Letter to the 2016 Democrats

I know this isn’t an issue that gets much traction with voters, but for seven million American Citizens, the taxation of US non-residents is by far the most pressing topic in the upcoming election. I’m a lifelong Democratic supporter. I have traveled to the US during presidential elections to volunteer for Democrats. I’ve donated, canvassed, delivered pamphlets, and driven voters to the polls.

And yet, in 2014, as difficult as it was, I voted Republican. I wrote to my Senators, Congressman, and the President about this issue, but nobody on the Democratic side seems to care that the current US approach to taxing non-residents is a nightmare for ordinary people who live outside the US. While the details are too complex to discuss here, the short version is that tax rules that are designed for US residents cause incredible complexity for those living permanently outside the US. I pay more in Canada than I would living inside the US - this is not an issue of tax-avoidance. I would gladly provide specifics if you’re interested.

At this point, beyond simply voting, I’m realizing that I need to start actively campaigning for Republicans among overseas Americans. This saddens me, but unfortunately this issue dwarfs everything else in terms of impact to me.

I find it appalling to realize that I may be forced to cast my vote for Donald Trump’s party in November. The current Republican platform addresses the tax issues for nonresident Americans, and explains how they will fix this.  From the Democrats, there is nothing. Every change that has been made to non-resident taxation has been a step to increase the complexity. There are many solutions that could be proposed, but to date only the Republicans even acknowledge that the problem exists.

From the Republican Platform:

“FATCA not only allows ‘unreasonable search and seizures’ but also threatens the ability of overseas Americans to lead normal lives. We call for its repeal and for a change to residency-based taxation for U.S. citizens overseas.”

Other solutions than the one proposed by the Republicans exist. I’m hoping that between now and November the Democratic candidates can join the Republicans in proposing a common sense solution that addresses the concerns of overseas Americans.

Comments

There are almost no news organizations in the US covering the mess that the US financial laws are causing for non residents. Outside the US, there are occasional stories about this. The comments afterwards are always impressive for the ignorance they demonstrate.

For example: A story was recently published in the Guardian about the financial problems caused by FATCA.

In response to this, comes the following comment:

Cheryl Petty

watch me play the world's tiniest violin...(thumb and forefinger)...sooooo sorry about having to declare your income, sooooo sorry you can't shield or hide your money...boo boo...such a sad story.

This is typical of the comments that appear in response to articles published concerning the tax treatment on US Citizens living outside the US. Cheryl Petty would be so spot on if her comment about people hiding their money was correct. What it really shows is the Ms Petty’s complete ignorance of the issue. There’s an underlying belief that the complaints are regarding rich Americans being forced to declare money that they are hiding outside the US. The seeds of this belief were planted by the comments made by President Obama and his officials when Fatca was passed. Their language indicated that they were trying to catch tax cheats. So, anyone complaining must be a tax-cheat, right? Despite actively searching, and writing to congress, I have found NO indication that the politicians understand the problem.

Here’s the reality. A US citizen living outside the US is bound by the tax laws of the country he is living in. He pays taxes in that country. He receives services in that country. He saves his money in that country, in investment accounts that comply with that country’s financial regulations. He isn’t doing this to “hide” his money; he is doing it because that is where he lives and wants to plan for his future. He is saving locally because US financial institutions will not accept investments from non residents. In most cases he is paying a higher rate of taxes than he would be if he were a US resident.

Every developed country besides the US recognizes this, and does not expect non residents to file a tax return. The US requires filing every year, but has set up the system to make filing almost impossible for a non resident.

 
It’s hard to blame people like Cheryl Petty for their ignorance. Despite the fact that these laws are causing a nightmare for over 7 million US citizens, there is no reporting on the issue in the US media. No politicians are even willing to acknowledge the mess that exists. Of course, if Cheryl Petty read the story she might have been in a better position to comment.  

How Canada treats nonresidents

As mentioned, I think the tax treatment that the US applies to non-resident US citizens is unreasonable. I’m going to try to describe some of the details on this, since this is an issue that has been completely ignored in the US press. But, as a comparison I think it’s worth understanding what happens when a Canadian citizen decides to move away from Canada on a long-term basis. Canada follows a system that is reasonable, but is set up to stop people from simply leaving to avoid paying taxes on previous earnings.

There are certain tests that need to be met for a citizen to be considered a nonresident, assume that on Day 1 a Canadian citizen, lets call him Bob, leaves the mother ship and meets these requirements.

Bob is responsible for filing Canadian tax returns up until Day 1. On these returns, he’s required to report all income, gains, interest, etc that he received before Day 1, and this does include income from worldwide sources. From Day 1 on, Bob is no longer required to file Canadian income tax returns. So in following years, Bob doesn’t need to file in Canada.

He is also required to pay what is effectively an exit tax. To satisfy the government of Canada, Bob will need to calculate what is referred to as deemed disposition of capital investments. So, Bob needs to pretend that he sold all taxable investments on Day 1, and report all gains on his final Canadian tax return. This is reasonable; he should pay tax on all income and gains that occured while he was still a Canadian resident.

In the future, when Bob receives income from Canada, from retirement investments or the Canadian Pension Plan he will pay tax at a 25% rate - note though that tax treaties with some countries may reduce this. He doesn’t need to file a return, this is a simple flat tax.

Canada’s system is reasonable, and straightforward. When you are a resident, you pay income tax to pay for the services you receive. If you leave, you aren’t taking these services any more, so you can stop paying. You can’t just leave to avoid paying tax though, the exit tax and nonresident tax on future income are there to prevent people from just taking off to avoid paying their taxes.

My letter to congress

Note: Last month, I sent a letter to Senators Wyden and Merkley, and Congressman DeFazio, all Democrats. I have voted for these candidates in the past. I received no responses, or any evidence that it was even read. Sen Wyden's page appeared to reject the letter since I had the audacity to try to fill it in from outside the US, the others accepted it.

---- Sent August 21, 2014

I’m writing to you to express my frustration with the current IRS approach to taxation of nonresident US citizens. The current approach is a major concern for US citizens abroad. Over the last several years, rather than moving towards trying to improve the situation, the IRS seems to be actually making the situation worse. Many citizens abroad are reluctant to complain, due to concerns that they may be non-compliant with the IRS rules. I think the current situation is sufficiently broken that it needs congressional action to rectify it. The way the situation is today, I actually feel that without any action I will need to encourage my children to abandon their US citizenship. I’d like to explain to you the current situation for a nonresident US citizen, and suggest an alternative.

I’ve been living in Canada for the past 15 years, and have had Canadian citizenship for over a decade. I’m married to a Canadian citizen. I haven’t worked enough years in the US to qualify for either Social Security or Medicare. Current IRS rules require US citizens to file returns based on worldwide income annually, regardless of whether or not they are US residents. Note, that the only other nation with this requirement is Eritrea. The tax laws require this whether or not the citizen has ever worked in the US, and whether or not the citizen has any US based income. In my case, I’ve worked in the US for 5 years since graduation, and I do maintain some US based mutual funds. I’ve filed my returns every year as required.

As a nonresident, filing a US tax return is more complicated than you might think. The problem is that the US taxes on foreign accounts are designed to apply additional taxes, presumably to encourage domestic investment. While this may be reasonable for US residents, these rules pose major problems for Americans living outside the US.

For example, the Canadian equivalent of an IRA is called an RRSP. The IRS does not recognize being tax deferred however, and expects that any income, dividend, or capital gain distributed inside the RRSP be declared on each year’s tax return. Unfortunately, since the account isn’t considered taxable in Canada this information isn’t available. Most financial advisors recommend that US citizens living abroad do not contribute to mutual funds, since the tax treatment in the US makes proper filing extremely difficult & impose additional taxes. Of course, the fund companies that I’ve dealt with in the US, Vanguard, T. Rowe Price, and Fidelity, all prohibit investment from nonresidents. The investment vehicles that Canadians use for education and retirement savings, RRSPs, DPSPs, DCPCs, TFSAs, RRIFs, and RESPs are all unrecognized by the IRS and subject to additional filing requirements. If I purchase a house in Canada, the IRS considers it a foreign property and subject to additional tax rules when I sell. To me though, it isn’t a foreign property, it is my home. And that’s the key; a US resident who buys property in Canada is very different from a Canadian resident who does so.

 So, the US has put in place a filing requirement, but has also put in place rules that make compliance a nightmare, and impose improper treatment of the assets of non-residents.

Now the US has added FATCA and FBAR to attempt to track US citizens’ foreign accounts. Personally, I think that the US is within their rights to require citizens to disclose their foreign accounts, since a US citizen could decide to return at any time. However, the filing and tax requirements for non-resident US citizens do not seem to pass the fairness test. For someone living in a foreign country, complying with its tax rules, and using no US services why would the US government feel entitled to their tax money?

The upshot of this has been record numbers of US citizens renouncing their citizenship. The vast majority of these people renouncing their citizenship aren’t tax evaders; rather they are ordinary people who have decided that the burden of the current US tax rules have become too onerous. Online forums are full of discussions of US citizens contemplating renouncing. These aren’t rich tax-evaders, they are ordinary people caught trying to deal with an unfair tax code. Personally I would find it extremely upsetting to give up my US citizenship. I’ve voted in every election since leaving the US. I find it incredibly depressing that there are no voices in the US government trying to rectify this situation. Instead, there’s now legislation being proposed by Senators Schumer and Reed to permanently bar US citizens who renounce their citizenship from the US. Rather than address the problem, they are trying to punish people who are taking the only avenue left to them to deal with an unfair situation.

I have two children, aged 13 & 15. My daughter was born in Oregon, and has US citizenship by birth. She lived in the US until she was 6 months old. My son was born in Canada. The same rules that apply to me would apply to my children, regardless of whether they ever live or work in the US. I’ve always assumed that at some point they’d both likely live in the US. But with the current tax situation I believe the best course would be for them to renounce at age 18. Trust me, it is painful for me to write that, and yet I can’t willingly subject them to the rules that have been put in place.

Now, I want to add that I fully support the US trying to stop tax cheats, and clearly the rules in place are designed to do that. But, applying these rules to non-residents has created a nightmarish situation. It seems clear that there’s a simple solution to the current situation: moving to join the rest of the world in a residence based tax system. Clearly, the US doesn’t want people moving out of country to avoid a coming tax bill. Requiring US citizens to file taxes for 2-3 years after leaving the country would solve this problem.  The US could certainly continue to require a tax return from all citizens based on US income only. Under this requirement, I would still need to file taxes, but there would be a pathway open for me to stop short of giving up my US citizenship. This would fully solve the problem for people who were born in the US but never lived there.

It is also worth noting that the perception of the US in the rest of the world is suffering because of this.  Having lived in the US with a Canadian spouse and now as a US citizen in Canada, I can tell you that criticism of the US system is justified.

Finally, I’d like to include a quote from a policy paper released by Barack Obama in 2008:

Obama understands the special concerns and issues of Americans living abroad and

will seek to address these as president.

  

Strengthen Economic Security for Americans Abroad: Barack Obama believes that the U.S. government should pay close attention to how American citizens are treated in the private sector while they live and work abroad. Our government must work to ensure that overseas Americans have every chance to compete on a level playing field, and he will work with Americans abroad to identify and understand problems they may face as a result of U.S. government policies.

Candidate Obama recognized that there were problems. Sadly, President Obama is enacting policies to make the situation worse. Hopefully you will at least make an effort to rectify this situation.

About Me

I was born in the northeastern US. My parents and grandparents were all from the southern US originally. I grew up and was educated in New England, at least somewhat. After graduating college I went west to ski and rock climb, under the pretense of attending graduate school. It turned out I liked graduate school more than expected, and four years later I’d received a PhD in engineering physics.

A chance meeting with a foreign professor led to a job in Europe after graduate school, and I lived there for two years. I returned to the US to take a research position in a US government lab. Shortly after this I met a Canadian who’d recently moved the US. The two of us fell in love, and were married two years later. This was an interesting time, together we learned about tax & immigration issues facing Canadians moving to the US. Our intention was to stay in the US forever.

Fast forward 3 years. We’d moved to Oregon, and our first child was born. I was working for an exceptionally dysfunctional start-up company. The investors were planning to relocate the company, but it seemed clear to me that the long term plan was for the company to fail and the investors to get a tax writeoff for their losses. I sent off a few resumes for jobs I’d seen advertised, one in Washington, one in NJ, and one to a Canadian company.

I got a great job offer in Canada, and much to my wife’s delight we decided to move to the Great White North. This was an interesting time, and I got the opportunity to learn about tax & immigration issues facing Americans moving to Canada. 

Our second child was born in Canada, and I’ve been living here for almost 15 years now. I knew when I moved here that I needed to file a US tax return every year, but only considered this a minor inconvenience. It turns out that A) I was doing it wrong and B) they’ve changed the rules/requirements such that it’s nearly impossible to comply with the rules while living outside the US.

I've been a Canadian citizen for a decade, but before deciding to become a citizen I carefully researched the implications on my US citizenship - I was adamant that I would never give up US citizenship under any circumstances. I thought dual citizenship was a great gift for my children. People who know me well always refer to me as “their American friend”. I have an American flag in my office, given to me by a coworker. I've raised my children to understand that they should also consider the US as their home. I throw a July 4 party every year for friends and neighbors. My wife makes red, white, and blue desserts, we serve Sam Adams beer, chips and salsa (to complete the NAFTA experience), and I put on a kick-ass fireworks display.

That’s who I am.