A mantra that has been frequently iterated on this blog is that the federal tax code is immensely complex. This truth has reached the point that many people file returns in an honest way without knowing if tax penalties will be coming down the pike.
News that a growing number of Americans are relinquishing their citizenship largely due to unnecessarily punitive tax codes provides another opportunity to return to the previously stated mantra. In 2013, 3,000 people gave up their U.S. citizenship, which marks a three-fold increase as compared to 2012. That number is only expected to climb, according to Newsweek.
The problem, according to observers, is that the U.S. tax code creates liability based on a person’s nationality, rather than his or her country of residence. As such, an American working and maintaining long-term residence abroad may still be required to pay U.S. federal taxes. Interestingly enough, the U.S. is the only industrialized nation with this type of policy.
To add to the trouble, federal tax officials have increased scrutiny on all Americans abroad. The Foreign Account Tax Compliance Act requires foreign financial institutions to turn over information about American account holders to the Internal Revenue Service. In turn, foreign banks are making it difficult for American citizens to open up a simple bank account.
The reality of the situation is that Americans abroad have such a difficult time understanding whether or not they have a U.S. tax liability that they are faced with impossible choices: Either well-intentioned individuals try to wade through the tax code on their own or they consider resigning their citizenship. It seems as though this is simply a choice that people shouldn’t have to make.
Source: Newsweek, “Why Americans Abroad Are Giving Up Their Citizenship,” Barbara Stcherbatcheff, June 28, 2014
