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Tax regulations remain challenging for American expatriates

Wednesday, July 10, 2013

Tax regulations remain challenging for American expatriates

Frequent business travelers across the U.S. have long campaigned for a relaxation of state taxation laws. Individuals who spent a significant amount of time on the road often have to file state returns for each region they visit, even if they only stay there for a short while. Add this to the complexities of writing off accommodation expenses, such as staying in serviced apartments or corporate housing for a few days, and the situation soon becomes increasingly complicated. However, executives and mobile professionals are not the only ones faced with labyrinthine taxation rules, as millions of Americans living overseas have their own challenges, according to The Birmingham News.

Insult to injury
In a recent blog post, financial adviser Stewart Welch outlined some of the difficulties American expatriates face in terms of taxes. The most obvious - and contentious - is that the U.S. is one of the only countries in the world to impose taxes on citizens living overseas. The only other nation in the world to practice what is known as "citizenship-based" taxation is Eritrea, a small country in the Horn of Africa. 

For some expatriates, this merely means the additional headache of filing a federal tax return. However, depending which state American citizens hail from, they may also be required to file a state return. This not only means a lot more paperwork during tax season, but also real financial implications. The resulting situation can prove extremely expensive, which Welch claims often offsets the fiscal benefits of living and working overseas.

Even Americans returning to the U.S. after a period of time living abroad are not out of the woods yet. In some cases, expatriates who have lived overseas for many years face tremendous difficulties in obtaining even basic financial services upon their return, such as establishing a new bank account or securing a line of credit.

Demand for change
Earlier this year, members of Congress convened to assess the current citizenship-based taxation model in the U.S. According to The Hill, American expatriates living in countries around the world wrote to their state representatives, demanding that regulations be changed to avoid penalizing U.S. citizens living overseas.

Some nonprofit groups, such as American Citizens Abroad which is headquartered in Geneva, Switzerland, have been equally vocal about the current state of affairs with regard to foreign income taxation requirements. Marylouise Serrato, the organization's executive director, told the news source that the present system simply doesn't work.

"We want to empower Americans who are going overseas who create economic opportunities," Serrato said. "We are just not doing that with citizenship-based taxation. You pay taxes in the jurisdiction where you have earned the income. You shouldn't be taxed twice on the same income."

Handing in passports
Although Congress is currently examining taxation regulations, many Americans have had enough. According to Time magazine, tens of thousands of U.S. citizens are renouncing their citizenship to avoid what some people feel are predatory taxation laws.

The news source reports that there has been a seven-fold increase in the number of Americans turning in their passports since 2008. Although overall numbers of expatriates taking this somewhat drastic step pale in comparison to the number of Americans living overseas, many U.S. citizens feel it is the only way to avoid the substantial financial penalties that come with being taxed twice on a single income.

"I became increasingly frustrated by the necessity to file in two countries," Peter Dunn, a former U.S. citizen who now lives in Toronto, told the news source. "I could not live with the abuse of America taxing me even though I could not receive any services or benefits of living in the U.S."