Ever since “Under the Tuscan Sun,” I’ve imagined channeling my inner Diane Lane and restoring an old Italian farmhouse. I’m guessing that many Americans assume that’s what living abroad is like (thanks, Frances).
But for the estimated nine million Americans who live abroad, everyday life is less about busted plumbing and splashing in fountains and more about working—and taxes. And a recent case that the Supreme Court has added to its docket for the 2023-24 term will no doubt be of interest to them.
Moore v. United States
In Moore v. United States, the Court will consider whether a relatively new tax—the “mandatory repatriation tax”—created under a provision of the 2017 Tax Cuts and Jobs Act is unconstitutional under the Sixteenth Amendment.
The petitioners in that case, Charles and Kathleen Moore, are not Americans living abroad—the Moores live in North Carolina. But in 2005, they invested in an Indian corporation that reinvested its earnings to grow the business. Years later, the Moores learned that under the 2017 tax reform law, they were subject to a mandatory repatriation tax, or MRT. The result was that taxpayers like the Moores owed tax on those reinvested earnings. In the Moores’ case, they were subject to the tax going back to their original investment at a 15.5% tax rate—netting them a tax bill of $14,729.
You can read more about the case here.
Repatriation Tax
Rebecca Lammers, a U.S. citizen who lives and works in London, champions issues that are important to expats as part of her work as the Chair of the Taxation Task Force for the Democratic Party Committee Abroad. She says that Americans abroad “weren’t thought about” when Congress crafted its repatriation tax. The problem, explains Lammers, is that the tax is a tax on people, not corporations. And worse, the language in the statute makes no distinction between investments in small companies and big ones.
Here’s how that impacts Americans abroad. It’s not unusual for those who live and work abroad to own a small business. As part of their growth strategy, they tend to draw a minimum salary and do what the Moores did—keep the profits inside the company. It’s a savings plan, of sorts.
But under the 2017 law, any profits inside the business are fair game for taxes retroactively. That means a massive chunk of their savings—perhaps for retirement—could be taken away. That could put people off from starting a new business. And what’s more synonymous with the U.S. than an entrepreneurial spirit?
Lammers says that she understands the law’s intent was to ensure the rich pay their fair share. But the rules, as written, apply to all business income outside of the U.S.—there’s no de minimis exception.
Misperceptions
And, Lammers notes, there is a broad misperception that Americans living abroad are wealthy. That’s not true, she says, citing a November 2022 survey that proves otherwise. This is “not the rich 1%,” she states.
Most Americans abroad aren’t simply lounging on yachts in the Mediterranean. Most people move abroad for work, family, or education. That’s precisely what drew Lammers to the U.K. She moved abroad for her Master’s degree, got a job, and married a Brit. “I had no idea that I’d still be here 16 years later,” she says.
Lammers isn’t surprised that American abroad may be disproportionately impacted by the repatriation tax, even though they weren’t the targets of the new law. Americans abroad, she says, often aren’t thought about when passing legislation. They are simply collateral damage.
That’s been the case for years, she says, even when it comes to the basics—like filing. The laws are more complex to navigate, like foreign tax credits and exclusions, which are even more complicated when combined with particular circumstances like treaties. In most cases, those taxpayers must file even if they’re not expected to owe any tax. A recent survey suggested that only 33% of Americans abroad said they owed any tax, but all of them reported paying professionals to assist with preparation. Even worse? Expat CPAs can be three times more expensive than those who focus on taxpayers in the U.S.
Easy Solution
There is an easy solution to that problem, Lammers says: no filing requirement when no tax is due. Most filings from abroad, she notes, aren’t yielding top dollars.
So why doesn’t something like that already exist? Lammers says that it’s not a priority in Congress. And, she says, it can appear at odds with chasing tax fraud. But, Lammers explains, being diligent about tax fraud doesn’t have to mean that you can’t make the tax fraud more fair. Those stories about billionaires hiding their dollars offshore are a story—but they are not the story. “Congress knows,” Lammers says, “that 99% of taxpayers are not in that bucket.”
There is something like this in the works. Congressman Donald Beyer (D-VA) is expected to re-introduce H.R. 6057, the Tax Simplification for Americans Abroad Act, this month. The bill, which Beyer introduced last year, directs the IRS to make available a new tax form for certain individual taxpayers living abroad. The form will allow taxpayers to demonstrate nonresidence and declare foreign income, foreign taxes paid, and U.S. source income from retirement, pension, and social security benefits.
Other Issues
Lammers cites other issues that can be difficult for Americans abroad, like efforts to meet increased reporting requirements. For example, she says, some countries like Australia require that residents establish retirement accounts approved by the government (the government may also choose investments). In the U.S., some of those accounts may be treated as passive foreign investment company—or PFIC—assets. If you’re familiar with PFICs, you know that taxation can be tricky and involve the dreaded mark-to-market treatment (where you recognize gain or loss based on the PFIC’s value at the end of the tax year).
Ordinary operating accounts may require annual FBAR reporting. As part of the Bank Secrecy Act (31 USC §5314), every U.S. person with a financial interest in, or signature or other authority over, one or more foreign financial accounts with an aggregate value of more than $10,000 must annually report the account to the Treasury Department. Failure to report can result in a penalty, depending on whether the failure was willful or non-willful. Despite the requirement, almost 30% of respondents in the 2022 Tax Survey of Americans Abroad were unaware they may also need to file an FBAR
Taxpayers may also find it difficult to open and maintain U.S.-based financial accounts due to the USA PATRIOT Act.
Federal Reserve Bank of Chicago – part of United States central bank.
And don’t even get Lammers (and others) started on receiving and responding to IRS communications from overseas which is limited to mail and phone calls. That’s been made even more challenging, as the IRS provides less assistance for international taxpayers. According to the 2022 Tax Survey of Americans Abroad, all IRS Taxpayer Assistance Centers abroad were closed in 2013, and there is no funding for Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs outside the U.S.
Renunciation
If compliance is hard for Americans abroad, why won’t they renounce their citizenship? It’s a question that I hear time and again.
Lammers has a quick answer: Not everyone has that option. Americans may be allowed to establish long-term residency, but that’s not the same as obtaining citizenship in another country.
Besides, Lammers points out, it’s against the law to renounce your citizenship for tax purposes.
Easy Fixes
But, she says, some of these issues are easy fixes—bipartisan and non-controversial. That’s where voting matters, according to Lammers. Congress needs to hear from those who are experiencing these hardships (for voting information for U.S. citizens living abroad, click here).
Making it easy to file, she says, will increase compliance. Otherwise, the fear of non-compliance means that some taxpayers are afraid to ask questions—they may be paralyzed with fear. The IRS, she says, is “made out to be the bogeyman.”
A change in the laws to make it more expat-friendly could change that while also boosting compliance rates. Lammers is confident that it won’t harm existing efforts to identify tax cheats, urging, “We can do both.”