Tuesday, February 22, 2011

On Taxes Expatria

The United States taxes based on citizenship. While this may sound like a perfectly normal thing, it isn't. Most countries tax based on residency. For instance, if you are British and move to Hong Kong for 3 years, the money you make in Hong Kong is not taxed by Her Majesty's Revenue and Customs. If you "remit" the money to the UK, to pay for a house or rent or a car--that money is taxed as income. Barring that, money a British subject makes outside the UK while living outside the UK is not taxed by the UK. This is the case in most countries, save North Korea, the Philippines, and the United States.

If you are a US citizen living abroad with no financial connection to the US, no travel to the US, no family or assets in the US, you must pay US taxes as well as taxes to the country where you live, of course. Usually there are dual taxation treaties so that you only pay the amount of the greater tax burden, almost always the non-US tax burden, but the treaty divides the tax between the governments.

On the off chance that some American is reading this before heading to the UN, that treaty is quite complicated. Typically the UN "borrows" citizens from other countries and pays a stipend to their home governments in lieu of the citizen paying taxes. That doesn't happen for Americans so the UN pays your income taxes to the US government for your UN income. It pays the taxes assuming the UN income is the first income, i.e. subject to the lowest tax bracket, and claims all deductions for that first income.

For Americans living abroad, I highly recommend hiring a tax accountant who specializes in issues of dual taxation to do your taxes. The complications are many and varied. For instance, US taxes are paid in US dollars and UK taxes in GBP. Assuming the simplest income, income in all GBP or USD, when do you calculate the exchange rate? Do you do all the math in one currency and then convert on the day you pay the taxes? Or do you have to do the conversions for every payday or every time you remit income to the UK? What about charitable contributions? Since they are partially tax advantaged in the UK, can you still write them off on your US taxes? Does any of this sound easy? Throw in minor differences like the different tax years--the UK year runs from April 6 to April 5 and taxes are due the next November or January (it changed not long ago), while the US year runs with the calendar year and taxes are due on April 15--and I'm betting you already have a headache. Dual taxation is not fun.

Here is a somewhat naive editorial on taxation by citizenship. Read it and at least the comment by American Expat.

By the way, in case anyone has ever heard or wondered about US citizens renouncing their citizenship, it is usually to avoid taxes. At a PTA coffee morning a few weeks ago, I joined a agitated discussion with two moms, each with an American spouse, about American citizenship. One wanted citizenship for her children, but her husband didn't because of the tax consequences. The other's spouse was considering renouncing his citizenship due to tax issues. Neither had any family in the US or plans to move there.

For some final tidbits of interest, even when you renounce your citizenship, the IRS assumes that you are doing so for tax avoidance and considers you liable for up to 10 years. As a practical matter, this isn't a big deal as the IRS would have no jurisdiction over you unless you came to the US or had assets in the US (the IRS could seize those to satisfy back taxes). Individual states also tax based on citizenship and have their own rules that add to the fun. If you are from Massachusetts, for example, and you move abroad and change your state citizenship to another state, usually Texas or Florida, and therefore don't pay state taxes to Massachusetts while abroad, but then move back to Massachusetts when you return to the US, then Massachusetts figures you were avoiding taxes. Massachusetts can charge you with back taxes and penalties for your entire time abroad. That state hasn't earned the nickname "Taxachusetts" for nothing.

1 comment:

Sarah B said...

I read on the americanexpats.co.uk forum that the 10 year liability after renunciation had been changed in 2008...there is a tax accountant who posts on that forum. I haven't really researched it (and have no intention of giving up my U.S. citizenship...) but I think they have changed that law.