New Tax Headaches for U.S. Citizens Living Abroad

A good chunk of the 9 million Americans living overseas could face a bigger tax bill as a result of a clause in Trump’s tax bill, passed late last year. Specifically, Americans living abroad are now more likely to face tax bills on their overseas business interests due to the new “deemed repatriation tax.” The bill imposes a one-time, 15.5 percent tax on profits that American businesses have accrued overseas – regardless of whether businesses opt to repatriate those profits back to the U.S.

The aim of the repatriation tax was initially to sway large corporations, like Apple and Google, to bring their profits back into the U.S. from overseas. However, numerous expat Americans have been caught up in it. Many are facing significantly more onerous tax liabilities as result, given that any American with more than a 10 percent stake in a controlled foreign corporation will be forced to pay the one-time tax within eight years.

The problem is, the way the law is worded treats every American citizen and green card holder in the world [operating through a foreign corporation] the same as Google,” Monte Silver, a U.S. tax attorney and senior counsel at Eitan Mehulal Sadot in Israel, told the Financial Times earlier this year. “There is going to be some sort of uproar … but the problem is expats have no political clout.”

Moreover, the trouble with this is that many Americans who will now owe as a result of the repatriation tax don’t necessarily have the money to pay it.

A Canadian doctor called me to talk about a surprise he just discovered related to his tax liabilities in the United States,” tax expert Andy J. Semotiuk explained in Forbes. “A dual U.S.-Canadian citizen, he had accumulated retained earnings in his professional corporation of $2 million and suddenly he learned that he had a $300,000 U.S. tax liability. Since he is resident in Canada and there is no plan to transfer the retained earnings to the USA, according to the new U.S. tax law designed to force U.S. companies to repatriate foreign holdings, he was stuck.”

As pushback against the policy mounts, some are optimistic that the U.S. might change the filing system for expats all together, getting rid of burdensome double taxation. (The U.S. is just one of two countries in the world that taxes its citizens on worldwide income regardless of residency, with the other being Eritrea.) Several high-ranking members of the Trump administration have reportedly spoken out in favor of moving toward a residence-based taxation system for those overseas.

Ultimately, however, tax experts point out that major tax reforms are a relatively rare event – the next major reform is unlikely to occur for at least a couple of decades. Until then, Americans abroad might find themselves stuck with big tax bills.

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