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March 1, 2015 - Phil Hodgen

It’s the paperwork, stupid

It’s time to channel my inner Bill Clinton. (OK, maybe that’s not such a good idea). When he was running for election, his campaign manager’s mantra was “It’s the economy, stupid.”

Anecdotally, the people we help expatriate complain about the expense, burden, and risk of U.S. tax paperwork when they are living abroad. Quite often they owe no income tax to the United States. Despite that, they must prepare a tax return far more complex than the one that a U.S. resident would have — with the accompanying expense and risk for screwing up. And there are many opportunities for screwing up that are simply not available to a person living in the United States. 🙂

The science is settled. We now have academic confirmation. A recent study led by Dr. Amanda Klekowski von Koppenfels of the University of Kent (in Brussels) looked at U.S. citizens and expatriation. (Hat tip to Jackie Bugnion at American Citizens Abroad for alerting me to this). A summary on the University’s website refers to the paperwork and penalty problems as being central to renunciation considerations.

Other key findings I thought were interesting:

  • 43% of renunciants had incomes under $100,000;
  • 31% of the sample (1,542 respondents) were thinking of renunciation.

Will this make a difference? Will the U.S. government change the laws?

Residence-based tax rules would largely solve the problem. American Citizens Abroad has been arguing for this change to the law. At the moment (as in forever), the United States taxes citizens on their worldwide income, no matter where on the planet they live.

While there are small noises in Congress about residence-based taxation, my only response is to echo the quote: “Science may one day accomplish this, but it hasn’t done so yet.

In the meantime, it is cheaper to go through the final year expatriation mess (including the $2,350 filing fee charged by the State Department). I expect the number of renunciations to increase.

Expatriation