International Law

Americans Renouncing Citizenship Over Tax Issues

By Stan

This one has me a bit confused. I’m not a tax guy, and perhaps one of my faithful tax expert readers (you know who you are) will kindly jump in on this issue. Here is what the New York Times had to say:

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.

Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.

American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income.

Yes, Americans are taxed on overseas income over 91,400 (that amount goes up on a regular basis, by the way). That means you get 90K tax free (U.S.) and pay over that amount on the normal graduated basis. However, that’s only if you take the tax exclusion. I assume that folks who make anything under 90K, or even slightly over, will take the exclusion since it’s easy. But there is another option, the tax credit.

Under this alternate option, if I understand it correctly, you basically get a credit for any tax paid to a foreign government. However, this also depends on the tax rates applied in that country. For example, if you live in Fakeistan and are taxed at an actual rate of 25%, but in the U.S. you would be taxed at a rate of 35%, then you would still be responsible for paying U.S. tax for that additional ten percent.

I think the last time I took the credit, the rates between the U.S. and China were not terribly far apart, but that also will vary depending on your income, etc.

Anyway, my point is that there are at least a couple of ways to minimize tax, and for most folks, I’m not sure why the issue of double taxation comes up. I do have some suspicions, though.

First, these “disaffected” folks are probably in very high tax brackets and have different concerns than the rest of us who live in the real world. For them, a couple of percentage points may amount to serious money.

Second, let’s face it, a large number of expats (in China at least) are getting a big chunk of change offshore, probably in Hong Kong or alternative locations where they are paying zero in tax. They report some of their income to the tax authorities here, just enough so they don’t get into trouble, but the majority goes offshore. This means that a lot of people are avoiding PRC tax and, more important for this discussion, have no offsetting China tax credit to avoid U.S. tax.

In other words, many expats who make a lot more than 90K probably cannot use the tax credit option. And even though they are avoiding tax, they are still complaining about the U.S. government coming after them on their offshore income.

If I’ve got this right, at least for some individuals, then all I have to say is boo freakin’ hoo. You can’t complain about double taxation if you are not paying PRC tax. And if you are paying PRC tax, then take the damn credit.

For anyone who is legitimately having a double tax problem (i.e. not a tax cheat), obviously the above does not apply to you.

© Stan for China Hearsay, 2010. | Permalink | 4 comments | Add to del.icio.us
Post tags: China income tax, double taxation, tax avoidance, taxation, U.S. income tax

Full post as published by China Hearsay on April 28, 2010 (boomark / email).