I’ve decided to write my representatives concerning the US practice of taxing its citizens abroad.  For your sleepless nights, here’s my letter to Senator Webb – feel free to alter it and use it to write your representatives, too!

US taxation of citizens abroad

Dear Senator Webb,

Thank you for your tireless work on behalf of the State of Virginia. As a citizen eligible to vote in Montgomery County, I want to bring an issue to your attention that concerns over 5.5 million US citizens.

As I am sure you know, the USA levies taxes on all its citizens, regardless of residence. This makes the USA unique among developed countries: all others levy taxes based on residence alone.

As I understand it, this taxation by citizenship is intended to prevent very wealthy Americans from avoiding taxes in the USA by moving abroad. Unfortunately, there are several unintended unfair consequences for less wealthy US citizens abroad. Allow me to mention a few you would have to expect were you to move abroad for job reasons.

1. The US dollar exchange rate unfairly influences taxation. The USA taxes its citizens abroad based on their income converted into US dollars. You might earn the same salary in year one as in year two, with no change in cost of living, but be forced to declare an increase in income of several thousand US dollars because the dollar was devalued in that period. If you buy a home for the duration of your stay, the exchange rate hits you even harder: selling your house might net you little in your local currency, but still look like a fat profit in US dollars, and the IRS would tax you despite your having made no real gain.

2. US citizens have a competitive disadvantage on the global playing field. If you are hired as an expatriate by a large company, you cost the company more in expenses and tax attorney fees, which makes you less attractive for hiring. If you move abroad without company assistance, you have to contend with arcane tax laws and the administrative effort of filing income taxes twice. If your income is above the exclusion, you will pay taxes to two countries. This competitive disadvantage of its citizens is damaging to the US economy, particularly in this climate of globalization.

3. US citizens abroad run the risk of unintentionally becoming criminals because of the complex tax laws and agreements. The US tax code is complicated for US residents; it is worse for you as a citizen abroad. Additionally, IRS personnel rarely are able to answer questions you might have, for instance related to local pension plans and related accounts, so even if you try your best you run a very real risk of unintentionally running afoul of the IRS.

4. US citizens abroad are being denied basic local banking services. Many local banks altogether refuse dealings with anyone liable to taxation by the IRS rather than running the risk of being sued. (They may make exceptions for you if you have sufficient net worth.)

5. US citizens abroad are kept from taking on responsibilities. As stated on the IRS website of the FBAR FAQs: “Any United States person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year,” must file an FBAR. In other words, even if the account is not yours, such as a company account or an account of an association you join, you must report it if you have signature authority over it. This has wide-ranging implications. You may be denied promotion because US tax law would require you to disclose the company account to the IRS. You may shirk involvement in civic associations (or be denied such involvement) for the same reason. Your career options and your effectiveness as an informal ambassador for the USA are thus greatly reduced.

6. US citizens abroad may cause others to become criminals unintentionally. If you have set up your accounts to give close relatives signatory rights for emergency situations, you may have set them up for severe “civil penalties, criminal penalties or both” if they fail to file an FBAR for your account. Because the FBAR requires that the yearly high water mark in US dollars be reported, it would be easy to make a mistake unwittingly. That the FBAR doesn’t allow for account numbers in the international IBAN format seems a minor nuisance in comparison.

7. Taxation of citizens abroad is a form of taxation without representation. You will be able to vote from abroad, that is true, but the vote of overseas citizens like you is split across all fifty states and your concerns diluted to insignificance. Representation is based on residence, and taxation should be, too.

In sum, US taxation burdens and disadvantages its citizens abroad. It is unfair in several regards. I ask you to work toward replacing taxation based on citizenship with taxation based on residence. As a first step in that direction, I ask you to revive and support the Working Americans Competitiveness Act that Senator DeMint introduced in 2007 (S. 1140).

Respectfully,

Stephan Stuecklin-Wightman