Part 9 – For #Americansabroad: US “citizenship taxation” is “death by a thousand cuts, but the S. 877A Exit Tax is “death by the guillotine”

1995 – The origins of the S. 877A Exit Tax – Video of House Oversight Committee

 

 

This testimony in this video covers a number of perspectives. It includes a consideration of whether the S. 877A rules are a “human rights violation”. This video should be watched in its entirety. It illustrates the viciousness of the Exit Tax and the attitude of the Clinton administration. There is a suggestion that the purpose of the S. 877A rules was to “keep people from leaving”. If you find any testimony or questions that address the problems of “Americans Abroad”, please leave a comment describing the speaker, time and the substance. It appears that there was little or no consideration of how this would affect “American Citizens Abroad”.

As go the “Exit Taxes” imposed by a nation, so goes the moral values of the nation

The manner in which a country treats those who emigrate from the country speaks volumes about the morality of it’s tax system. The S. 877A “Exit Tax” illuminates the viciousness of “place of birth” taxation.

The above tweet references the following comment about the reform of U.S. citizenship taxation and the “Exit Tax”:

For those that are making submittals to Senate Finance, it is important to note that all all exit taxes must be removed. In the previous round of submissions, an exit tax was proposed in the ACA submission, and Senate Finance liked it.

I’ll be the downer (again) and say that I suspect the likelihood of no exit tax is slim to none. Even Canada has an exit tax (called a “departure tax”). And when you consider that a *rational* exit tax (which the US’s is not, due to CBT) is merely a settling up of deferred taxes, then it actually makes sense.

So, the problem is not the exit tax, per se. The problem is that it’s applied to expats who haven’t lived in the US for eons. I.e., the root problem is, as in all cases, CBT.

IMO the best that one could hope for is that USCs who lived outside of the US for more than X years (where X is a largish number) would be spared the exit tax or subject to a trimmed down version. And this would be a one-time thing for “grandfathered” expats only. However, even that seems really unlikely given how Congress currently views USCs abroad.

The previous posts have demonstrated that, whether by accident or design, the effects of the U.S. “Exit Tax” are by far the harshest on those U.S. citizens who have lived outside the United States the longest. The Exit Tax operates to confiscate a large percentage of a person’s non-U.S. assets. I am NOT aware of any other “Exit Tax” or “Departure Tax” that has has the primary effect of confiscating assets that are foreign to the country. The “confiscation of foreign assets” was probably NOT the intent of the S. 877A rules. That said, the confiscation of “foreign assets” is the primary effect of the S. 877A rules. One might ask, how did this happen? How could such an unbelievable “cruel” and “unfair effect” develop?

The answer is that the “confiscation of foreign assets” is the result of “citizenship taxation”. Why? You know the answer, but to repeat:

“Exit Taxes” are designed to impose taxes when an individual leaves and is NO longer subject to the “taxing jurisdiction” of a country.

In a system of “residence based taxation”, the event that severs the “tax connection” with a country is ceasing to be a resident of a country,  and establishing residence in  a new country.

In system of “citizenship taxation”, the event that severs the “tax connection” with a (and there is only the U.S.) country is ceasing to be a citizen of the country (U.S.). Since, few people will want to be “Stateless”, those relinquishing U.S. citizenship are (almost) always citizens of another country. Furthermore, they will likely be residents of that other country and have assets in that other country. It is for this reason that the U.S. “Exit Tax”, has the primary effect of   confiscating “foreign assets”. (Assets that are local to you, but “foreign” to the U.S.) This is a matter that should be of great concern to those countries who foolishly signed FATCA IGAs.

I suspect that most would agree that “Exit/Departure” taxes reveal the worst and the ugliest aspects of a country’s tax system. Therefore, the S. 877A rules demonstrate how incredibly “ugly” U.S. citizenship taxation really is.

For all practical purposes, U.S. Homelanders live under a system of “residence taxation”. I agree that the Internal Revenue Code uses the word “citizen”. But the rules of U.S. “citizenship taxation” are written for those who are U.S. residents. Therefore, for 98% of U.S. citizens, U.S. “citizenship taxation” is actually “residence taxation”. It’s only for the 2% of Americans abroad that “citizenship taxation” is revealed for what it really is.

Citizenship taxation is:

The taxation of people, who were “born in the U.S.” and “live outside the U.S”. Those subject to “citizenship taxation” are taxed ON income earned outside the U.S. (which is also subject to taxation in their country of residence”). I have never met a person who was SUBJECT to U.S. “citizenship taxation” (meaning they lived outside the U.S.) who approved of it. That said, very few Americans abroad really understand the full extent of what “citizenship taxation” really is and how it really operates.

I wrote this series of posts about the U.S. “Exit Tax” for two reasons:

1. To educate people about how it works. Very few people understand this tax (and that includes accounting and legal professionals).

2. For the purpose of demonstrating how horrible, unjust and unfair the U.S. “Exit Tax” is to Americans abroad – particularly those who have lived abroad for most of their lives.  If you agree that “Exit Taxes” are a good indicator of the principles that are the foundation of a tax system, then you would likely agree that the U.S. “Exit Tax” as defined in the S. 877A rules:

– is unconscionable in the brutal way that it operates to confiscate the “foreign” retirement assets of Americans abroad; and

– is a particularly vicious example of the general principles of “citizenship taxation”.

The general principles of “citizenship taxation” are “death by a thousand cuts. The S. 877A Exit Tax is “death by the guillotine”.

The S. 877A rules are particularly vicious because they are the inevitable and logical result of the American system of “citizenship taxation”. If the United States is to have an “Exit Tax” at all,  that “Exit Tax” CANNOT be defined according to the principles of “citizenship taxation”.

In fact, the S. 877A rules are the best argument there is for the United States to move to “residence based taxation”.

I believe  that the United States has three options:

1. Not have an “Exit Tax” at all – preferred

2. Have an “Exit Tax” that is based on the principles of “residence taxation” (For example, American Citizens Abroad has suggested an “Exit Tax” based on Canada’s “Departure Tax”.)

3. Change to “residence taxation” and have an “Exit/Departure” tax that is based on a system of “residence taxation”.

It is clear that the current S. 877A tax cannot continue. I suggest there are three reasons:

First, it is unjust and immoral in the extreme. Once the U.S. “Exit Tax” is understood it will provide powerful disincentives to immigrate to America. It’s simply wrong. Why would anybody move to a country that they could not leave without being forced to surrender a significant portion of their net worth?

Second, there is no way that people can pay the tax. The S. 877A rules create taxation with no “income realizing event”. Where does the money come from to pay the tax? It’s a huge liquidity problem?

Third, as this tax becomes more and more understood, I suggest that the prospect of the “Exit Tax”  will drive Americans abroad to “renounce citizenship”. 

Those who are NOT “covered expatriates” will want to renounce before “inflation” or “currency fluctuations” make them “covered expatriates”. Those who are “covered expatriates” will consider all their options for exiting the U.S. tax system at the lowest cost. Many “covered expatriates” will pay the “Exit Tax” viewing the payment as in investment in their future finances and piece of mind.

Is this what the United States regards as sound tax policy?

It’s seems clear that the “Exit Tax” (as expressed in the S. 877A rules) has to change. What should the appropriate change be? The answer is to move to system of “residence taxation”. This will immediately mitigate the worst effects of any “Exit Tax”. Furthermore, under a system of “residence taxation”, any “Exit Tax” will be triggered by  ceasing to be a resident of the United States.

What does it mean to “ceases to be a resident of the United States”?

The “devil is in the details”. That said, let’s assume that a necessary condition for “taxing jurisdiction” is that one have minimal connection to a country that would justify taxation. Why are “Canadian Snowbirds” NOT subject to U.S taxation? The reason is that they don’t spend enough time in the United States. In other words, their “residence” in the United States is NOT sufficient to meet the minimum test.

“Residency” for U.S. tax purposes – how is to be determined?

In 2008 Cynthia Blum and Paula Singer published a paper in the Vanderbilt Law Journal (“A Coherent Policy Proposal For U.S. Residence-based Taxation of Individuals”) which argued that:

 The concept of “substantial presence,” already incorporated in § 7701(b), is the best tool for this purpose. This argument is based on the assumption that the United States will continue the process of implementing a new border control system that will greatly simplify the determination of an individual’s actual days of presence in the United States.

In other words, Blum and Singer are arguing that the “substantial presence test” which is currently a “sufficient condition” for taxation should become a “necessary condition” for taxation. They also suggest that this is dependent on being able to determine how many days an individual spends in the United States.

Many of these thoughts are captured in the recent submission of American Citizens Abroad to the Senate Finance committee.

aca-submission-senate-finance

See particularly pages 6 – 10 where ACA argues for “residence taxation” (similar to the Canadian model) and an “Exit Tax” (similar to the Canadian model. It’s interesting to see how:

– the extent to which the S. 877A rules reflect the principles  of “citizenship taxation”; and

– the extent to which Canada’s “Departure Tax” rules reflect the principles of “residence taxation”.

With respect to the unfairness to U.S. citizens residing outside the United States, the ACA recommendation includes:

3. Foreign pensions, retirement savings plans and insurance policies would also be excluded from the scope of this exit tax, as these items are the result of work and savings realized as nonresidents. This provision is of vital importance to long-term overseas residents, many of whom have had their entire career with foreign employers.

5. Americans and green card holders who are already resident overseas at the time of passage of the law introducing RBT and who are in compliance with their U.S. tax filing under CBT on the
date the new law takes effect are excluded from the exit tax. Their assets, including their primary residence overseas, have essentially been accumulated through working and saving overseas and should not be subject to the exit tax. This grandfather clause is essential so as not punish Americans abroad who have accumulated their life savings overseas, have not received U.S. governmental services and yet who have been subject to the discriminatory impact of CBT for the duration of their foreign residence.

The vicious effect of the current S. 877A rules are no more and no less than a reflection of U.S. “citizenship taxation” in general.

Furthermore, the application of the S. 877A rules demonstrate the absolute impossibility of living outside the United States under the current rules of “citizenship taxation”.

This has not escaped the notice of “IRS Taxpayer Advocate” which asks about “torment”:

A former (renounced) U.S. citizen in the U.K. comments about “torture” :

What’s the answer? It’s time to end the tormenting and torturing of Americans abroad. It’s time to eliminate “citizenship taxation.

Although citizenship taxation may have always been the law, the awareness and enforcement did not begin until 2009. Americans abroad simply cannot and will not live under this injustice. Renunciations of U.S. citizenship are rising. Do it yourself “relinquishments” are rising.

Hostility toward the U.S. government is real and growing. I do NOT believe that the U.S. government is hostile to Americans abroad. I do believe that the U.S. government is indifferent to Americans abroad. The problem is that:

“Indifference often is a form of extreme abuse”.

“Citizenship taxation” is overwhelmingly “place of birth” taxation. People do NOT choose where they were born. They do choose where they live. People should be “taxed” according to the choices on where they live and NOT based on an accident of birth.

“It’s unjust. It’s inhumane. I didn’t choose where I was born!”

By practising “citizenship taxation” the United States of America, in the 21st Century is one of the very few countries in the world where:

“The circumstances of your birth are largely determinative of the outcome of your life.”

The issue is NOT (as some academics suggest) whether “citizenship taxation” can be justified.

The issue IS whether “citizenship taxation” is good tax policy in the modern world.

The time has come for the United States to join the world and NOT cling to an antiquated and ridiculous rule (which may have never even been policy).

Those renouncing U.S. citizenship INCLUDE “tax compliant” Americans

It’s interesting that many of those “renouncing U.S. citizenship” have always filed U.S. taxes. They are and always have been tax compliant. It’s NOT about “taxation”. It’s about the “life control” that is associated with the U.S. rules of “citizenship taxation”.

Those renouncing U.S. citizenship INCLUDE Patriotic Americans

It’s not about Patriotism. Many of those “renouncing” U.S. citizenship today feel that they are Patriotic American citizens. People are renouncing because of the incredible damage that the U.S. rules of “citizenship taxation” is doing to people’s lives. For first hand accounts of “Patriotic American Citizens” who felt FORCED to renounce their U.S. citizenship, see:

 


On the issue of Patriotism, I will end with a quotation of one of America’s greatest writers:

Americans abroad have a long history of supporting the U.S. government. It’s time for the U.S. Government to support Americans abroad!

John Richardson

2 thoughts on “Part 9 – For #Americansabroad: US “citizenship taxation” is “death by a thousand cuts, but the S. 877A Exit Tax is “death by the guillotine”

  1. Mark Twain

    If an investment is in USA, and it is not liquidated upon exiting, its capital gains would be realized at whatever future date it might be sold. At that time, the tax on gains would be easily assessed by USA and any necessary settling up could be done versus the tax treaty. The concept of cashing out at exit is not necessary. Not in Canada, either.

    Reply
  2. qm

    I know many tax compliant, patriotic Americans who have renounced. Many have done so seeing the $2m threshold approaching, to protect their families and get on with their lives. All with heavy hearts.

    You did not mention the additional burden on those who renounce who have US citizen relatives–the tax their relatives are supposed to pay on receiving a gift or bequest from a covered expatriate. More and more will be covered expatriates as the $2m gets smaller by reason of inflation and currency change. Although the IRS promises to give guidance on this unenforceable “succession” tax that punishes the children for the acts of their parents, so far, since 2008, we are still waiting for it. The reason for the delay is that there is probably no way of identifying those donors or deceased persons who were covered expatriates. Will the US take a FATCA approach and assume every foreign donor or deceased person is a covered expatriate unless the US recipient can demonstrate otherwise?? Certainly this law proves your point that an exit tax reflects the morality of a nation.

    Reply

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