I recently read a popular article on NBC News for which the headline read “American expats are left high and dry by Trump’s tax reform”.
While some of the article is accurate, I think it brings some very slanted views to what is really going on.
Personally, I’m not a fan of this new tax bill and I think expat rules are too far reaching and need to change. But this article, in my opinion, does not always give a fair argument.
US Expats are NOT being left “high and dry”.
Will the new Trump Tax Bill help or hurt US expat taxpayers?
Technically? Both. But it’s mostly helping.
The maximum Foreign Earned Income Exclusion (FEIE) amount increases every year with inflation. At least it used to. Now it will increase with the Chained Consumer Price Index. This index seems to grow ever so slightly slower than inflation, so this is not a good thing.
Realistically, however, US Expats can claim the foreign tax credit for income that exceeds the FEIE maximum on income that is not excluded.
Also, the change in the index usage applies to many tax provisions. Policy makers are not just picking on expats here.
Whether this is fair or not, I don’t really know. I would love to have an open-minded and unemotional discussion with an economist who was willing to debate both sides.
The new bill also took away moving expenses and the Alternative Minimum Tax remains, which again, sucks for everybody. Not just for expatriates.
Finally, the account reporting requirements have not changed.
This, I admit, is bad for US Expat taxpayers, as the tax filing requirements for having money elsewhere create a huge time cost (an therefore a real money cost) to US persons living abroad.
So where is the new tax bill helping expats? Income tax rates. They decreased slightly.
It’s not much, but it’s real money.
But there really isn’t any DOUBLE taxation going on
Between the foreign earned income exclusion and the foreign tax credit, expats will never pay more in tax than the amount they would pay if they were earning money and living in the US.
Social taxes are also not doubled. If you pay social taxes to most other countries, you do not have to pay them to the US.
The Foreign Earned Income Exclusion
If you qualify for the Foreign Earned Income Exclusion, $110,000 or more of your earned income might be totally excluded from tax anyway – even if you pay no tax to a foreign country. If anything, this is EXTREMELY favorable for expats and even unfair to those living in and paying tax to the US.
But expats can also claim the foreign tax credit in most cases, even if they do not qualify for or exceed the exclusion.
Let’s look at the foreign tax credit and how it eliminates double taxation for expats
If you pay $20,000 USD to the United Kingdom and would normally owe $15,000 to the US, the $20,000 would be completely credited and there would be no balance due to the US.
In most cases, the $5,000 “not used” could even be carried forward into future years.
If an expat owed $10,00 in income tax to another government and $15,000 to the US, however, then the taxpayer must pay the US the difference of $5,000.
I know this can be painful, but even with an open mind, I don’t see how this is “double taxation”.
You still get MANY benefits and advantages from the US for your tax dollar.
And…. it’s TOTALLY worth it – look what you get!
What if you live in some dictatorship that decides to requisition your savings account?
No problem if you keep an account in the US instead.
What if the bad guys come over the hill and you need to run home to be safe and to keep your family safe?
Yep, come on back, it’s all right here where you left it.
Who is going to pay for that security? (I’m asking the writers who are claiming that US Expats are left “high and dry”).
Security is not cheap, and it’s a LOT more expensive than infrastructure.
Why should an expat not pay the same to maintain this as all other US taxpayers but still get to enjoy the benefits?
Are the citizens living in the US supposed to fit the bill for the others that are out gallivanting around the globe in search of other fortunes?
And then expats expect to just come on back any time, even use the security we all enjoy while their gone, and have everything paid for and waiting for them to utilize on return or if they need it?
I don’t think that sounds right.
Speaking as someone who pays 100% in US taxes and as someone who has served, I think this is total hogwash.
I understand that much of the world offers great living conditions, liberty, and security. It’s not just the US, I know. Still, since you are not double taxed, it makes no sense to abandon your US citizenship or permanent residence, in my opinion.
In summary, change the far-reaching and burdensome non-US account reporting requirements, sure, but US expats were not left “high and dry” and they are not “double taxed”.
Please feel free to leave a comment.