Tax reform for US citizens in France is receiving more attention than ever, and Americans living overseas – and their numbers are growing in the country – may be asking: is change coming?
Tax reform is widely regarded as a key issue for Americans abroad, with the country’s system of ‘citizenship-based’ taxation criticised by both Democrats and Republicans for the burdens it places on those living outside the country.
This year has brought new developments, including two bills.
The Supreme Court also agreed to hear a case concerning a one-time tax affecting many American business owners overseas, and the State Department (responsible for foreign policy and relations) publicly acknowledged the difficulties that Americans living abroad face as a result of US tax law.
Despite this, citizenship-based taxation looks set to continue for the near term, at least.
However, more modest reforms may be more easily attainable and activists have been urging their fellow citizens overseas to keep the momentum going and make their voices heard.
What difficulties do US citizens abroad face with their taxes?
Under current law, American citizens have to file a declaration for US tax no matter where they live.
While measures exist to prevent double taxation – a US-France tax treaty offers protections to Americans in France – compliance requires Americans living overseas to complete additional forms and procedures, often leaving them no choice but to spend money on a specialised accountant.
Furthermore, overseas members of both major political parties have called for reform, as policies enacted by both Democratic and Republican governments – nominally intended to fight tax avoidance and evasion – have had major consequences for ordinary Americans living overseas.
In 2010, the Obama-era Foreign Account Tax Compliance Act (Fatca) required foreign banks and other financial institutions to inform the US about their American clients. This discouraged them from taking on US citizens, and made it easier to track down individuals who owed taxes.
Earlier this month, when the US State Department proposed to lower the fee for renouncing US citizenship, it referred to the “not insignificant anecdotal evidence regarding the difficulties many US nationals residing abroad are encountering at least in part because of Fatca”.
Small companies owned by US citizen affected by ‘repatriation tax’
There is also controversy over a relatively new law on taxes on earnings from companies operating abroad but owned by parent companies in the US.
Laura Snyder, a lawyer advocating on behalf of Americans abroad, told The Connexion that overseas Americans were the “worst affected” by this tax.
In 2017, then-President Donald Trump signed the Tax Cuts and Jobs Act. This implemented a one-time ‘repatriation’ tax (also called ‘transition tax’) on undistributed earnings from foreign subsidiaries of American corporations, and from other non-US companies whose shareholders are American citizens.
In the past, these earnings were subject to US taxation only once the American parent company or the American shareholder ‘realised’ the income, for example through dividends or the sale of shares. At this point they could be liable to US tax, minus a tax credit for French tax paid.
However, since 2017, there has been a new regime in place for companies owned by parent companies in the US (as only income earned within the US is now subject to corporate income tax).
The new ‘repatriation tax’ is now payable as a transitional measure, at special one-off rates, on earnings from 1987 to 2017, whether these have been ‘distributed’ to shareholders or not. This tax is payable in instalments over eight years.
Supreme Court case
This controversial one-time tax is now the subject of a Supreme Court case: Moore v. United States.
Ms Snyder told The Connexion: “Not only does the tax apply retroactively to amounts the taxpayer did not actually receive but also, because of the way the repatriation tax was structured, in most cases no foreign tax credit is available to the taxpayer.”
Craig Carlson, founder of a US-style diner with two locations in Paris, was one of the taxpayers affected by the above tax law. “We’re mom-and-pop [small] businesses, and any percentage really hurts, you know?” Mr Carlson said.
Ms Snyder co-authored an ‘amicus brief’ in the case: an opinion submitted to help the court make its decision, saying that the case “was a good opportunity to communicate to the court and to the rest of the world what our issues are”.
The case has broader implications for the US tax code too.
Many right-wing legal groups are hoping to use it to declare a federal wealth tax as unconstitutional, because it would also relate to ‘unrealised’ assets.
Proposed laws show ‘growing awareness’ of the issues
Some proposed new laws are evidence of growing awareness of these issues, however, Ms Snyder said.
This includes a ‘Commission on Americans Living Abroad Act’ and a ‘Tax Simplification for Americans Living Abroad Act’.
The former would establish a cross-party panel to study the various concerns of citizens abroad, including taxation.
The latter would introduce a simplified tax form for people who do not owe any actual US tax and whose annual income is less than $400,000.
In addition, the Tax Simplification Act would expand the types of foreign income that can be excluded from US taxation. This would include pensions, retirement fund withdrawals; and payments related to disability, unemployment, family medical leave, or childcare.
Finally, it would raise the threshold of overseas assets for filing the foreign bank account report (FBAR) from $10,000 to $200,000. Currently the FBAR must be submitted to the Financial Crimes Enforcement Network separately from one’s tax return. This is similar to France’s 3916 form, which declares overseas accounts.
But John Richardson, a lawyer who helps overseas US citizens, said that even if these new laws come into force, citizens would still remain subject to taxation on foreign income from sources such as non-US investment funds, the sale of property, and business profits.
He added that people with these kinds of income would not benefit from the simplified tax form even if they earn less than $400,000.
Mr Richardson also warns that while it would simplify some matters, the proposed bill would also impose an additional obligation on foreign banks, as they would have to notify their US account holders if they have sent a report to the IRS about them.
This could exacerbate the difficulties that US citizens have faced in opening bank accounts abroad since Fatca, he believes.
“I think it's likely to create the illusion of having done something about it,” said Mr Richardson.
Ms Snyder, however, believes the act overall is “a step in the right direction”. She said: “It would not help everyone, but it has the potential to help a lot of people.”
At the same time, the Tax Simplification Act, which is a Democrat-led proposal, may face difficulty passing through a Republican-led Congress that tends to vote strongly on party lines, as was the case with an earlier version of the bill last year.
Organisations hope to mobilise American voters abroad
Some are working to increase awareness of the issues, both in the US and abroad.
Rebecca Lammers, chair of a tax task force for Democrats Abroad – the Democratic Party’s organisation for overseas US citizens – hopes to mobilise overseas voters for the 2024 presidential and congressional elections so as to “hit the ground running in 2025”.
At the same time, she emphasises that the struggle of overseas taxpayers is “not really a partisan [party-led] issue”.
Indeed, the counterpart to Democrats Abroad, Republicans Overseas, also advocates for residency-based taxation. In 2018, a Republican introduced the Tax Fairness for Americans Abroad Act, which also – unsuccessfully – sought to exclude a greater portion of foreign-sourced income from US taxation.
Ms Lammers called for more US citizens abroad to complain.
She said: “There's just not enough people who live abroad who are contacting their members of Congress and saying that this is a problem.”