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America's Punishing Worldwide Tax Scheme

You know who's really thrilled about American actress Meghan Markle's engagement to Britain's Prince Harry? Uncle Sam. Although Markle will live in the U.K., Washington will get a cut of her income, because Americans owe taxes on money earned abroad.

Even if Markle becomes a British citizen, she will be required to file a tax return in the States unless she also renounces her U.S. citizenship. Depending on her levels of assets, she may have to share very private information about her holdings.

There are some advantages to matrimony with a prince. If she were marrying a regular Jack, she would also find it hard to open a bank account in the United Kingdom: The Foreign Account Tax Compliance Act (FATCA), which was enacted under Obama, deputizes overseas financial institutions to snoop on and collect taxes from Americans, making banks reluctant to take on U.S. clients. But she will still suffer under a tax regime that is all but unique to the United States.

Until recently, only five of the 33 countries belonging to the Organization for Economic Cooperation and Development (OECD) had a worldwide tax system for corporations. Just one other country, Eritrea, has a citizen-based individual tax scheme. America's policy is a legacy of the Revenue Act of 1862, which implemented the collection of taxes from Americans regardless of where they reside to discourage draft dodgers from fleeing to Canada during the Civil War.

This is how it works: If you're an American living and working abroad, you report your income in that country and pay taxes to that government. You must then pay U.S. taxes on the same income. Yes, there is an exclusion for foreign earnings of about $100,000. And yes, you get a tax credit for the foreign taxes paid. If you're lucky, filing the U.S. return is simply a time-consuming hassle. But depending on your income level and location, the tax credit may be too small to let you avoid paying extra taxes to the IRS. And if your assets are above $300,000, there are additional forms to file and taxes to pay.

FATCA is best described as the ugly love child of Uncle Sam and Big Brother. Passed in 2010, it requires law-abiding Americans with legitimate bank accounts outside the country and foreigners working in the United States to turn over information about overseas holdings above $50,000. The far-reaching law forces a variety of institutions to hand over private bank data about depositors, without a warrant and independent of any suspicion that a tax crime has been committed.

I don't expect Markle to be exempted from this violation of privacy, since foreign banks face steep penalties for not complying with the law. And if she's found to be non-FATCA-compliant, she could be hit with a 30 percent withholding tax on her U.S. earnings.

If the actress gives up her American citizenship, of course, the punishing tax treatment goes away. Some 5,411 people did that in 2016. Although this is understandable, it remains a costly move that involves relinquishing part of your identity. As much as I despise the French government, I was grateful not to be forced to renounce the citizenship of my birth when I became an American.

If you aren't rich or royal, you may also find the $2,350 it will cost to return your passport hard to stomach. According to State Department data, that fee is $2,236 more than the average imposed by other high-income countries.

Get ready as well to prove five years of IRS compliance—a potentially expensive project—before being freed from the American taxman's grasp. And if your net worth is greater than $2 million, you may even be hit with an exit tax.

The good news is that the recently passed Republican tax reform package partially shifted the country to a territorial tax system. The bad news is that it only benefits companies; lawmakers have expressed no intention of fixing the individual side of the code. But wouldn't that make a nice royal wedding gift from Uncle Sam?

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  • NeverBetter||

    The 18th century British Empire would be so proud what the US has become.

  • JC DoubleTaxed||

    At least in the time of King George the III the American Colonists received some services in exchange for the tax claim.

    Today, the U.S. does not provide U.S. resident services to its 9 million overseas.

    Worse than in King George III times is the complex and costly compliance, and that U.S. laws scares banks elsewhere to the point where they don't want to do business with Americans.

    Samuel Adams labeled the tax imposition (also without "Representation") as Tributary Slavery. This is worse today.

  • vek||

    This is why it's so awesome to be self employed! It's been a long time, but years back I looked into possibly moving some business assets/income off shore. It's not super hard to do, but your business has to make sense for doing it. I work in IP, so moving that kind of stuff is easy. I ended up not doing it because it wasn't worth the hassle for the savings I would get, but it's always a thought for the future if I end up having enough cash to make it worth it.

  • loveconstitution1789||

    The USA demands that foreign banks treat all Americans as tax dodging criminals, so foreign banks loathe doing business with Americans.

    Another reason that Bitcoin is so popular.

  • Rhywun||

    Is there any better example of the loathsome contempt that Democrats have for people earning money than a bill named "FATCA"? Disgusting.

  • Cynical Asshole||

    On some level I'm kind of disappointed that they weren't able to figure out a way to get another "T" onto the end. It's like they're not even trying anymore.

  • Elias Fakaname||

    Just another reason to drive progressives out of the country.

  • eyeroller||

    That only hurts other people, so I don't care about it.

  • Mickey Rat||

    Now de De Rugy is for increasing the deficit.

  • JFree||

    It's not the tax side of that nonsense that is punishing. It is the legal claim of authority by the US to adjudicate property disputes that happen outside the US. That dates back to the Alien Tort Claims Act of 1789.

    What our government should be doing is telling Americans who had eg property confiscated in Cuba - Fuck you. That's your problem not ours. A good half of our wars have been to protect overseas property of Americans - including WW1 which was about protecting belligerent bank loans made to France/UK.

    And bluntly, the US government should stop protecting property anyway - even domestically. As long as we tax income - not wealth/property, we should not be giving subsidies by allowing/requiring government to protect it.

  • MarkLastname||

    Your last paragraph as absurd. Where does wealth come from? Income. Wealth is accrued income. What on earth are we paying a fraction of our income to the state every year if not to protect our property rights?

  • Scarecrow Repair & Chippering||

    Your definition of wealth is confusing to me. Part of my wealth is simply job experience, regardless of whether it earned me anything at the time. Do you mean collected assets? Wealth is more than that.

  • Mark22||

    And bluntly, the US government should stop protecting property anyway - even domestically. As long as we tax income - not wealth/property

    The US most certainly taxes property, both real estate and other forms of property. This directly funds both property-related services like police and fire, and unrelated services, like education. So if you offer the trade "no property related services in return for no property taxes", I'm certainly for it. On top of that, investment income (i.e. income derived from property) is taxed, and money itself is taxed through increasing the money supply.

    US property taxes are quite high compared to the rest of the world, actually.

    One really has to wonder what kind of mom's basement dweller you are that you think that property isn't taxed.

  • CatoTheChipper||

    Plank #4 of the Communist Manifesto:

    " Confiscation of the property of all emigrants and rebels."

  • dantheserene||

    In their defense, unlike "1984" the Communist Manifesto *was* meant to be an instruction manual.

  • AlmightyJB||

    No one needs more than one citizenship.

  • Johnny B||

    As an American living in Canada who last lived in the US during Clinton's administration and who will probably will stay here the rest of my life, here is the problem with giving up one's US citizenship: If you do so, first, you have to clear the board with the IRS on all future taxes; who knows what that is going to be? Second, I have assets in both countries. The tax people here tell me I should consolidate them here, but so far that is too much to do. Third, if you have family across the border, you want no hassles when going to visit or for weddings and funerals, so it is nice to have the passport that says ``please don't mess with me.'' For that privilege, however, I have to fill out FACTA reports on all foreign owned assets (real and financial), do taxes in two countries every year, and hold two passports.

  • Johnny B||

    Oh, and giving up that passport means that I am sure there will be an asterisk next to my name when I do cross the border. Who needs the added stress of dealing with that at the one place, the border, where you are treated as though you have no rights already.

  • ||

    As much as I despise the French government, I was grateful not to be forced to renounce the citizenship of my birth when I became an American.


    Frankly, I don't see the point of getting naturalized, once you have a green card you have all of the useful privileges of residency and none of the pesky obligation of citizenship.

  • Mark22||

    Frankly, I don't see the point of getting naturalized, once you have a green card you have all of the useful privileges of residency and none of the pesky obligation of citizenship.

    The point is that if you don't get naturalized, you have no inherent right to remain in the US. That is, you can be kicked out when the laws change or deported under existing laws if you become undesirable.

    One of the immigration reforms that would be quite beneficial would be to force people to naturalize within 10 years of receiving a green card or leave.

  • JC DoubleTaxed||

    The U.S. has built a virtual Financial Berlin Wall to keep U.S. persons in by punishing harshly those who have left – even those gone decades. FATCA is part of this new Berlin Wall.

    JFK famously said in Berlin 'we don't need to build walls to keep our people in.' Fast forward to the present day, and the US has done precisely that. U.S. tax and compliance laws apply Kafkaesque double taxation with the U.S. tax code assuming all U.S. persons are tax residents of the U.S. (even those who live overseas and comply and pay tax to their countries of residence), with extra U.S. penalties, restrictions, and disincentives for money, accounts, pensions, and investments in countries other than the US; even if you live permanently overseas and your accounts are local to you.

    In an increasingly global and mobile world the US should not punish US persons living, working overseas, and expanding US influence and trade overseas.

    The US should join the OECD and adopt Residence Based Taxation. To align the terminology in Congress in regards to tax reform for U.S. companies and U.S. persons, Republicans Overseas is advocating for "territorial taxation" for INDIVIDUALS. Companies already have this.

    Any U.S. persons overseas caught up in this must visit the message boards of The Isaac Brock Society, and purpleexpatorg, Facebook Citizenship Based Taxation and American Expatriates Groups, citizenshiptaxation dot ca, and FixTheTaxTreaty dot org

  • JC DoubleTaxed||

    Once resident overseas one does not receive U.S. government services provided to U.S. residents such as roads, unemployment, food stamps, etc. So there are no services in exchange for the double taxation. Thus the double tax claim is one-way, unjustified, and un-American.

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