What does US citizenship-based taxation mean for US citizens living overseas?
By SARAH HERSHENSONUS tax form (illustrative)(photo credit: INGIMAGE)
The USA and Eritrea are the only countries in the world that tax their citizens based on two things: on residence and on citizenship. Wherever their citizens live, US (and Eritrean) citizens have to file tax forms to their governments. If you are an American living outside the country, you have to collect your financial data from your country of residence, overseas banks and investment houses and send it to the IRS.One might ask, “Why should I pay taxes to another country? I pay taxes in the country where I live.” The IRS would probably answer, “You, as an American citizen, have to be aware of and observe our tax laws even if you do not live here.”FATCA (The Foreign Account Tax Compliance Act) requires US citizens who live outside the US to report on their non-US financial accounts. It requires all foreign financial institutions, such as banks, to search their records for proof indicating the US personal status of their clients. They must then report to the US the assets and identities of US citizens.Is this fair? In 2016, attorney Marc Zell, representing the organization Republicans Overseas in Israel, contested before the Israeli court system that FATCA was an invasion of privacy. The case made it all the way to the Israeli Supreme Court. However, upon second hearing, Judge Menachem Mazuz decided not to grant the petition against enforcement of FATCA, stating that the requirements of the modern world trump individual rights, given the needs of governments to combat financial crime. He further stated that, in the modern world, the right to privacy is limited.Zell does not agree, nor is he giving up. He thinks that the new Republican Congress will repeal FATCA in 2017 and is working in Washington to schedule a hearing on FATCA. He is also working with Keith Redmond, an advocate for expats and FATCA expert, to include legislation that would abolish citizenship-based taxation in the new administration’s tax reform package.What do you do in the meantime? Asa Cohen, a past national president of the Association of Americans and Canadians in Israel explains.“Our goal is to present fact not opinion, and how to comply with the law. I advise going to the Internet page, Do I Need to File Form 8938 – Statement of Specified Foreign Financial Assets. There you will see the tax thresholds over which you pay tax. FATCA forms and taxes might not affect you. It might also be good to speak to an accountant.“The American living overseas probably has a bank account in the city where he lives that he uses for a variety of everyday expenses. Reporting the amount in the savings/checking account is not too cumbersome.”However, each case is different. Julian Landau, national president of AACI, representing AACI’s position, and Marylouise Serrato, Executive Director of American Citizens Abroad, both agree that the US should do away with FATCA and instate Same Country Exemption. This would alleviate the filing burden for FATCA on Americans as well as the identification and disclosure of their accounts by the foreign financial institutions.Meanwhile, FATCA remains on the books and American citizens who reside overseas must comply.