US Taxes: the Residence-based Plan
Apart from Eritrea the United States is the only country in the world that levies taxes based on citizenship rather than place of residency. For American expats in France and elsewhere this raises a number of issues.
As reported last August not too many U.S. expats or would-be expats are aware but Washington is on a domestically-contested warpath deploying heavy artillery in its tax battle with Americans settled in France and elsewhere. Part of that battle relates to what the tax authorities and US citizens come to agree as being both reasonable and fair in the area of taxing citizens abroad.
Here Victoria Férauge offers a progress report on a thorny issue. Her article originally appeared on her blog The Franco-American Flophouse, and is republished here by kind permission of the author.
American Citizens Abroad has been doing some excellent work to try and get the U.S. system of citizenship-based taxation changed to residence-based taxation.What’s it all about and why would this be good for Americans abroad and Americans at home? Let’s begin with a quick and dirty explanation of the difference between CBT and RBT.
Citizenship-based taxation (CBT): The U.S. is the only country in the world other than Eritrea that taxes based on citizenship and not on residency. This means that wherever in the world that an American citizen (or Green Card holder) is living and working, he must report his “foreign” (local to him) bank accounts, file tax returns and pay U.S. taxes in addition to the taxes he pays locally in the countries he resides in. An example:
An English teacher in France: Makes a modest salary, has French checking and savings accounts, and a small studio apartment. Because she lives in France she files French tax returns and pays national and local taxes to the French government and to the city she lives in. But because she is a U.S. citizen she must then turn around and report her French accounts to the US Treasury, file tax returns to the U.S. IRS and, depending on the circumstances, pay taxes to the U.S. government even though not one dime of her money came from the U.S. – it was ALL earned in France and deposited into local French bank accounts.
Residence-based taxation (RBT): Under this system a resident of a country may still be required to report on his worldwide income (depends on the country), but a non-resident only pays taxes on local income. An example:
Take the same English teacher in France and imagine she has a few investments in the U.S. that she left behind her when she moved Because she is a tax resident of France she would pays French taxes on what she earns and saves in France but she would only file tax returns and pay taxes to the U.S. on the income that is actually earned in the United States. Her French income would not be taxed by the U.S. because she is a resident of France and not of the U.S.
Sounds pretty straightforward (and sane) to me. To make it even easier to understand ACA has produced this excellent short video about their proposal which explains all the advantages the U.S. would have if it changed systems.
“Residence-Based Taxation (RBT) for Americans abroad is the only way forward to keep America and Americans abroad competitive in a global economy. Get the word out on RBT by sharing and “liking” this 3-minute ACA-produced video. “
And for a bonus, here is an interview with Jackie Bugnion of Co-Director of American Citizens Abroad (ACA) that provides more details:
Jackie Bugnion discusses why ACA is the voice for Americans overseas and provides an update on work regarding taxation regulations.
My take on the CBT vs. RBT debate can be found in my 2012 post:
Diaspora Taxes: Citizenship-based Taxation.
Reprinted by kind permission of Victoria Férauge, who owns the copyright, and the The Franco-American Flophouse .
Author: Victoria Férauge
Born in Seattle, USA. Victoria Férauge has lived on 3 continents (North America, Asia and Europe) and describes herself as “country agnostic”. Mother of two she believes in “assignments, not jobs … networks, not companies” and is “passionate about technology, culture, language.” She blogs from Paris about life and fitting in as an American-born mother married into a French family and working professionally with French colleagues.
- FACTA hits Americans’ Access to Bank Service (french-news-online.com)
- U.S. Wages its 2012 Diaspora Tax War
- TurboTax – Tax Tips for Resident and Non-Resident Aliens (turbotax.intuit.com)