I claim will not be allowed on my American form because it is not an American pension. That tax free savings account is not recognized down south. I and millions of others may end up owing taxes to America.
Fair? Hell not!
These are not legitimate taxes. These are taxes due because tax savings incentives in Canada do not qualify in America. I spend all of this money saving for retirement the best I can, and America undercuts me. They say you cannot do that. They say you have to invest in our vehicles. What are they called? 401K’s. I don’t know. I live up here. I cannot even buy them because I don’t live in America. My employer does not offer an American pension. And if they did, if I could invest in these American retirement plans, Canada wouldn’t accept them because I live in Canada. I’m a Canadian resident and I have to abide by Canadian tax law while I’m living here. The same goes for Canadians living in America – and there are many . They have to pay American taxes according to American tax laws. Makes sense. And you know what? They do not have to file taxes in Canada because they are not residents. They do not have to do double paperwork and try to figure out a way to make their 401Ks work in Canada at its higher tax rates. And if Canada did that? If Canada applied its higher tax rates to Canadians living in America, the American government would be all over it for stealing their tax dollars. My tax preparation will become more complex but so will the IRS’s. It will be more difficult to do the paperwork. Extra income will be offset by extra cost. And we will find other ways to not pay. Count on it. We will dump these useless tax savings accounts and find different ways to save for retirement. America will not save any money this way, and its citizens abroad will suffer more. We will likely renounce citizenship in droves. I know I will.
Congress, read this blog. You have seven million of us plenipotentiaries on the ground. Our influence abroad matters both financially and diplomatically. America’s image abroad is dismal, and I’m being nice. Very few of us help it. In fact, we join in on the denunciations. Very few of us talk positively about America, and most of us talk very negatively. Why should we help? You treat us like criminals. You treat us like shit.
Listen to ACA (American Citizens Abroad) and adopt their residency based taxation proposal. Do it now!
This is an excellent piece and I hope you will spread it as far and wide as possible. Please drop in for a cuppa at isaacbrocksociety.ca and maplesandbox.ca anytime. Misery loves company but we need as many good minds (like yours) as we can get to assauge the misery and shine a light on US extraterritorial tax tyranny.
BRAVO and thanks for this. True true true.
Reblogged this on U.S. Persons Abroad – Members of a Unique Tax, Form and Penalty Club and commented:
Excellent post – problems well documented.
Well said! I couldn’t agree more.
Citizenship based taxation makes it impossible to live outside the U.S. and have a normal life. You can’t share accounts with a foreign spouse or child without having to report their income to the U.S. You can’t plan for retirement without the U.S. saying any gains are taxable even when they are not taxable in your country of residence. You can’t afford to file every year if you are low income because the cost of international tax preparers is way too high. The U.S. treats its long term expats as if they need to be punished for not living there.
For short term expats a lot of these issues may not seem too difficult as they likely still have their main savings and other banking in the U.S. Trying to live with a foreign family abroad as the U.S. person in the family makes you a liability to your spouse and children just because you are American and the U.S. taxes on citizenship not residency like the rest of the modern world. The U.S. treats expat families as if they are criminals until proven otherwise. This makes it not only expensive to show them you and yours are not criminals but, makes it far more attractive to lose your U.S. citizenship to protect your family from U.S. over reach. My spouse pays taxes here where we live and where he is a citizen, to Canada. Many people married to U.S. persons abroad feel the U.S. demands are a personal violation. If the U.S. ever wakes up and finally goes to residency based taxation it could then focus on catching those who actually live there and who are actually “off shoring” instead of saying every American all over the world is a suspicious person and so is everyone they are related to. It’s ridiculous and insulting. It has the affect of building an onerous wall around the U.S. to keep people in. Who would move abroad long term if they knew the situation the U.S. puts expats into?
You do not have to report your spouse’s income. At least I hope not; because I don’t. Maybe I’m breaking another law I don’t know about. She says if I include her name on any form, I can expect a divorce.
I think she means reporting the bank account. Reporting the income of a non-resident alien spouse is voluntary, but reporting their bank balance is required if the US spouse has signatory authority to it.
I think “their income” in Atticus’s second sentence referred to the accounts not spouse and child. If a non-US and a US person share an account then both the account amount (FBAR, possibly 8938 too) AND the interest it earned (1040) would have to be reported. The non-US person’s salary and interest earned on any non-shared accounts would not be reported to the IRS. However there are plenty of other tax laws out there that you, me and everyone else have likely broken. It’s the IRS complexity trap. Nobody can escape that.
Hi John, I’ve enjoyed your blog and would really like to speak with you on the phone. Would you be willing to call me? You should be able to get my email address from this comment. If not, let me know by making a new comment, I am subscribed to this thread. Cheers. Peter W. Dunn
I was referring to FBAR’s and all the penalties that go along with them. I had never heard of FBAR and would love to have been able to file them once I heard of them without subjecting my Canadian spouse to ridiculous penalties applied usually to criminal drug lords and money launderers. The U.S. cannot seem to see a difference in a long term expat family and a drug lord and applies the same penalties to everyone regardless of the situation. My spouse objects to having his bank information shared with the U.S. since he was never American and makes and reports all of our income here in Canada. Further, it was nearly impossible to plan for any future here in Canada while he was married to an American without incurring reporting costs out of our means. Thus, I stopped being American. The U.S. makes it impossible for all but, the very wealthy to continue being their citizen abroad. Indeed it seems the U.S. laws are written with a bent to punish you and your foreign family for not living there.
Thanks. It certainly does feel like this. And you confirm my last point — Americans abroad shit on their country in conversation. We are almost all anti-ambassadors. It is a foreign policy disaster.
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Excellent posts, excellent blog. Yes, send over your links via the comment section to this one.