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Comment by moonshinefe | Hacker News Reader

"The U.S., by comparison, taxes citizens’ income no matter where it’s earned."

This is a common statement I see pretty often on the internet, often in the context of bashing the US. However, there's a big asterisk there if you look the rules up. If you're not making over 6 figures, you still have to file I believe, but you don't pay taxes. So the vast majority of Americans abroad are not paying taxes back to the US ($100800 / year is the cut off by the looks of it)[1].

I'm not saying it isn't annoying still to file with the IRS or there aren't people who are over the threshold getting burned, I just feel it's often a glossed over detail that puts the US in an unnecessarily harsh light, considering, again, most people won't be penalized financially here.

[1] https://time.com/money/4298634/expat-expatriate-taxes-us-myt...

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This is true but the situation is substantially more complex than you suggest, including things like PFIC treatment of retirement plans in the foreign country (where you need to pay unrealised capital gains every year), differing treatment on capital gains of housing, Affordable Care Act penalties if you're in the US more than 30 days. Not to mention any use of the foreign tax credit means you need to calculate AMT.

Not to mention none of paperwork you need is nicely collected and presented in US Dollars for you. God forbid you live someplace like Australia that uses a July-June tax year.

I have to file my US taxes every year and the "cost" is usually $400 to $800 to hire a tax preparer who knows what they are doing and takes a fair amount of my time every year.

And don't forget banking regulations that force foreign banks to report the activity of American account holders.

In some areas, it can be hard for an American to even open an account due to the excessive regulations imposed by the American government.

https://www.wsj.com/articles/expats-left-frustrated-as-banks...

Thanks for the first hand account. I'm not from the US and was just mainly pointing out that a lot of details are clearly left out on news site articles when they try to sensationalize this stuff.

I guess at the end of the day the entire situation is very complicated and can't be summed up in a small article. I still don't think it's very accurate how they're portraying it though, nonetheless. The article doesn't mention your situation really at all, it just makes a generalization and moves on.

Do you pay taxes only on earnings over the 108K then? I was under that that's what the ceiling was the OP was referring to.

I think you pay US taxes only on 108K, plus taxes on whatever tax jurisdiction you're in. Which is kind of a bummer.

For the first 108K, AFAIK, you just pay taxes to wherever you earned the money. If you made 100k a year selling widgets from Columbia, you're only subject to Columbian income tax.

I don't think there's any such thing as a free lunch - you'll have to pay for one set of taxes no matter what. The US double taxes over 108k.

Ouch that's rotten. I thought there was a way to deduct from that 108K whatever you were paying in taxes wherever you were domiciled.

Local taxes on earnings above the $108000 can be taken as a credit:

https://www.irs.gov/individuals/international-taxpayers/choo...

However, you can choose to take the foreign tax credit on any amount of foreign income which has not been excluded under the foreign earned income exclusion or the foreign housing exclusion.

So it isn't a double tax, the US credits the foreign tax payments.

Thanks for the link. I looked it over but I am a bit confused on 108K figure now. Is the 108K additional credit you can take whether a local exclusion has been taken or not? Is that correct?

It is an annoying burden though. My wife is American and doesn't earn anything like that amounts, but really hates this thing. You easily end up in a situation where you didn't know you were supposed to file and you get get worked up because in typical American fashion these forms are filled with dire warning and threats of harsh punishment for making mistakes.

That is what I don't like about the US. They are not very accepting towards honest mistakes. The legal system frequently disregards intent when ruling and punishment for even small infractions can be quite severe in the US.

It is not a good thing when citizens are frequently genuinely afraid of their own country.

>"They are not very accepting towards honest mistakes. The legal system frequently disregards intent when ruling and punishment for even small infractions can be quite severe in the US."

Can you give examples of people being "severely punished" for a minor infraction? I am curious to hear this since as you say it happens so frequently.

The U.S is not perfect by any means but it is certainly not a place that is vengeful towards its citizens. Your comments just read like America bashing.

How do you define "severely punished"? A quick Google search will turn up folks impacted by this taxation law in very severe ways. Sure, not death penalty severe, but being fined huge fines is severely punished to me.

The largest penalties the IRS levies are for failure to file which is 25% but there is absolutely no reason to incur this as you can always file for an extension, it can be done online. Penalties are generally you pay the difference and interest on that difference. The IRS doesn't make up arbitrary fines for people. The penalties are well documented and published.

Yes the tax code is absurdly complex but the overwhelming majority of people in the US have no trouble with the IRS. The majority of people file a 1040[1] and get a small refund every year.

Further the IRS is more than willing to work with people to resolve issues and will create an installment plan or payment schedule that will work for people's finances even if it takes years. There is no "pay this on the spot" or we will throw you in jail. That simply doesn't exist. Tax evasion on the other hand is something entirely different as that constitutes criminality in the eyes of the IRS.

[1] https://www.irs.gov/pub/irs-soi/12rswinbulreturnfilings.pdf

> Can you give examples of people being "severely punished" for a minor infraction?

Try possessing a small amount of LSD.

Please read the entire context of the OPs post:

>"They are not very accepting towards honest mistakes."

Possessing LSD is not an honest mistake.

> The legal system frequently disregards intent when ruling and punishment for even small infractions can be quite severe in the US.

Is this actually true? I'd like to learn more about if it is. My personal experience has been that all of my honest small mistakes were accepted as honest mistakes, occasionally with a small fine.

The US incarceration rate was at 750/100k about 5 years ago, which is 1% of the adult population, and significantly higher than everywhere else on the planet. South Africa during the height of apartheid was 'only' 540. The rest of the western world is sub-200/100k, with most of them at 150 or lower. The US is more than five times more imprison-ey than pretty much any of its contemporaries, and ten times more than select examples like Norway or Germany.

Unless Americans are ridiculously more criminal-minded than other humans, the US is doling out more punishment than others for the same misdeeds.

The US has significantly more misdeeds, e.g. ~5 times as many homicides as most West European nations. This is a result of very many things of course.

But U.S. is improving, though; 25 years ago the difference was more like 10 times. Some countries in Europe (like Sweden) have actually stopped improving, so eventually the U.S. will catch up. Then it will have less homicides, which is likely to also bring less incarceration.

Sometimes I think that the European style is not necessarily better. E.g. yesterday I read about two cases in the local newspaper crime news section. There was 5.5 years prison sentence given to a hamburger restaurant owner for tax evasion done over the course of 6 months, and 90 hours of community service plus conditional imprisonment for an aggravated child molestation over a period of 7 years. This ratio doesn't look right to me, but it's what we do to get the low incarceration rate.

25 years ago was when the US incarceration rate was ballooning. The 80s and 90s were the start of a massive surge in incarceration[1], up from the baseline. The idea that the US is improving and other nations have 'stopped' is only because the US departed so significantly from the pack in the first place. Similarly, while the US has a ridiculously high homicide rate, most of the people in prison are not murderers.

The way you're phrasing it is like saying "The A+ student has stopped improving, whereas the failing student is still failing but improving[2]. One day he'll catch up to the A+ student"

As for the odd sentences you mention, you can cherrypick weird sentences in any system. In Texas, for example, there was a black 14-year-old who punched some and they died, and he got ten years for it. There was a wealthy white 16-year-old whose reckless driving killed four and injured seven, and he got no jail time for it. The defense arguments included 'he never learned to say sorry because he was brought up wealthy - you sent money instead of saying sorry'. The kicker about these two sentences? They were issued by the same judge [3]. In California, another serious case ended in a significantly reduced sentence because the judge thought that the defendant's wealthy upbringing meant he wouldn't be able to 'survive prison as well'. And New York is replete with stories of people being incarcerated for years without a trial [4]. Then there's the famous 'pizza-slice' felony, where three-strikes laws sent a man to prison for life for stealing a slice of pizza [5].

The point here is that you can find all sorts of oddities in sentencing - what really matters on a national scale is the aggregate. You mention the sentence for that single child molester - is that happening for a large number of such cases?

The US system is ridiculously fucked up, and it has to improve a lot before it can join its contemporaries. Given the general American public's bloodlust towards punishment, it ain't gonna happen.

edit: sorry for the waffle, I just find the US incarceration system both fascinatingly and horrifyingly out-of-the-ordinary.

[1] https://en.wikipedia.org/wiki/United_States_incarceration_ra...

[2] Actually, it isn't improving. Incarceration is much higher in the US now than 25 years ago, see [1]

[3] http://www.dailymail.co.uk/news/article-2524108/Judge-let-sp...

[4] https://www.nytimes.com/2015/06/09/nyregion/kalief-browder-h...; https://www.nytimes.com/2016/08/01/nyregion/9-years-in-jail-...; http://nypost.com/2015/06/15/kid-arrested-at-17-has-been-at-...; http://www.nydailynews.com/news/national/king-ala-man-jail-8...

[5] http://articles.latimes.com/1995-03-03/local/me-38258_1_jerr...

> The idea that the US is improving and other nations have 'stopped'

When mentioning improvement, I was referring to homicide and violent crime, not incarceration. In crime statistics, the U.S. improvement is clearly visible. U.S. was for a long time oscillating somewhere around 10 homicides per 100 000 pop per year, the peak was in 1991, and after that it started to do gown and is now around 4.

http://www.bbc.com/news/world-us-canada-13799616

Incarceration rate in the U.S. is somewhat following this. It increased from 1970 until about 2007, and has since then turned slightly downwards (see figure 5)

https://www.brookings.edu/research/ten-economic-facts-about-...

[edit:language]

No this isn't true. I was a CPA focusing in Tax before transitioning to the tech world. I couldn't count the number of IRS notices I have had to address and respond to for my clients over the years. It's a real simple process. You write a letter addressing the IRS notice that was sent to the client explaining the situation along with what you have done to remedy the situation (here is the tax I owe along with penalty and interest and/or here is why you are wrong). That's it. Issue solved and problem resolved.

Now if you are suspected of tax fraud, that's a whole other ball game but that doesn't come about from small honest mistakes.

>You write a letter addressing the IRS notice that was sent to the client explaining the situation along with what you have done to remedy the situation (here is the tax I owe along with penalty and interest and/or here is why you are wrong). That's it. Issue solved and problem resolved.

That's great if you actually made a mistake. What if you didn't?

My wife got a notice for her 2013 tax form. They challenged her education credits and were saying we owe taxes + interest + penalty. Respond within 30 days or pay up.

I called them up and asked what they wanted for proof. They weren't accepting the university's 1099 form (or whatever it is), because they said all it shows is the amount she was billed, not the amount she paid.

Umm.. OK. What if I show bank statements that show payments to the university that match the timeframe and amount?

"Sure!"

Reasonable people, I thought.

So we hunted down 3 year old bank statements and sent it to them.

Another letter: They don't accept the statements. "Why?" I asked. "Well, all it shows is you made payments. We need proof these were for education purposes and not, say, parking fines."

"But you said last time it'll be OK!" Their response was the formal equivalent of "Whatever, we don't care"

So I contacted the university. They said "Just mail them the 1099!" Had to explain that it didn't work. University said it's the first time they've heard it not working. So they dug up the old billing statements that itemized the charges.

In reality, it wasn't this short. We had about twice as many back and forths with the IRS as I indicated above. The process took 6 months.

Yeah, they try to put the fear of God into you at the outset, but the IRS is actually pretty lenient as long as they think you're acting in good faith.

You must continue to file, claiming a foreign tax credit. Then there's the double-taxation issue, in that unless the country you're living in has a tax treaty with the US, any income over 100,000 has to have taxes paid in full to both countries, and there aren't that many tax treaties.

Then you have to file FBARs with FinCEN because likely you have a bank account with more than $10,000 in it, subject to forfeiture of 50% of the balance if you don't.

Then there's FATCA which is onerous enough that in many countries, banks will not do business with US persons in the first place, which will poses a challenge.

Then there's the fact foreign brokerages cannot have accounts for the benefit of US persons unless they're regulated by the SEC.

Then if you own a business abroad that you're the sole proprietor of you may well have a controlled foreign corporation (IRS 4.61.7, form 5471), have fun.

It was my understanding that it's not true double taxation, but rather the US gets the money difference if it's the higher tax.

So for example, if country ABC's tax rate is 25% and the US would be 38% for you, you'd pay ABC 25% and the US 13%.

If however ABC country was 42% tax rate and the US 33% for you, then you'd owe the US government nothing (but wasted time) on your income.

Correct me if I'm wrong, but I am pretty sure this is how it works.

That's how it works if the country you're in has a no-double-taxation treaty with the US, and what's included/how it's calculated depends on how the treaty works. Many do not. [1]

If you live in a country without a tax treaty, like the Bahamas for instance, you must pay both taxes separately with no offsets/credits. [2] IANATA though so always worth double-checking with this kind of money on the line. My experience with this is moving to the US from Canada, so I dealt with both tax treaty income and dual-status returns.

[1] http://www.rumbaklaw.com/resources-and-tools/us-federal-tax-...

[2] https://www.irs.gov/individuals/international-taxpayers/tax-...

In the top-right corner of every US tax form, there is an OMB control number. It stands for estimated annual burden imposed on the public. The estimated burden consists of time spent multiplied by implied hourly cost. These estimates may appear innocent but they actually have a direct impact on the government, such as agency head count and budgets. The estimate for Form 1040 is as follows:

  > [0] The average burden for taxpayers filing Form 1040 is about 15 hours and $280

If I add up my time as well as the tax accountant's time and fees to file taxes, this is quite underestimated. However, this is anecdotal evidence. What would be great is to have two fields on these forms where tax payers can enter the actual amount of time and expenses required to complete them, as part of the feedback. The agencies can then use the median to update their assumptions and act accordingly.

[0] https://www.federalregister.gov/documents/2014/04/30/2014-09...

> most people won't be penalized

An American couple I know, ordinary people with ordinary lives and nothing special level of income, who live in Canada pay ~$5000 in legal fees every year to do their non-resident U.S. tax return and stay in compliance with U.S. law. They pay zero U.S. tax. But saying that filing the U.S. tax is merely "annoying" doesn't cut it. I would say $5000 per year can be described as being penalized.

Yes that does not sound right. My wife is a US citizen, we live in the UK, I prepare her US tax returns every year myself. It takes about a Saturday afternoon every year and it costs me $0. It's rather complicated, but not paying-someone-else-five-thousand-dollars-every-year-to-do-it complicated. Your friends' tax advisor is taking advantage of them.

You say they pay zero US tax. This means either:

1) Their income level is low enough that this is legitimately the case. If so, they can save $4900 per year by switching from paying 'legal fees' to buying a copy of 'Turbo Tax Deluxe'.

2) They (legally) ought to be paying some US taxes, but they're paying fees to someone to help them evade taxes. If so, then perhaps it's worth $5000 per year to them.

But perhaps they'd rather pay $5000 than spend a day with Turbo Tax? If so, then that's their choice.

I very much doubt that Turbo Tax Deluxe can do dual-country U.S./Canadian tax returns and take care of nuances of cross border tax issues (how U.S. pension/401K/IRA is treated under Canadian law, how a Canadian RRSP or tax free savings account is treated under U.S. law) and special reporting requirements for non-resident U.S. citizens.

He says he pays $5000 for the US return and I can confirm Turbotax works just fine for filing US tax returns while living abroad. They're overpaying.

They are paying too much unless there is some unique complication. I'm a US expat in Europe and pay ~ $1000 for my US and foreign tax preparation.

Why would you do that? Maybe it's a weird question and it's coming from someone who doesn't see upside to having a US passport in the first place, but why keep it if it's that painful?

There's a renunciation fee, plus a renunciation tax that requires you to pay the IRS taxes equal to the tax burden due if you'd disposed of all of your US possessions on the date of disposition.

In addition, they will not allow you to renounce if it would otherwise leave you stateless.

Also, if you ever apply for a tourist (non-immigration visitor's) visa to the US, form DS-160 asks

"Have you ever renounced US citizenship for the purpose of avoiding taxation?"

Not sure whether they still let you in though, anyone knows?

PS: check out the form, btw, it has several interesting questions.

http://photos.state.gov/libraries/jamaica/231771/PDFs/DS-160...

They may not have any other citizenship. It often takes years, and can also costs $1000s, to acquire it.

It's actually illegal to get rid of your US citizenship for tax reasons.

That's incorrect and misleading. There are two things here: US law, and what the State Department does, which are sometimes contradictory. Current US law says citizens can renounce citizenship regardless of tax obligations, although it does not remove these obligations - the IRS could still take steps to get their money back. In practice, the State Department slows down or blocks people renouncing citizenship for all kinds of reasons (tax reasons, they may be under duress, age, lack of second passport, etc etc.) This does not change the law, and ultimately if you're wealthy and persistent enough to go through the enormously complex procedure of renouncing citizenship, you will be able to get it renounced despite tax obligations.

Once that happens (rich person is no longer a citizen & owes taxes) they'll face many consequences, and the two largest are 1) the IRS will take steps to get their money and 2) they will be barred from entering the US if their renunciation was for tax purposes. Note that in 2) the Attorney General must state that your renunciation was for tax purposes, so if the AG is busy with other things, you're not high-profile enough, or nobody cares, you will probably be able to return to the US.

In reality, of course, things are a bit more complex: the State Department officers are usually unfamiliar with renouncing citizenship and mess up with one or more steps. Some people are never put on a list of renunciants and some do not have their US passport taken away or cancelled. Even some high-profile renunciants have not been put on the list - or were not put on the list until people complained.

If anyone wants to read more, this [0] is mostly factual and pretty well researched.

I am not a lawyer, I am not a renunciant (and never will be), and if you make any decisions about renouncing your citizenship based on this comment you are insane.

Sidenote: renouncing citizenship is not a right everywhere (many countries don't allow it.)

[0] http://www.renunciationguide.com/expatriation-process/renunc...

Really? But how would they know you did it for that reason?

Foreign banks tend to not deal with customers with US tax residence though due to FATCA requirements.

So it might be a burden even if you are under the threshold.

This hasn't been my experience at all in three countries (Singapore, Vietnam, and Australia)

FATCA is relatively new, effective 2010, so if you opened your bank account before then, you may well be grandfathered in.

Banks and brokers can't hold/manage/transact securities (stocks and bonds) for a US taxpayer because of an SEC -- unless they are SEC regulated, which almost no one outside the US is. Therefore, us taxpayers are also much less profitable for them even if the FATCA requirements are all satisfied.

I've not had that issue. The worst i dealt with was that one bank wanted paperwork from my bank in the US, which had been closed before moving (around 9 months living with only cash). The other bank didn't act like it was an issue.

I had an account in France for a while without any trouble. BNP Paribas.

Also, you get Foreign Tax Credit for income tax paid abroad, which means that even if you earn more than the Foreign Income Exclusion Threshold ($100,800 in 2015) in practice you will only pay the IRS any income tax if you live in a country where the income tax rates are lower than the US federal income tax rates, which is not common (although state income taxes sometimes make this a bit more complicated).

In practice this means that US persons living abroad typically only pay US income tax if they make decent money and the local taxes are lower than those in the US and even then they only pay the difference.

You still need to file your tax returns every year though.

> if you live in a country where the income tax rates are lower than the US federal income tax rates, which is not common (although state income taxes sometimes make this a bit more complicated).

That only applies to a subset of countries that the US has an agreement with.

The situation is way more complicated than what can be discussed in a HN comment. When it comes to things like social security taxes, the taxation of US-sourced income etc., double taxation treaties can help a lot, but generally speaking no tax treaty is required to claim foreign tax credit.

1. I would assume it's still annoying to file. I'm Belgian, and if I were to move abroad, I would have to file nothing with the Belgian authorities.

Heck, I have filled out US withholding tax forms in the past, and they suck.

2. If you do make more than +- the $100,000, you do obviously end up paying significantly more. There's no clean and reasonable way to exit for (wealthy) americans, if you would want to.

3. I think people should, in general, be able to move away from their home country if they want to without too much additional burdens. Definitely not the case for americans.

> I'm Belgian, and if I were to move abroad, I would have to file nothing with the Belgian authorities.

Don't you have to ask to get yourself radiated from Belgium's tax system?

You have to file one last tax return (< the usual one year). Once you have done that and are living abroad, you're pretty much in the clear.

The problem is that compliance is complex and enforcement random. Currency fluctuations can change your circumstances overnights.

Also lots of catch-22 situations. People who are American by virtue of birth can but never live here can get into trouble when they coke to the attention of the tax authorities. Renunciation is also difficult and creates other issues.

You are ignoring the $10,000-per-year fines for failing to file FBAR forms that spooked a lot of expats with small companies abroad.

I don't believe so, my last sentence mentions I acknowledge filing forms to a different country is annoying and an additional burden. It's certainly not the US only who penalizes people for not filing legally required tax forms on time.

The IRS had several amnesty programs FBAR-related because so few people knew about them, even those that did send their tax papers as required!

freddie_mercury bellow touches most of it, and there are other issues: a friend of mine who lives abroad but maintains a mailing address in the us, has a yearly dance taking hours of calls, faxes and writing letters to explain that he does not need to file state taxes and that the state should not, in fact, put a lien on his assets.

Also, the filing requirements (fbar and fatca in addition to a lot of stuff on the "regular" form) are insanely onerous. The tax code essentially assumes that any financial activity a US taxpayer does outside the US (even if that's where they reside) is done with the intention of tax evasion.

When FBAR was created, it covered a few hundred to a few thousand presumed evaders. Now it covers millions to ten of millions with the same presumption of evasion.

I'd much appreciate if people who comment also mention in how many jurisdictions they have paid taxes, so that one has a frame of reference.

> So the vast majority of Americans abroad are not paying taxes back to the US ($100800 / year is the cut off by the looks of it)[1].

Do you assume that he vast majority of Americans abroad are not making USD 100800? Because it doesn't say so in the source you provided.

My understanding is that the this doesn't apply to self-employment tax either - so if you're consulting you on the hook for that as well.

What happens if you simply ignore filing US taxes? Do you get arrested if you return, even if it's just for visiting?

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