US tax rules sour life for Americans living abroad

US tax rules sour life for Americans living abroad

13th February 2013, Comments 7 comments

A growing number of American expats are reportedly renouncing their citizenship rather than deal with the increasing difficulties imposed on them by US tax authorities.

Scott Schmith is a patriot and a US military veteran but he is no longer a US citizen: Sick of complex tax rules making his life in Switzerland miserable he recently handed back his passport.

"It was a pretty big decision and there was a bit of anxiety," said the 50-year-old photographer who served in the 1990-91 Gulf war and has been living in Switzerland since 1993.

But once he received his Swiss passport and handed back his US one last September, "it was like a load of weight off my shoulders."

Schmith is one of a growing number of American expats who are opting to give up their citizenship rather than deal with the increasing difficulties imposed on them by US tax authorities, observers say.

US tax rules sour life for Americans living abroad

John, a 60-year-old business strategy specialist who asked that his last name not be used, told AFP he had decided to give up his US passport after losing sleep for years over the intricate tax filing requirements Washington places on all US citizens, regardless of where they live in the world and where they make their money.

When the United States recently began pushing through regulations aimed at fighting offshore tax evasion, the implications for him -- a "squeaky-clean" law-abiding citizen -- became too overwhelming, he said.

"I just got more and more anxious about my ability to protect myself and my family from the administrative overhead of the US government," said John, who has been based in Switzerland since 2002.

Six European countries, including Switzerland, have recently agreed to comply with the 2010 US Foreign Account Tax Compliance Act (FATCA), requiring banks to report all holdings by their US clients to the Internal Revenue Service.

"Offshore tax evasion costs the US jobs and billions of dollars each year, and it puts an unfair burden on the average American taxpayer to make up the difference," Senator Max Baucus, who chairs the Senate Finance Committee and sponsored the legislation, told the New York Times last year to explain why FATCA was needed.

Jackie Bugnion, a Geneva-based tax expert working for the American Citizens Abroad lobby group, however told AFP that while the aim in theory is to "go after the wealthy resident in the United States who is hiding money overseas," only a small minority of those affected fall into that category.

An estimated four to seven million Americans live outside the country, ranging from US military personnel, diplomats and others on temporary assignments, to so-called "accidental" Americans who happened to be born in the United States to foreign parents and dual citizens who may have lived most or all of their lives abroad.

According to observers, most of these people don't owe any taxes to the United States, but they still have to go through the process of filing complex IRS returns each year.

"Over the past 10 years, I have paid more to tax preparers than I have in tax," John said, insisting his decision to give up his US passport had nothing to do with the amount of tax he was being asked to pay, but rather the filing burden and fear of penalties if he messed up.

-- Banks are eliminating US clients --

The United States is the only country in the world besides Eritrea that taxes based on citizenship rather than on residence or the source of revenue, Bugnion said.

This also means that anyone who happens to have a US passport falls under the new FATCA rules, regardless of their background or fortune.

Fearing the workload of ensuring compliance with FATCA and especially the consequences if they slip up, "banks have been actively eliminating American clients," Bugnion said, lamenting that Americans often "can no longer get mortgages, and are being told their bank don't want their business."

While this is happening all over the world, Americans are especially feeling the heat in Switzerland -- the main target of a US campaign to track down institutions and individual bankers who help US clients open secret accounts overseas.

"Switzerland is the canary in the coalmine on this issue," Bugnion said.

Switzerland's largest bank UBS, for instance sent out letters to all its American clients late last year telling them to prove compliance with US tax rules or to take their business elsewhere.

That letter came as a shock to many, Bugnion said, adding that she had been receiving desperate calls from people who had spent their entire careers abroad and had never realised before they were supposed to file US tax returns.

"Suddenly they realise their entire life's savings could be at risk," she said.

In addition to making it difficult for Americans to simply open bank accounts abroad, the US tax rules also trip up US citizens' attempts to do business in other countries, observers say.

John for instance said he had long wanted to go into business with a good Swiss friend, but "every time we got close to a deal, my citizenship became a huge stumbling block."

According to US law, any business anywhere in the world which is more than 10-percent owned or controlled by American citizens or interests must file its annual balance sheet to US tax authorities.

Bugnion said she had spoken with people who had been forced to shut down businesses, while John said he knew people who had lost their jobs because companies didn't want to put up with the hassel and cost of employing an American.

There are some signs that relief could be on the way.

A Senate Finance Committee aid told AFP that chairman Baucus was preparing proposals that might affect the taxation of US citizens abroad.

The senator, he said on condition of anonymity, "is committed to improving the US tax laws to ensure that US competitiveness is not hindered by unnecessarily burdensome tax rules."

In the meantime, however, "Normal people with normal incomes are (being) tremendously negatively affected by these regulations," John said, expressing bitterness that he had been forced to give up his nationality.

Schmith meanwhile insisted he didn't regret becoming Swiss, but said he would have preferred to also hold onto the passport of the country he once fought for.

"If it hadn't been for the US micromanaging, I would still be an American," he said.

Nina Larson / AFP / Expatica

Photo credit: John-Morgan

7 Comments To This Article

  • Kevin L. posted:

    on 11th March 2013, 14:44:09 - Reply

    Starting in 2008, the USA even made renouncing your citizenship expensive to the tune of $450 USD. One final spanking.
  • Joe E posted:

    on 22nd February 2013, 06:00:46 - Reply

    My very large Dutch bank canceled my investing account several years ago, then my American brokers demanded proof of my American citizenship about once a year. Eventually I moved back to the USA and now have only domestic accounts.
  • carrico posted:

    on 20th February 2013, 14:25:54 - Reply

    Bill: Check out PressEurop for the latest l poll results on a free trade zone between the U.S. and Europe--and vote!
  • bill posted:

    on 20th February 2013, 13:49:22 - Reply

    I agree that the need for US citizens to file US tax forms even if you have not lived in the US or do business in the US is onerous and is terribly "big brotherish." I realized a few years ago that I should have been lodging tax forms yearly. I submitted the tax form for the year and the three previous years. I owed no tax in any year (Earned income exclusion and foreign tax deduction), so the IRS left me in peace. (They did "helpfully" point out a small error in one of my returns.) They generally don't level penalties unless you owe tax or appear to be hiding income/taking dubious deductions/exemptions. It is a convoluted system, but if your finances are not complicated (reporting salary, mutual fund income, etc.), the forms can be filled out yourself at the cost of 2-3 hours (less, once you have the routine laid out after the first year). Don't forget to file Form 4868 to get a 6 month extension on the filing date. This gives you time to lodge the Belgian form first (so you know your income and tax paid).

    I can understand that if your finances are more complicated and/or you are a business owner, it can be a gigantic headache. I hope they simplify the rules. I dream of the day when the good ol' US of A joins the rest of the world and eliminates the tax filing requirement for non resident citizens!
  • vegasbrianc posted:

    on 19th February 2013, 17:23:23 - Reply

    I read this article and seemed awfully familiar. Sure enough it is almost a carbon copy from the Wall Street Journal. Just google Scott Schmith and look for the WSJ article to get the rest of the story.
  • carrico posted:

    on 18th February 2013, 13:14:23 - Reply

    And now they're raffling off green cards?!!
  • carrico posted:

    on 14th February 2013, 23:25:05 - Reply

    Watching the Tour a couple of years ago, a guy said he had a green card (visitor), and was afraid to go home (easy) and come back (very hard). His American English was perfect, I'd detected no accent.