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Comment by morgante | Hacker News Reader

It really doesn't make sense how the US is the only country which insists on taxing their citizens, no matter where they live. It makes American labor less competitive and promotes the insularity of American culture.

I'm living abroad and you can definitely see the impact of the US tax system in the background of expats: Americans are severely underrepresented. The same salary, when offered to a British expat and an American, is much less attractive to the American because of the 30+% tax burden imposed.

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I'm also an American expat (Iceland), and for a lot of people, there will be no difference except for inconvenience. If you make less than about $100,000 per year, you exclude that income from US taxes completely. You still have to file a 1040, but you just declare the income on one line and negate it five lines later. You send the IRS the completed form showing you owe $0 and you're done.

And if you make more than $100,000 but live in a country that isn't a tax-haven, you exclude that income too because you're only taxed on the difference between the taxes you would owe the US government and the taxes you paid in your home country. In Europe at least, you're almost always taxed at a higher rate than the US would have taxed you, so again, you don't owe anything. You're only looking at that 30% burden if you live in a country with no taxes and you make millions of dollars (because again, the first $100k is excluded).

I agree it's a bit crazy that the US taxes worldwide income, but the practical consequences seem pretty minimal. My bank has no problem with me as a customer, or at least if they do, they haven't said anything to me about it.

> there will be no difference except for inconvenience.

There also appears to be a factor of risk. I'm not American but have had Americans in my team. A slight procedural error, either by themselves or by the IRS, can be a huge financial and legal problem, and expose the person to litigation. It seems draconian and unfair to me.

Thus the practical consequences are more than minimal.

I actually talked with an accountant in the US my first tax year living year, and her advice was "don't use an accountant". I have no idea if this is true or not, but according to her, the IRS's view is basically, "we know this is complicated stuff, so do your best, and if you make a mistake, no big deal", whereas if you hire an accountant and get something wrong, the assumption is that you're trying to avoid taxes.

That advice sounds to me a bit like if you go on trial for some small thing (let's say a pub brawl), and you're told "don't get a lawyer, it will make you look bad".

Perhaps it is sometimes a good advice, but it can also be a spectacularly bad one.

Yeah, I was a bit leery as well, but my situation isn't that complicated, so I saved the money and did it myself. Will update from prison later if it comes to that. :)

It seems tax authorities can be surprisingly flexible as long as they don't get a whiff of attempted tax evasion anywhere.

E.g. at some point around 2000 or so, I'd just moved to the UK, and my personal finances were total chaos around the move. I'd sold quite a lot of shares in Norway, and traded quite a bit on NASDAQ via a US brokerage account (in 2000... yes, it got ugly; thankfully not that much money), and had income from both UK and Norway split between employment and contracting in the same tax year. And transfers back and forth between my UK, US and Norwegian accounts... To make it more annoying, UK and Norway have different tax years (Norway follow calendar year, UK does not). And to be honest my record-keeping at the time was shoddy to the extreme.

So I wrote a letter to UK and Norwegian tax authorities where I set out the details of my income, assets and losses as best I could. I told them I had no clue how to accurately figure out exactly what was due (for the US it was easy because it was all losses that year; the US brokerage account was just relevant because it provided deductions for losses on my Norwegian taxes). Gave them a number each that I thought was close to correct. Filled in my tax returns with estimates (and explained in my letters that the numbers were estimates). Both just accepted my estimate with no arguments, and no requests for further documentation. No fines, or angry letters, or conflicting estimated tax calculations or anything, which was what I feared when I sent it all off.

I don't know much about the UK or Norwegian tax authorities, but at least with the IRS you might have just gotten lucky. They only have sufficient manpower to go after a small percentage of questionable returns, so even if you make a lot of mistakes on yours (or evades taxes), there's still a good chance you won't get audited unless you're a big fish.

Yes. I moved to Iceland from Tennessee, a state with no state income tax. However, I needed a permanent address where I was sure I'd get mail, because I hadn't yet found a long-term rental in Iceland, so I did my Federal tax return using my mom's address in Arkansas, where there is a state income tax.

A couple of years later, Arkansas wanted to know why I didn't pay them any tax on my income from that year. I called someone, explained the situation, and he just had me write a letter. Problem solved.

We're conditioned to fear the IRS because audits look horrible on fictionalized TV shows. In reality, I think you're right. The IRS is just a collection of people, and if you make an honest effort, the person on the other end isn't out to ruin you.

> The IRS is just a collection of people, and if you make an honest effort, the person on the other end isn't out to ruin you.

Yes, they are people, but if what happens to you depends on people, the end results can be rather unpredictable.

You're right that this isn't applicable in most European countries, but it does hit Americans harder in other major world cities which have lower taxes than the US, like Hong Kong or Singapore.

I'm in Abu Dhabi, where there is no income tax, so tax treaties aren't really helpful. As a result, salaries here are actually proportionally lower than they would be in a higher-tax country, which works out well for everyone besides Americans. The exclusion is helpful, but you can still end up with a substantial tax bill as well as having to be careful about how much time you spend in the US.

You're right of course, but this is mostly by design. Rightly or wrongly, the US position is that you need to pay taxes to someone. I think the intent of the laws is at least arguably reasonable, but the execution isn't great.

Assuming for the moment that the US isn't going to stop taxing expats on foreign income, I do think the exclusion limit is too low by about half. Making it more like $200k would allow more highly paid "normal workers" to avoid the penalty, while still hitting the very wealthy purely looking at the tax dodge.

And the limitations on time spent in the US are absurdly low as well. I'm an academic, so if I attend a couple of conferences there, I actually have to count the days left when I book a holiday to spend with my family. I have almost as many paid vacation days in Iceland as I'm allowed to spend in the US without forfeiting my bona fide tax home status, which is ludicrous.

> Rightly or wrongly, the US position is that you need to pay taxes to someone. I think the intent of the laws is at least arguably reasonable, but the execution isn't great.

You do pay taxes in (for example) Hong Kong. It's just not as a high as the US rate.

> Making it more like $200k would allow more highly paid "normal workers" to avoid the penalty, while still hitting the very wealthy purely looking at the tax dodge.

That would certainly make sense. Personally, I think a more thorough analysis of income sources is also in order: if you're genuinely working for a foreign company as a foreign employee, I think that should be treated differently than a wealthy person who is just avoiding US residency for tax purposes, despite the majority of their income coming from US sources.

> You do pay taxes in (for example) Hong Kong. It's just not as a high as the US rate.

Then you'd pay a proportionately lower rate for your US burden. The overall amount of tax owed should be relatively constant.

> I think a more thorough analysis of income sources is also in order

I suspect the issue here is the manpower required to do it and/or the potential for extra loopholes. Could I start a company in Singapore that just happens to derive all its income from US sources and has me as its sole employee? Taxing by amount makes a certain degree of sense in that regardless of shenanigans, if you get money at the end, we tax that money. (Though of course, we don't actually do this in the US with things like capital gains.)

You can't really work in Hong Kong, Singapore, or Switzerland making over $100k without milking the housing deduction given that income taxes are lower than the states.

If the country has no taxes, the foreign income exemption doesn't work. Also, it maybe doesn't work if you are going to get a job in Iran, Cuba, or North Korea...there are certain standards to meet.

What about social security taxes?

  It really doesn't make sense how the US is the only
  country which insists on taxing their citizens, no
  matter where they live.

Brit here and I disagree - the American system seems a lot fairer.

Taxing on residency rather than citizenship creates a bizarre system where if you're a millionaire you can enjoy all the benefits of being a British citizen, but you can be "domiciled abroad" in Belize, Seychelles, Monaco, or other tax havens.

Then you can be British enough to donate millions to a political party, receive a knighthood - but pay far less tax than a middle class office worker.

If you want to be taxed like a citizen of Seychelles, it makes sense to me that you'd be a citizen of the Seychelles and not any other country.

I'm also British. The American system is insane and catastrophically unfair, which is why you keep seeing news stories about how horrible it is.

The British "non dom" system is unique to the UK and is not any particular feature of residency based taxation (which is how every country in the world works save America and Eritrea). And there are constant rumblings about abolishing it or reforming it. I suspect non-dom status will eventually go away, but residency based taxation will stay.

At any rate, no country other than America has any chance of implementing such a policy. To make FATCA work required one of the most draconian laws that's ever come out of a democracy. Most people don't understand it at all. The law says that every financial institution in the world must obey the USA. This is enforced by not only taxing US assets, but because many institutions don't have any US assets, forcing those that do to recursively apply penalties to all their trading partners who aren't in compliance. A big part of the cost of FATCA isn't even reporting Americans to the IRS. It's keeping track of every firm you trade with and whether THEY are reporting their customers to the IRS ...... and then violating your contracts with them by withholding payments until they fall into line.

I see a lot of people saying things like, well, the threshold is high enough that all I have to do is paperwork. Or "it doesn't seem so bad really". I find this to be naive. Here's what can easily happen next:

• The threshold is lowered. As expats have no meaningful representation or organisation as a group, taxing them is effectively free money.

• The FATCA recursive enforcement infrastructure is extended to mandate global compliance with other US laws, by making banks impose penalties on any company or person that Congress doesn't like. People get upset as they suddenly realise that US law now takes precedence over their local laws.

FATCA is literally a totalitarian takeover of the entire global financial system by America. They don't care if people have to violate local laws in order to obey. The view of Congress is that American law supercedes all local law. It's the formal establishment of a global American empire.

why that would be wrong?

you are confusing country of residency with country where you earn your income.

if a millionaire lives in Belize, earns his money by having his money invested in Belize and pay whatever taxes Belize require, that law will give zero tax to the usa. it will just force that millionaire to give up citizenship.

now if he makes his money in the usa, then your point is invalid as you clearly don't understand the issue. also this is exactly what corporations do already and this law won't change a thing.

> The same salary, when offered to a British expat and an American, is much less attractive to the American because of the 30+% tax burden imposed.

There's a ~100k foreign income tax exemption and many countries have tax treaties with the US which bypass even that and give a US tax credit corresponding to the already taxed foreign income.

Big issues are there are constraints on the time you can spend in the US (too much holiday there and you're not considered living abroad) and there's the additional burden of caring for and declaring your income to the US, most expats don't need to be involved with the home country aside from grousing about it and renewing their passport.

Big issues are there are constraints on the time you can spend in the US (too much holiday there and you're not considered living abroad)

Check with your accountant for an authoritative take on the following, but since I happen to be right with a certainty approaching "Gravity exists" I'll write the correction here: There exist two tests by which you can qualify for the Foreign Earned Income Exemption. One is the physical presence test, which is automatically ruled in your favor (i.e. you are ruled to be a foreign resident) if you spend less than 30 days in a tax year physically in the US. The other is the Bona Fide Residence test, which is less of a deterministic question than physical residence. There's no limit to the amount of time you spend in the US every year as long as you meet the IRS examining officer's impression of someone who "clearly lives in a foreign country continuously for an indefinite period."

I've had years with upwards of 100 days in the US, and never had any problem with claiming Bona Fide Residence in Japan. As my accountant phrased it once: "If you've got only one refrigerator, and it's on, and it isn't in the US, then you're certainly BFR abroad."

For more on this scintillating topic: https://www.irs.gov/Individuals/International-Taxpayers/Fore...

Thanks, I'd checked the IRS website a long time ago but I guess I missed the BFR, or assumed you had to fit both rather than either, I only remembered the physical presence test (which you can easily breach if you work in pretty much any EU country, if you spend all your PTO/vacation time back in the US)

It makes American labor less competitive

That's the point. It means skilled American workers are less likely to work elsewhere, thus increasing the competitiveness of America by restricting the supply of skilled workers for the rest of the world. It might suck for individuals but as national policy it makes a lot of sense. Plus it raises more tax.

Most expats I know end up sending substantial sums back to the US, either directly or indirectly by moving back their and spending their accumulated savings.

Not the only country. Norway will also tax citizens in certain circumstances. I believe though Norwegians can state they have left the country permanently (though can still return) and lose rights to social benefits such as unemployment payments until you have been working in the country again.

Since living in Norway, I've learned of this. It seems that the taxes are generally when you are making money from Norway - it is possible to get disability money from norway, taxed, and live abroad. You do lose the social benefit rights, but you keep your taxed income. My understanding is that they figured that in the long run, it actually saves the country money because of the lack of social services provided, and works out if one moves to a place with a strong exchange rate against the NOK.

One advantage of the US system is that they don't care when you switch your country of residence. My understanding of places like Canada and Australia is that emigration can cause a tax hit as you have to logically liquidate your assets in a final tax filing. Can non-US-ians comment on this?

IIRC some countries have treaties with the U.S. and tax American citizens less.

The specifics of the tax treaties depend on the country, but in general it works out to avoid double taxation. If you live in a part of the world where income taxes are generally at higher rates than the US, such as most first-world countries, you get a dollar-for-dollar tax credit against your US taxes for foreign taxes paid, which generally extinguishes your US liability. (There exist other options, notably the Foreign Earned Income Exemption, for folks earning below ~$100k a year.)

The folks with a trickier situation are the ones who either a) are getting subpar tax advice (really, really easy, since few accountants are qualified to talk about multinational taxation and those that are generally charge a bundle) or b) folks who live/work in a low-taxes-low-services nation but end up getting a mid-taxes-no-services bill tacked on due to their US citizenship.

Representative examples of the two regimes: I have lived and worked in Japan for the last ten years. Japanese tax rates are generally on par with or slightly above US tax rates. (There exist important qualifiers on this for practical tax planning for small businesses here.) This results in me every year shipping my accountant a lot of numbers after which he comes up with a calculation which says something like: "Taxes owed to US: $20k; taxes accrued in Japan: $22k; take Japan/US tax treaty credit; net tax owed to US $0."

On the other hand, consider a high-salary employee of a bank's Hong Kong office. The HK top tax rate is 15%. The US top tax rate is 39.6%. Uncle Sam will happily advise you that you have to pay the 24.6% difference (on your last marginal dollar, naturally).

All of the above assumes one is doing one's level best to pay the lowest tax bill consistent with the clear intent and established practice of the enforcement divisions of the laws of the United States. This, regretfully, does not describe all taxpayers.

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