After the presidential election, some citizens planned on renouncing their citizenship and moving abroad to Canada, or elsewhere. It would be interesting to survey those who stated this proposition to see if they followed through on their promise (or threat).
The Immigration and Nationality Act applies to U.S. citizens who exercise the right to voluntarily renounce their U.S. citizenship. However, potential relocating Americans must realize that renouncing American citizenship has profound implications on any future return to the United States. Why? Signing an oath of renunciation is an irrevocable act for Americans over the age of 18. Despite this serious implication, the number of individuals that renounced their citizenship in 2015 was eighteen times as many Americans that renounced their citizenship in 2008, which set yet another record for the third consecutive year.
In September 2015, French President Francois Hollande promised households a 1 billion-euro ($1.1 billion) tax cut next year. Why such benevolence? Hollande’s government was attempting to make up for the glut of gross domestic product (GDP) that was taken by his government in taxes in 2014.
Finance Minister Michel Sapin said “we’re doing it because it’s both fair and necessary.” Both France and Belgium collected the equivalent of 47.9 percent of gross domestic product in 2014. France’s finance ministry estimated that taxation and social charges have fallen from 44.9 percent of GDP in 2014 to 44.5 percent this year.
In addition to the foreign earned income exclusion, taxpayers may also claim an exclusion or a deduction from gross income for an expenditure for housing if the home of the tax is in a foreign country and they qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.
The housing exclusion applies only to amounts which are treated as paid by an employer, which includes any amounts paid to a taxpayer or paid or incurred on a taxpayer’s behalf by his or her employer that are taxable foreign earned income for the year. In contrast, the housing deduction applies only to amounts paid for with earnings from self-employment. Thus, the source of the amounts paid typically determine use of the deduction or exclusion.
Form 1116 relates to foreign tax credits, which are intended to affect taxpayers living abroad. These credits benefit foreign taxpayers by reducing the double tax burden that arises when foreign source income is taxed by both the United States and the foreign country where the taxpayers’ income originates.
The foreign tax must meet four tests to qualify for the foreign tax credit:
- The tax must be a legal and actual foreign tax liability;
- The tax must be imposed on the taxpayer claiming the credit;
- The taxpayer must have paid or accrued the tax; and
U.S. taxpayers that have paid or accrued foreign taxes to a foreign country or U.S. possession, while subject to U.S. tax on the same income, may be able to take either a credit or an itemized deduction for these payments for foreign taxes. The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.
Qualifying Foreign Taxes
Taxpayers may only claim a credit for foreign taxes that are imposed by a foreign country or U.S. possession. The tax must meet four tests to qualify for the credit:
Federal tax law provides the foreign tax credit to relieve taxpayers of the double tax burden imposed when their foreign income is taxed by both the United States and the foreign country where their income originated. Usually, if the foreign tax rate is higher than the U.S. tax rate, there will be no resulting U.S. tax on this foreign income. If the foreign tax rate is lower than the U.S. tax rate, the U.S. tax on the foreign income will be the difference between the two tax rates. Keep in mind that the foreign tax credit reduces U.S. taxes on foreign source income, but never reduces U.S. taxes on U.S. source income.
In the first week of May, 2016, the U.S. Department of the Treasury announced several actions to strengthen financial transparency and combat the misuse of companies to engage in illicit activities. Treasury announced a Customer Due Diligence (CDD) Final Rule, proposed Beneficial Ownership legislation, and proposed regulations related to foreign-owned, single-member limited liability companies (LLCs). Together, these efforts target key points of access to the international financial system – when companies open accounts at financial institutions, when companies are formed or when company ownership is transferred, and when foreign-owned U.S. companies seek to evade their taxes.
Here’s a primer for United States taxpayers residing abroad:
U.S. citizens must file a tax return. Any U.S. citizen who earns income of any kind is obligated to file a U.S. tax return every year, no matter where he or she resides in the world. Many Americans, living abroad and in the U.S., find it unfair that the United States is the only country that requires citizens to file tax returns whether or not they are earning income on U.S. shores. This is a leading reason why some Americans are renouncing their U.S. citizenship.
Unlike most countries, the U.S. taxes its citizens on all income, no matter where they live and where their income is earned. The current United States tax laws, because of requirements for reporting income, filing tax documentation, as well as the ensuing tax obligations, have made many Americans renounce their citizenship. Section 349(a)(5) of the Immigration and Nationality Act details a U.S. citizen’s right to voluntarily renounce his or her citizenship. Signing an oath of renunciation is an irrevocable act unless the individual is under the age of 18.