The U.S. is one of only two countries in the world (the other is Eritrea) that taxes its citizens regardless of where they live.
That creates a “tax nightmare” for an estimated 9 million American citizens living outside the U.S., a Bloomberg editorial states. Moreover, the U.S. tax system “stinks,” the posting asserts.
American expats don’t necessarily owe the U.S. any tax: They can deduct taxes paid to host countries, which are often higher, or take an exemption. But they have to file returns and disclosures regardless, at a significant cost in accounting fees, nuisance and needless anxiety, writes Andreas Kluth.
“The U.S. proceeds as though any citizen with a foreign bank account were a likely tax evader or money launderer. Citizens with foreign assets must disclose them not only to the IRS but also to the Financial Crimes Enforcement Network,” he writes.
Adding to a “Kafkaesque” and “draconian” tax situation, the Obama-era Foreign Account Tax Compliance Act — intended to fight money laundering and offshore accounts — made things worse for ordinary Americans, encouraging foreign banks from any association with expats. President Trump’s 2017 tax reform made it worse. Inadvertently, the IRS now treats the American owner of a lemonade stand in Belgium like Google, according to the editorial.
At a minimum, the U.S. should simplify the rules for its expats and raise the balance thresholds so middle-income filers are exempt. But the best solution would be even simpler: Follow the example set by almost every other economy (did I mention Eritrea?) and base the personal income tax on residency, not citizenship,” writes Kluth.