Each and every year, millions of Americans living abroad have to file their tax returns and pay what they owe to Uncle Sam. Believe it or not, the US is one of just two countries in the world to tax citizens living abroad. (The second is Eritrea, a small African country controlled by a repressive dictatorship.) It’s true that the majority of American expats end up having to pay little to no taxes, as they are only taxed on earnings above a certain amount and can also offset host country taxes against what remains. Moreover, Americans abroad are also subject to tax on foreign pension contributions and capital gains tax when selling a foreign property. Added together, that can lead to a pretty big tax bill.
Beyond expensive and inconvenient, this system is also outdated. “The taxation of Americans abroad was designed to deter draft dodgers who fled the country to avoid fighting the Civil War more than 150 years ago. From the beginning, in other words, bad intentions were assumed. Yet hardly any of the estimated 7.6 million U.S. expatriates today are trying to evade taxes – indeed, most pay more than they would at home,” The Bloomberg editorial board wrote in a 2015 editorial. “It’s for the sake of fairness that other countries base the taxation of their citizens on residence. After all, why demand taxes of people who don’t benefit from the proceeds – who cannot use their countries’ roads or schools or health care while living abroad?”
And for the millions of Americans abroad, paying taxes is more than just a nuisance. Some of them have even considered giving up their American citizenship because of it. 40 percent of the nearly 9 million Americans abroad wouldn’t rule out renouncing their US citizenship because of tax reasons according to research conducted by Greenback Expat Tax Services, which specializes in providing tax assistance to Americans living outside of the US. Moreover, according to Greenback, which surveyed 2,100 Americans abroad to get a better idea of how Americans expats felt about US tax regimes, 19 percent actually said that they were seriously considering getting rid of their citizenship. 5 percent actually said they are planning to renounce.
But how many people actually acted on that desire to chuck out their American citizenship? Well, according to the numbers, more than you might think. According to information supplied by the US Treasury, in 2016, 5,411 people renounced their status as American citizens or ended their long-term residencies in the US. That’s up from 4,279 people in 2015 – over a 25 percent increase. Even when giving up their citizenship, Americans are still subject to an exit tax, the amount of which varies depending on the type of assets an individual holds.
All in all, Americans living abroad face significantly more tax burdens than the expats of other countries. There has been some talk of reform, but the rules and regulations have only tightened in recent years to prevent wealthier Americans from evading taxes by hiding money in offshore accounts. It doesn’t look like change is on the horizon anytime soon.
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