Top 5 Challenges for Americans Living Abroad
#1: Discriminatory Tax Policies for Americans Living Abroad
Approximately 9 million Americans living outside the US are subject to discriminatory tax laws.
They must continue filing US tax returns and information reports, even if they are paying taxes in their country of residence.
Any local businesses they are associated with become entangled in the complex web of US tax laws.
#2: The Impact of FATCA
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, has exacerbated the challenges for Americans living abroad.
FATCA requires foreign banks and financial institutions to act as unpaid informants for the IRS, or face a 30% withholding tax on US-source income.
FATCA’s Flawed Assumption
FATCA operates under the assumption that all Americans with investments outside the US are tax evaders, even those living full-time overseas. However, this assumption is simply not true.
The most popular destination for Americans living abroad is Canada. It is home to as many as 2 million US citizens.
The top combined federal and provincial income tax rate in Canada can approach 50%, with one province (Newfoundland and Labrador) having a top rate of 51.3%.
Given these high tax rates, it is clear that Canada does not resemble a tax haven in any way. FATCA’s premise that Americans living abroad are tax evaders is not supported by the facts.
#3: Banking Challenges for Americans Living Abroad
Many foreign financial institutions have closed accounts held by US citizens to avoid the burdens of FATCA compliance.
- In France alone, the Banking Federation has warned its members they must close as many as 40,000 additional accounts held by US citizens living there by the end of the year.
- The European Banking Federation estimates that up to 300,000 more US citizens living in Europe could lose access to banking services by the end of the year.
US banks and brokerages have also started closing accounts owned by non-resident citizens.
Overseas Americans are effectively locked out of banking relationships and mutual fund investments, both in the US and abroad.
#4: Retirement and Pension Challenges
Overseas Americans often face double taxation on their pensions, paying income tax to both the US and their adopted countries.
They are generally unable to own foreign life insurance policies with cash value without facing significant tax consequences.
#5: The Impact of Tax Reform
The 2017 tax reform law has further disadvantaged overseas Americans.
The mandatory one-time repatriation tax of 15.5% (or 8% for less liquid assets) on deferred profits in foreign corporations has led to double taxation for many Americans living abroad.
Expatriation: A Last Resort
Faced with these challenges, the number of US citizens expatriating (giving up their citizenship and passport) has skyrocketed in recent years.
Unless Congress takes action to end or substantially modify the system of citizenship-based taxation, expatriation may be the only viable alternative for some overseas Americans to live normal lives in their adopted countries.
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Thinking about a second passport? There are just seven official (legal) ways to get one. Find out which one is the best option for you: How to get a second passport.
Need Help?
We can assist in every phase of giving up your US citizenship or long-term residence. This includes helping you get a second passport before giving up US citizenship.
And if you’re not ready to expatriate, we can help you take advantage of tax breaks in the Tax Code that apply to US citizens and permanent residents living overseas.
Schedule a free no-obligation consultation with a Nestmann Associate to see if expatriation is right for you.
