Your Taxes Matter - CBT vs. RBT
Congratulations, you are now an overseas American. However, as a US citizen who lives and works overseas you have the same obligation to declare your income and file a tax return. The US has a ‘citizenship based taxation or CBT’ on global income and benefits. You might have noticed that your tax return has different forms and your tax preparer is requesting additional information, which you are not accustomed to in the States. Let us briefly review key features of being an ‘International Tax Payer’. Then, we will review and compare against a proposal to switch to a ‘Residence Based Taxation’ (RBT), and benefits of an RBT regime.
Currently, according to the Foreign Earned Income Exclusion rules (www.irs.gov/pub/irs-pdf/p54.pdf), taxpayers are able to exclude a certain amount of foreign income only from their taxes; for 2019, this amount was $105,900. Other sources of income earned in the US are still being taxed in their entirety and not subject to any exclusion. However, any foreign income exceeding the limit is subject to the tax rate including the ‘blocked income’. If a US citizen makes $110,000, he will be liable for taxes for the $4,100 on the same tax rate as $110,000; this is the ‘stacking rule’. In addition, taxpayers are able to claim any foreign taxes against their US tax liability; and they benefit from excluding qualified housing expenses from taxable income. There are additional burdensome requirements with respect to International US Taxpayers such as Foreign Bank Account Report (FBAR) as well as Foreign Account Tax Compliance Act (FATCA). Foreign financial institutions are obliged to report banking transactions of US taxpayers to US Treasury.
Furthermore, CBT has been researched by American Citizens Abroad (https://www.americansabroad.org ), where it shows ‘some of the worst problems that CBT imposes on US citizens overseas with regard to Social Security, Functional Currency and Foreign Pensions, ; thus putting Overseas Americans at a great disadvantage as compared with their US Tax filers at home. For example, Americans working for foreign employers cannot contribute to Social Security; whereas self-employed Americans and those working for US employers are required to contribute. In addition, Under CBT, the functional currency is the US Dollar, and not the currency of residence. Therefore, Americans who have investments in real property and financial assets are subject to currency exchange risks giving rise to ‘phantom capital gains due to rise of local currency against the dollar over time’. Furthermore, most foreign retirement plans overseas are not recognized as ‘qualified’, and as such, contributions as well as unrealized gains in the plans are immediately taxed.
Currently, according to the Foreign Earned Income Exclusion rules (www.irs.gov/pub/irs-pdf/p54.pdf), taxpayers are able to exclude a certain amount of foreign income only from their taxes; for 2019, this amount was $105,900. Other sources of income earned in the US are still being taxed in their entirety and not subject to any exclusion. However, any foreign income exceeding the limit is subject to the tax rate including the ‘blocked income’. If a US citizen makes $110,000, he will be liable for taxes for the $4,100 on the same tax rate as $110,000; this is the ‘stacking rule’. In addition, taxpayers are able to claim any foreign taxes against their US tax liability; and they benefit from excluding qualified housing expenses from taxable income. There are additional burdensome requirements with respect to International US Taxpayers such as Foreign Bank Account Report (FBAR) as well as Foreign Account Tax Compliance Act (FATCA). Foreign financial institutions are obliged to report banking transactions of US taxpayers to US Treasury.
Furthermore, CBT has been researched by American Citizens Abroad (https://www.americansabroad.org ), where it shows ‘some of the worst problems that CBT imposes on US citizens overseas with regard to Social Security, Functional Currency and Foreign Pensions, ; thus putting Overseas Americans at a great disadvantage as compared with their US Tax filers at home. For example, Americans working for foreign employers cannot contribute to Social Security; whereas self-employed Americans and those working for US employers are required to contribute. In addition, Under CBT, the functional currency is the US Dollar, and not the currency of residence. Therefore, Americans who have investments in real property and financial assets are subject to currency exchange risks giving rise to ‘phantom capital gains due to rise of local currency against the dollar over time’. Furthermore, most foreign retirement plans overseas are not recognized as ‘qualified’, and as such, contributions as well as unrealized gains in the plans are immediately taxed.
It is worth noting that the US is one of two countries in the world that adopted a CBT income tax regime; the other country is Eretria. Most industrialized nations have adopted Residence Based Taxation. RBT proposes that nonresident Americans will be taxed based on residency status and as such will be subject only on US source income. As such, US citizens will compete favorably with their counterparts who are Canadian, European, Australian, and others globally. Simply put, under a CBT tax scheme, US citizens are more ‘expensive’ as employees for foreign companies overseas. A benefit of Americans living and working abroad is a potential increase in exports of American goods and services to their foreign locations. US trade exports abroad translate to jobs at home. Furthermore, overseas Americans sent remittances home annually in the estimated amount of $6.8 Billion (2019 Data)
https://www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data)
These homebound funds provide a critical source of direct investments in the US Economy in terms of homes, financial assets, business setup, etc. These Americans can be the catalyst for promotion of foreign direct investments in the US economy. FDI also is proven job creator in the US.
According to Americans Abroad (https://www.americansabroad.org/taxation/), Tax Fairness for Americans Abroad Act of 2018 (TFAA), which has been introduced in the US House of Representatives as of December, 2018, proposes taxing US citizen residents abroad solely on their US sourced income. Additional analysis provided to Congress demonstrated that RBT would arrive at a revenue neutral budget score within ten years of implementation.
https://www.americansabroad.org/media/files/files/dc1e1c4e/DEG_short_memo_on_RBT_proposal_11.06.2017.pdf
We encourage further awareness of RBT by your employers and colleagues. Support the Tax Fairness for Americans Abroad Act of 2018 (TFAA) by contacting your House Representative.
by Yassin Yassin
Member
U.S.-U.A.E. Public Affairs Committee
https://www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data)
These homebound funds provide a critical source of direct investments in the US Economy in terms of homes, financial assets, business setup, etc. These Americans can be the catalyst for promotion of foreign direct investments in the US economy. FDI also is proven job creator in the US.
According to Americans Abroad (https://www.americansabroad.org/taxation/), Tax Fairness for Americans Abroad Act of 2018 (TFAA), which has been introduced in the US House of Representatives as of December, 2018, proposes taxing US citizen residents abroad solely on their US sourced income. Additional analysis provided to Congress demonstrated that RBT would arrive at a revenue neutral budget score within ten years of implementation.
https://www.americansabroad.org/media/files/files/dc1e1c4e/DEG_short_memo_on_RBT_proposal_11.06.2017.pdf
We encourage further awareness of RBT by your employers and colleagues. Support the Tax Fairness for Americans Abroad Act of 2018 (TFAA) by contacting your House Representative.
by Yassin Yassin
Member
U.S.-U.A.E. Public Affairs Committee