Part 3 – Q. If I am a US citizen living abroad how will I be taxed by the USA? A. It depends what country you live in!

It’s worse and even more outrageous than you might think …

Part 1 of this series introduced you to the idea that the United States taxes the non-US income of people who do NOT live in the United States and are tax residents of other countries. (Well this is the penalty for having been “Born In The USA”.)

Part 2 of this series explained that the rules used to impose taxation on those nonresidents were far more punitive than the rules imposed on Homeland Americans. It’s true. All other countries stop imposing taxation on their citizens who sever residence from and/or domicile from a country. But, the United States takes the opposite approach. The United States imposes worse taxation on those citizens (whether expats, emigrants or accidentals) who live outside the USA than on those who live in the USA. (Proving that the US taxation does not even pretend to be a “benefits based” tax system.)

Just when you thought it couldn’t get worse …

Part 3 of this series focuses on the fact that the form of taxation imposed on Americans abroad actually depends on the country where they live. Yes, it depends on the kind of treaties and agreements that the United States has with those countries.

I am going to focus on only three example which will illustrate the point.

First – US Taxation of Americans abroad and Social Security payments. If you live outside the United States and receive Social Security payments, which country has the right of taxation? Well, it depends on what country you live in. For example, see the following discussion on Quora.

Read John Richardson's answer to Are there any countries that tax US citizens living in and have become tax residents of that country, on US social security benefits received? on Quora

Second – Q. Are Americans abroad required to pay Self-Employment taxes? A. It depends on what country they live in. This is because the United States has totalization agreements with some countries and not with others. This means that in some cases, Americans abroad are required to pay self-employment taxes to both the United States and the country where they reside (assuming that other country has self-employment taxes). Here is a list of the 30 countries which are party to a US totalization agreement.

Third – which countries have effective tax treaties with the United States that allow for the taxation of pensions to be deferred until they are actually received? Compare Canada which has protection built into its tax treaty with Australia where the US tax treatment of the Superannuation is a nightmare.

There are many more examples. But, I hope you understand the point.

The disparity in the way Americans abroad are taxed has weakened the opposition to US citizenship-based taxation. Some Americans abroad like certain treaty provisions and some don’t. Some individuals benefit from specific treaty provisions when others don’t. Some people have been subjected to specific US taxes (example transition tax and GILTI) and others haven’t. The issue (IMHO) is about the propriety of citizenship-based taxation at all! Not about whether a specific individual is hurt by a specific provision.

Remember: The injustice of the United States imposing worldwide taxation on people who live in other countries is far bigger than any individual!

Conclusion:

These problems arise from and only from the US policy of imposing worldwide taxation on people who are tax residents of other countries (AKA citizenship-based taxation). Notice that this has nothing to do with FATCA, FBAR or other information returns per se.

The taxation of Americans abroad on their foreign income is grossly unfair. It’s just that the taxation of residents of some countries is more unfair than the taxation of residents of other countries.

#YouCantMakeThisUp!

John Richardson – Follow me on Twitter @Expatriationlaw

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