From the moment President Biden's latest proposed package of taxes and changes to existing regulations aimed at America's wealthiest taxpayers in particular went live on Monday, U.S. wealth managers and tax advisers have been trawling through its pages, to get a sense of the scale and nature of the changes that may lie ahead...
Widely seen as the administration's response to a combination of the need to replenish the Covid-depleted federal budget, alongside such recent exposés as ProPublica's "Secret IRS files" of last year, which, as ProPublica put it, revealed a "trove of never-before-seen records" that the publication claimed revealed "how the wealthiest avoid income tax," the Biden plan targets many of the specific asset-sheltering strategies that high-net-worth and ultra-high-net-worth Americans have long used to ring-fence their money from the taxman.
Of course, as is always the case with such proposed tax packages, as tax experts and others have been reminding us, it's never at all clear which if any of the measures outlined in the Biden document are likely to actually make it onto the statute books.
Here, Toronto-based lawyer and U.S. cross-border tax afficionado John Richardson considers what the likely ramifications of the Biden plan are for American expats – a group that, as he points out, are rarely if ever given much thought by Washington lawmakers, particularly when the declared goal is to crack down on "wealthy" Americans, (since, as far as Washington is concerned, that's what all American expats are)...
As long as the United States employs citizenship taxation, any proposed changes to the U.S. tax system will have an impact (sometimes intended, sometimes not) on Americans abroad.
The Biden Green Book for fiscal year 2023 (officially known as the General Explanations of the Administration's Fiscal Year 2023 Revenue Proposals), released yesterday (and available here), contains a number of proposals designed to both increase tax rates and increase the tax base by increasing the number of activities that are "taxable events".
Generally the proposals include a number of provisions to create and enhance taxation on both income from capital, and capital itself. These provisions are continuing to generate discussion in the mainstream media including The New York Times, Washington Post and Wall Street Journal, and are also certain to generate much discussion in the tax compliance community.
Much will also be written about how the proposals would affect Americans resident in the U.S. Far less, of course, as usual, will be written about how the proposals would affect Americans abroad.
(The U.S. rules of citizenship taxation steal from Americans abroad -- and the countries where they reside -- in hundreds of ways. Some of these ways are intended and foreseeable, while others are the unintended consequences that result from tax changes that apply to people, i.e. expats, who aren't taken into account during the political process.)
Significantly (if not surprisingly), the Biden Green Book does not suggest a move away from the U.S. system of citizenship-based taxation (CBT) towards a residence-based system, as is embraced by the rest of the world, and as many advocates for fairer taxation of American expats have long been calling for.
Otherwise, the Biden proposals (particularly those that create income realization events when a gift is made) suggest a worsening of the situation for Americans abroad.
That said, one proposal “might” (depending on Treasury) allow for a significant relaxation of the 877A Exit Tax rules, at least for a narrow group of Americans who are resident overseas, under certain circumstances.
Below, I've put together six ways that, as it's currently drafted, the Biden Green Book would impact Americans abroad, what I call the "Group of Six". (There are more, but this is a start.)
The “Group Of Six” includes:
1. Raising The Corporate Tax Rate To 28% (aka "creating Subpart F income and making more americans abroad "GILTI") (see page 2 of the Green Book).
Verdict: This will have the effect of increasing the number of Americans abroad subject to taxation on income earned by their small corporations but not received by them personally. GILTI, of course, is a type of income many U.S. expats receive; it stands for “global intangible low-taxed income,” a category of income first defined by President Trump's 2017 Tax Cuts and Jobs Act, and refers to income that's earned abroad by U.S.-controlled foreign corporations (CFCs) and is subject to special treatment under the U.S. tax code.
2. An increase in the corporate rate: The rate proposed in the Biden Green Book would increase the GILTI rate (here suggested to 20%), which would automatically affect many Americans who have businesses outside of the U.S. (still page 2 of the Green Book).
As the Green Book explains, "The 28% corporate income tax rate will consequently increase the GILTI rate in tandem.
"The proposal is scored under the assumption of a Build Back Better Act baseline. Therefore, the new GILTI effective rate would be 20%, applied on a jurisdiction-by-jurisdiction basis.
"The proposal would be effective for taxable years beginning after December 31, 2022."
Verdict: Under the Biden proposals, more Americans abroad will be "GILTI" and will possibly (depending on a combination of country specific factors and their specific circumstances) be subject to GILTI taxes at a higher rate than they would be now.
3. Simplify Foreign Exchange Gain or Loss Rules and Exchange Rate Rules for Individuals (see page 90 of the Green Book).
As the Green Book points out, since 1986 there has existed, for American individuals abroad, an exemption for Federal income tax purposes on "any gains realized through personal transactions involving the disposition of foreign currency where the gain is US$200 or less" (so-called "phantom gains").
As the law currently stands, U.S. individuals living and working abroad "must apply complicated rules relating to foreign currency transactions."
Therefore, simplifying certain rules relating to these transactions for U.S. individuals living and working abroad, or with other foreign ties, "would improve compliance and better reflect the economic environment in which these individuals live and work."
Verdict: This in interesting. While reinforcing the idea that Americans abroad are tethered to the U.S. dollar, it does suggest a recognition of the unfairness of how the 'phantom gain rules' as they currently stand harm the purchase and sale of residential real estate outside the U.S., a major issue for many expat Americans.
It's difficult not to try to imagine, at this point, how this would interact with the proposed rules converting gifts to taxable capital gains...
4. Provide For Information Reporting by Certain Financial Institutions and Digital Asset Brokers For Purposes of Exchange Of information (in other words, a proposal to require "certain" U.S. financial institutions to provide the same information to foreign governments about their taxpayers' U.S. accounts that the U.S. currently receives from these governments about Americans' overseas accounts, under the U.S. Foreign Account Tax Compliance Act, or FATCA) (see page 97 of the Green Book).
As the Green Book explains, the intergovernmental agreements (IGAs) that govern the way FATCA is enforced by countries around the world currently include certain commitments on the part of the U.S. to "achieve equivalent levels of reciprocal information exchange", which isn't now taking place.
"In order to fulfill this commitment, legislation is needed to require U.S. financial institutions to report to the IRS certain additional information on foreign account holders," it continues.
"Requiring financial institutions in the United States to report to the IRS the comprehensive information required under FATCA would enable the IRS to provide equivalent levels of information to cooperative foreign governments, in appropriate circumstances to support their efforts to address tax evasion by their residents.
"In addition, tax evasion using digital assets is a rapidly growing problem. Since the industry is entirely digital, taxpayers can transact with offshore digital asset exchanges and wallet providers without leaving the United States.
"...To combat the potential for digital assets to be used for tax evasion, third party information reporting is critical to help identify taxpayers and bolster voluntary tax compliance.
"In order to ensure that the United States is able to benefit from a global automatic exchange of information framework with respect to offshore digital assets and receive information about U.S. beneficial owners, it is essential that United States reciprocally provide information on foreign beneficial owners of certain entities transacting in digital assets with U.S. brokers."
Verdict: This is an attempt to reinforce the core principles of FATCA which are about the identification of US citizens outside the United States.
5. Expatriation – The Stick: Extend the statute of limitations for auditing certain expatriated individuals to three years from the date from which 8854 should have been filed (possibly forever) (see page 87 of the Green Book).
Verdict: This is theoretically very bad. It means that those who renounce without filing Form 8854 would be subject to a lifetime of risk. Practically speaking these provisions are not understood on the retail level.
6. Expatriation – The Carrot: Exempting certain dual citizen expatriates from the Exit Tax (see page 87 of the Green Book).
In a rare acknowlegement of the fact that there are some U.S. dual nationals who live outside of the U.S., are not rich, and, typically because they were simply born in the U.S. before their parents returned to their home country, have few if any ties to the States, the Green Book contains a proposal that would allow the U.S. authorities to "provide relief from the rules for 'covered expatriates' for a narrow class of lower-income dual citizens with limited U.S. ties."
This relief, the Green Book goes on to explain, "would apply only to taxpayers that have a tax home outside the United States and satisfy other conditions that ensure that their contacts with the United States are limited, and whose income and assets are below a specified threshold.
"Evidence of limited contacts with the United States may include a demonstration that the taxpayer’s primary residence has been outside the United States for an extended period. Evidence of the taxpayer’s income and assets may include a foreign tax return, information about the value of property owned by the taxpayer and the taxpayer’s sources of income, or information demonstrating that a certain amount of income earned from working outside the United States is excludable from U.S. tax."
Verdict: This is good news for the narrow group of people impacted by this – mainly “Accidental Americans”. It is bad news for the rest, because the existing rules will continue to apply to those “who are left behind”.
I assure you that the Green Book contains a large number of proposals that, if they find their way into law, will have a significant impact on Americans who live abroad. (I'll leave it to others to add to this list.)
My final point, however, is this: The U.S. system of taxing on the basis of citizenship contains myriad ways that Americans who live outside of the States can find themselves being obliged to hand over money to Uncle Sam, for as long as they continue to remain U.S. citizens.
And this latest tax package shows that even after years of determined, unswerving expatriate advocacy in favor of a move towards residence-based taxation, when Washington decides it needs to raise its projected annual tax haul, it invariably does so with minimal thought as to how its money-raising plans might affect those in Expatland – where it knows its voters are too thinly-spread across the 50 states to be able to cause any pain whatsoever to their members of Congress, should any issues arise.
Yes, there are a few "crumbs" here in the Biden Green Book that might make citizenship taxation just a little bit easier to live with, such as item No. 3, above, which would see certain hassles currently surrounding phantom gains claims relaxed.
But on balance, these provisions yet again represent a “doubling down” on the problems of citizenship taxation; and while the provision that might allow easier expatriation for “Accidental Americans” is long overdue and welcome, it does nothing else to make life easier for the rest of America's 6 million to 9 million overseas citizens.
John Richardson, pictured above, is a Toronto, Canada based lawyer who assists U.S. citizens and Green Card holders living outside the United States with their citizenship issues and other matters. He also helps dual American/Canadian citizens in particular with their financial planning issues. Richardson is on the board of the Alliance for the Defence of Canadian Sovereignty, and is one of the founding members of Stop Extraterritorial American Taxation, a recently-launched advocacy group. He is also the American Expat Financial News Journal's regular, and exceptional, podcast interviewer.
This article was taken from a longer piece on his website, CitizenshipSolutions.ca, where it may be viewed by clicking here.
- A reader asks about ‘navigating the shoals between U.S. and French citizenship’; Greenback Tax’s David McKeegan replies
- Expats see potential in launch of third parties in U.S. politics
- Joe Biden to Americans abroad: we'll "work...with you" on the issues impacting your lives
- Tax Foundation: Joe Biden’s plan to address 'offshoring' comes with contradictions
- 'Comprehensive' Biden plan to win overseas voters sank without trace after July launch