The Joy of Paying the IRS to NOT Live in America
It’s tax time.
Admittedly, this is everyone’s least favorite time of the year, but imagine if you had to pay taxes to the IRS and you didn’t even live in America.
This is our reality and the reality facing millions of American expats living around the world.
The U.S. State Department estimates there are 9 million U.S. citizens living abroad. That’s a lot of income tax the IRS collects just for the privilege of calling ourselves American citizens.
Let me just say that this is a stupid rule.
The U.S. is one of only two countries in the world which requires its citizens to file income taxes, regardless of their permanent residency. The other country: Eritrea. Probably the only thing that Americans have in common with Eritreans.
Here’s the official statement from the IRS:
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
The thing is most U.S. citizens don’t file (or pay). Let’s face it, it’s painful to complete income taxes in the country in which you reside. Add filing U.S. taxes into the mix and it’s almost unbearable. No wonder most American citizens don’t comply. Some expats probably don’t even know they’re supposed to file.
And the IRS doesn’t like that. On their website, the IRS admits they are aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns. And while there’s no official statement on the number of expats that don’t file, the IRS recognizes it as a BIG problem.
To smoke out tax evaders, the IRS began to crackdown on foreign investments several years ago. In 2013, the IRS started requiring foreign banks and financial service institutions to report U.S. citizen-held accounts.
Undoubtedly, these regulations were to crack down on criminals harboring money offshore. However, normal, law-abiding, middle-class people just trying to make a living got caught in the crosshairs.
To combat this issue, the IRS has instituted several programs, such as the Streamlined Offshore Procedures Program and the Offshore Voluntary Disclosure Program, to supposedly make it easier and less painful for expats to file. In other words, they are systematically tracking us down.
Failure to file has many consequences: passport revocation, liens on physical assets, freezing or seizure of all domestic and foreign assets, garnishment of wages and of course, imprisonment.
While living in the U.S., I actually enjoyed doing our taxes using tax preparation software.
That all came to a screeching halt when we moved to Canada.
The first year I tried to file our own taxes, I somehow managed to calculate that we owed the IRS over $100,000 in taxes for the year. That was in addition to the hefty sum we owed the Canadian Revenue Agency. I knew something had to be wrong. Very wrong.
We now shell out $3000 per year to have our Canadian and U.S. taxes prepared, because filing U.S. taxes while living abroad is a mind-numbing task.
The foreign tax credit laws are complex. And if the IRS says something is complex, it’s best to listen. The filing requirements are also vague, according to our accountants. And if there’s one thing you don’t want when calculating your taxes, its vagueness.
The amount of foreign tax that qualifies as a foreign tax credit is not necessarily the amount of tax withheld by the foreign country.
Foreign sourced qualified dividends and/or capital gains that are taxed in the U.S. at a reduced tax rate must be adjusted in determining foreign source income.
Charitable contributions are usually not apportioned against foreign source income; however, some contributions to charities organized in Canada must be apportioned against foreign source income.
Americans living abroad have access to the Foreign Earned Income Exclusion and the Foreign Tax Credit. But for high earners, there’s no getting around having to pay Uncle Sam, regardless of where you live. And expats MUST file their taxes, even if they don’t owe a penny.
Last year, we had the privilege to pay the IRS $1438. While some people might say that’s not very much to pay in taxes, remember we don’t LIVE in the U.S.
The only way to avoid filing taxes is to renounce our American citizenship. And that is something we refuse to do. Even if it means dreading tax season more than Americans who actually live there.