US taxpayers


The United States is a great country and anyone who has lived there comes away with much to admire.  (Curiously, one admirer was Admiral Isoroku Yamamoto, who led the Japanese attack on Pearl Harbor in December 1941, and was a special student at Harvard from 1919 to 1921 – which led him to argue against war with America.)

However, the United States sometimes exhibits what is sometimes called “American exceptionalism” (a term with more than one interpretation but loosely translated by others as “we make the rules to suit ourselves as we go along”).

In the area of tax, this is exhibited by the United States being almost the only developed country to tax on the basis of citizenship, as well as residence of taxpayer or source of income.  This was almost an accident of a US Supreme Court decision but it is now entrenched.  Like ancient Roman citizens, US citizens, wherever they live in the known world, owe allegiance to the mother country.  For much of the Pax Romana, Roman citizens were exempt from direct taxation but US citizens living or investing overseas are not so fortunate.

Millions of US citizens live abroad, many in Canada or Europe. There are hundreds of thousands of US citizens who may not even know they are US citizens.  If you are born in the United States, even if your parents are visiting, you are a US citizen.

In US legal theory, all such people are US persons and US taxpayers, even though many of them pay taxes where they live and may be exempt from US tax as result of available credits on their putative US taxable income.  Many of them, such as children, spouses at home or retirees, may not even have taxable incomes to speak of.  So, too, are many green card holders who have returned to their home countries

Fortunately, the US Internal Revenue Service is not really interested in people whose tax returns, if ever filed, would show nil tax payable (such as US born Canadian housewives), even if the IRS is not minded to recommend amendment of such over-reaching legislation.

Indeed, the IRS seems uninterested in recognizing that US citizens living overseas who are tax- compliant in their countries of residence are being put to increasing trouble in having normal lives – even where they are also citizens of the countries in which they now reside.

US investors overseas

However, wealthier US taxpayers living or investing abroad do face the interest of the IRS.  Although the US Senate has been described since the 1880s as the “most exclusive, most expensive club in the world”, US tax legislation does not help wealthier Americans investing overseas.

US taxpayers investing overseas must consider an array of requirements, including –

  • CFC rules – a US taxpayer may be taxed on the income of a controlled foreign company;
  • PFIC rules – a US taxpayer may be taxed on the earnings of a passive foreign investment company;
  • Foreign trust rules – US taxpayers may be taxed on the income of foreign trust they have created or from which they may benefit.

Reporting rules

In addition to any substantive tax liabilities, US taxpayers (including US persons living abroad) are supposed to file reports to US authorities on their foreign financial assets.

The main reports are:

  • FBAR – Foreign Bank Account Reporting.  US taxpayers are supposed to report interests in or signing authority over all foreign bank or financial accounts.

         More on FBAR Reporting

  • FATCA – Foreign Account Tax Compliance Act.  Foreign financial institutions with US clients are supposed to report their US clients to the US authorities or lose their licences to do business in the US.  Most banks in Australia (not all) now query their customers as to whether they are US citizens.

         More on FATCA Reporting

The predictable result of such over-reaching legislation is that many US persons overseas are being rejected as clients by overseas financial institutions.  It is hard to live in a country if every bank refuses to open a bank account for you.

It is also psychologically onerous to feel you are being branded something akin to a criminal when you have not broken any laws in the country where you live and of which you may now be a citizen.  It is even more vexing if you know that you do not owe the IRS any tax anyway because you have exemptions and foreign tax credits which would wipe out any US tax liability.

US estate tax

In addition to income tax, US taxpayers also have to consider US estate tax on their world wide assets.

Australia, fortunately, has abolished estate taxes, inheritance taxes and death duties.  It can therefore act as a useful jurisdiction for US citizens seeking to find an acceptable jurisdiction for estate planning.

Conclusion – US taxpayers living or investing overseas

US taxpayers living, working or investing overseas have special needs.  While not professing to be US tax lawyers, we can work, on a basis of understanding the complexities, with local US or overseas advisers to help ensure that US taxpayers are fundamentally compliant with US tax law and (hopefully) US reporting requirements are minimized.  This area is Byzantine in its complexity and vagueness and we doubt anyone could ever rationally or perfectly  comply (other than by giving all their assets and income to a non-US spouse or such like) but obviously most US citizens living abroad want to know what they can do to minimize problems which may be semi-insoluble until the US Congress wakes up to the mess it has created and does something sensible  (or other countries realize that their sovereignty has been usurped)..