Care to elaborate on this point? The US (like most other developed nations) has tax treaties with many other countries, partly to ensure that its citizens are not taxed twice on the same income.
For most US citizens living abroad, the practical outcome is that you don't pay 'double tax', but you pay the higher of {where you live, USA} taxes. (There's an alternative option that results in lower taxes, but only works for those earning less than ~$100k/year.)
If you're a US citizen permanently living abroad, you still have to pay taxes to the US. As far as I know, relinquishing citizenship is the only way to avoid that. The treaties might make the taxes fair in the end, or even reduce the taxes owed to zero, but it's still a ridiculous requirement and a lot of headache and potential accounting expenses for the individual. You still need to file the paperwork.
Then there are things like FBAR. Pension savings can also be tricky, since the US apparently doesn't honor foreign equivalents to 401(k). Employer contributions, and tax-deferred contributes, can/will end up being taxed under the same double-taxing scheme as regular income.
As a counter-example, I moved from Norway to the US some years ago. I was required to pay income tax to Norway for (if I remember correctly) two years after moving, and the Norwegian tax authorities would tax me on my entire US income, but allowed me to use the US taxes as a credit against my Norwegian tax obligation. After the two years, I no longer have to pay Norwegian taxes on my US income.
True, but if US non-residents were not taxed by the US, the whole issue goes away.
In case I wasn't clear, even if "double taxation" doesn't actually result in double taxation or an additional tax obligation -- i.e. (owed_US - owed_foreign) > 0 -- then it's still an unnecessary headache for the citizen.
In the US, thanks to extremely complicated rules and lack of centralized information collection -- many people use an accountant to file their taxes, which is much less common in other parts of the world. In my native Norway, for example, the tax authorities already have everything most people need to file, and indeed if you don't file at all they will simply calculate your taxes for you. (Unlike the US, they will mail a bill if you owe anything.) Living outside the US then potentially means having to use an American accountant to figure things out, unless something like TurboTax can do the job. (Last I checked, apps like TurboTax didn't do complex use cases like FBAR.)
In general these treaties protect foreign nationals living in the US from double taxation much more than US citizens living abroad. Also, I hope you're in one of the 70ish countries that has treaties! Because if not you could be looking at a 65-90% tax rate on any income over roughly 100k depending on the place.
Also, even in countries with a treaty, it doesn't always prevent double taxation of both income and capital gains.
For example, the Obamacare surcharge on investment income of 3.8% isn't eligible for any foreign tax credits...and it's not like any expat could even take advantage of Obamacare if they wanted to. Hell, I had trouble trying to take advantage of an Obamacare plan when I just moved to a different state.
This also doesn't include the added cost of the accountant needed to prepare expat taxes, which can easily run $4k-8k for foreign accountants who know the US system and understand the specific rules of their treaty.
"Also, I hope you're in one of the 70ish countries that has treaties! Because if not you could be looking at a 65-90% tax rate on any income over roughly 100k depending on the place."
My understanding is that US Citizens living outside the US can claim the Foreign Tax Credit, and that this doesn't require a tax treaty between the US and the country of residence.
The IRS guidance on the subject doesn't (as far as I have read) specify that a tax treaty must exist, for the FTC to apply.
Any pointers to more info?
(Regarding your last issue about the need for an accountant, due to the complexity of the US tax system: that's a good point but orthogonal to the worldwide tax and double taxation issues.)
Technically I think the more correct response here is that the U.S. is one of two countries in the world (Eritrea being the other - and never a good country to be compared with) that have a Citizenship based system of taxation.
Secondly - as you pointed out - U.S. citizens who make more than a certain amount and live in a low/no income tax jurisdiction will end pating U.S. taxes.
Not to mention the dacronian reporting requirements.
Pay the higher to the respective country or to the US? I have friends who make less than $100k but pay both US and expat host country taxes that would benefit from this.
I am an accountant, but I am not your accountant, and what follows is NOT advice:
The US government offers its overseas resident citizens two schemes to ensure they don't pay what you referred to as 'double tax'. You can choose only one or the other, not both.
Instead of A, you can calculate your US taxes as normal (i.e. as if you were living in the US), but then deduct the amount of any tax you paid in your country of residence. If you live in a high-tax country (e.g. UK), then IIUC your tax bill after deducting tax paid in your country of residence would be zero, i.e. you would not pay any taxes to the IRS.
According to OECD's "Taxing Wages 2017" report, an average earner in the UK pays less tax than a single average earner in the US. For a married single-earner couple, taxes will be lower in the US, and other specific situations can play in as well (e.g. while PPP adjusted income for average earners in the US and UK was almost identical, the nominal amounts diverge a bit more, so if you compare specific nominal income levels it may shift things a bit), but in general it's way too simplistic to assume the UK will be high tax and the US low tax.
I know that wasn't your point - it's just a pet peeve of mine that people seem to think US tax levels are so low; they can be, if your family situation is right, your deductions are just right, and you happen to live in one of the lower tax jurisdictions, but it can just as well go the other way. Similarly that a lot of people seem to think the UK is so high - it's below the OECD average.
If you want an unambiguous "high tax" example, go with Belgium - they top the OECD tax data on almost every measure by a large margin (40.7% tax + employer social security for an average earner vs. 26% for US and 23.3% for the UK according to Taxing Wages 2017) or Germany (39.7%).
Thanks. This is very interesting. Will take a look at the report. My intuition is that the US/UK difference flips around once you're well over median income, but haven't looked at the numbers.
Care to elaborate on this point? The US (like most other developed nations) has tax treaties with many other countries, partly to ensure that its citizens are not taxed twice on the same income.
A list of such treaties is available here: https://www.irs.gov/businesses/international-businesses/unit...
For most US citizens living abroad, the practical outcome is that you don't pay 'double tax', but you pay the higher of {where you live, USA} taxes. (There's an alternative option that results in lower taxes, but only works for those earning less than ~$100k/year.)