Should there be a tax on the foreign income of nonresident citizens?
by Tax Rascal
Decades ago, people around the world dreamt of immigrating to America, and American citizens believed they were part of the best country in the world. Now, it seems like the “American Dream”, is finding another country to call home. Of course, The United States still has some attractive qualities, but when it comes to taxation while living abroad, American citizens are willing to give up their American passports. What has changed? International taxation and the hassle of paperwork associated with tax laws for US citizens that are residents of other countries.
In the entire world, there is one country that taxes its citizens for their world-wide income, regardless of where they live; The United States. Well, actually, there are two; The United States and Eritrea. Eritrea is a country located on the Horn of Africa, with a population of about six million, which actually imposes a “diaspora tax” to its citizens. Regardless, the United States is taxing the income of working abroad citizens. For higher income Americans living abroad, the issue is how much money they are paying in taxes. For lower income Americans living abroad, the main issue is all the hassle that goes into the paperwork of filing taxes. Any American living in another country can take credit for income tax paid to other countries but in the long run, it is an extra load of paperwork and frustration for anyone. Either way, that means more work, more money and more time being used. For some, it seems like the best option is to renounce US citizenship. Renouncing US citizenship, for many translates to renouncing US tax obligations on future income and gains.
Renouncing US citizenship, is that a little extreme? Well, the US taxes the local income of nonresidents, resident citizens, and resident foreigners while also taxing foreign income of resident citizens, and resident foreigners. These taxes are “understandable” and also enforced in many other countries. However, the US taxing foreign income of nonresident citizens really pushes the limits of some American citizens living and working abroad. In fact, a record high number of US citizens renouncing citizenship has appeared on the Internal Revenue Service’s list in the second quarter of 2013; a total of 1,130 in the second quarter alone. Other US citizens not living in the US facing this issue have resorted to finding ways around the system in the country they live in.
In the big picture of this tax issue, is also the point that the United States seems to take all incentive away from its citizens going overseas. Besides the frustration this taxation causes, this tax also means the United States as a country, in a way, is cutting itself off from the world. The US seems to have not received the memo of the tax model which the rest of the world is following. “Should there be a tax on the foreign income of nonresident citizens?” The US says “yes”, while the rest of the world says “no”.