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Why We Need Residence-Based Taxation

Are you an American expat living abroad? If so, do you know your tax requirements and why residence-based taxation would be much fairer to you? In fact, I've been interested in this subject for a while, and I recently wrote a new book called The Expatriate's Guide to Handling Money and Taxes.

I recently found out residence-based taxation as a solution to the tax problems faced by U.S. expats when I spoke to Jackie Bugnion of American Citizens Abroad on the Goldstein on Gelt show.

Here is a transcript of my interview with her. Read on to find out what needs to be done with the taxation system for Americans abroad.

Douglas Goldstein: You've really been an advocate for Americans living abroad, having been outside the United States for a long time. How long has this been?

Jackie Bugnion: Forty-eight years.

Douglas Goldstein: You also recently authored the American Citizens Abroad proposal for residence-based taxation. What's that all about?

Jackie Bugnion: Residence-based taxation is actually nothing more than recommending that the United States adapt the system that every other country in the world applies. The United States is unique in its citizenship-based taxation, and what this means is that Americans who are residing overseas would be taxed at the same rate that currently non-resident aliens are taxed under U.S. tax laws. In other words, there would be an automatic withholding on U.S.-source income and taxes that anybody who has active income in the United States but is residing overseas would have to file. There are several aspects to it, but it basically means that people overseas would not have to file the 1040 in principal, and nor would they be subject to the FATCA reporting requirements of the banks or the 1040, and nor would they have to report the FBAR. In other words, they would be treated just like foreigners who are living overseas.

Douglas Goldstein: What benefit does the United States have for not collecting tax from people like you and me?

Jackie Bugnion: We believe that residence-based taxation will actually bring in more revenue to the United States than the current system. The current system of citizenship-based taxation is an anomaly because the United States has to recognize foreign countries. Since you have the first right of taxation, and therefore foreign tax credits are applied, they also allow the foreign earned income exclusion because they recognize that for Americans to be competitive in certain countries, this is an essential. The upshot is that 82% of Americans who are filing their taxes do not owe any U.S. tax.

Our estimates in our paper, having looked at all the information available publicly on the website of the IRS and the statistics, are that the revenue coming from Americans who are residing overseas, excluding U.S. military personnel and embassy employees, who are in a different category, probably ranges from $3 to $6 billion. That range is very large, and the reason is that there are different sets of statistics that come up with completely different numbers. One of the aims of our paper is to try and get our proposal scored. It would have to be scored before it would be accepted anyway.

Douglas Goldstein: So $3 to $6 billion of tax revenue comes into the United States from Americans who live overseas. It may not be a huge amount of money, but that would certainly buy a few F-35s.

Jackie Bugnion: It's a drop in the bucket. It's a small rounding error of 1% of the U.S. budget. It's totally insignificant. We believe that residence-based taxation will bring in as much money, starting at the $6 billion level. We think it would bring in close to $8 billion a year, and in addition, the transition phase would probably bring in a one-time additional amount, so we're talking over 10 years of at least $20 to $30 billion.

Douglas Goldstein: You spoke about residence-based taxation. We're not talking about how basically everyone in America who is living there is paying taxes. We're only talking about sending a letter to all of us who live overseas saying that from now on, you don't have to file or pay?

Jackie Bugnion: That would be wonderful if it would be that simple in the implementation. The implementation would be a little more complicated than that.

Douglas Goldstein: It just seems as though people like us have no representation on the hill. Why do they care about what we think if the system is working okay? Why bother to change?

Jackie Bugnion: The real fact of the matter is that the system is not working okay. Citizenship-based taxation is extremely costly and heavy for the filers overseas. It's very heavy administratively to the IRS, and it's well-known that many Americans overseas are not filing income taxes because they are simply not aware of the requirements. Many were born in the United States of foreign parents and moved back to their home country when they were 2 years old. They lived their whole lives overseas. It never occurs to them that they should be filing U.S. taxes and they don't get any services from the U.S. There are many instances of this kind of what they call "accidental Americans," and that's one of the reasons.

The other is that many people wonder why there should be a heavy administrative system where everybody does this complicated filing, when 82% of the people don't owe any taxes. Unfortunately, today with the citizenship-based taxation, coupled with FATCA regulations and the pressure coming from banks, and banks being shut off from Americans, American citizens overseas are increasingly being forced to renounce their citizenship in order to live a normal life overseas. That's why it's networking, and that's why FATCA on top of citizenship-based taxation has really become the disaster. It's really the straw that has broken the camel's back.

Douglas Goldstein: The people who wrote the FATCA legislation would argue that they're just trying to get the money launderers to come out of the woodwork, and this is a model for the IRS to find those people. How does that connect with citizen-based taxation, because that could also be going after a U.S. resident citizen who is hiding money offshore?

Jackie Bugnion: I think the original impetus for the passage of FATCA was precisely the American residents who are hiding assets overseas. You had the UBS case, and that led to a lot of political ire in Congress. Whoever had prepared this legislation, and there is a big mystery as to who, but certainly Treasury was involved and it was many years of effort that pulled this off the shelf and it was never discussed in Congress. The whole origin of FATCA is very dubious. It was sold as going after tax thieves. The problem is that because Americans also who are residing overseas, and I repeat that it's the only country that does this, it automatically implies that all people overseas by necessity have to have foreign bank account and they get pulled into this whole FATCA reporting.

Douglas Goldstein: I understand, having personally filled in FBAR and FATCA forms as well, but at the end of the day you have to look up these accounts anyway.

Jackie Bugnion: FATCA reporting requirements are different from FBAR. FBAR is only the individual who reports to the IRS. FATCA requires the foreign financial institutions to become arms of the IRS because they are required under the threat of serious legal considerations and serious withholding taxes to report to the IRS on any American who has an account overseas over a certain threshold.

Douglas Goldstein: If we just look at the United States Treasury as trying to maximize its income, why wouldn't they do that?

Jackie Bugnion: That's why they are doing it, but they are looking for the reporting to be able to prevent tax evasion. That's their goal. Actually FATCA has been very effective now from the point of view of the IRS, because they've combined it with the series of voluntary disclosure programs and the very wealthy Americans who are hiding assets overseas recognize it and that program allow them to come clean. The problem is that they've had a one size fits all in their solutions and it's extremely penalizing for Americans overseas who have not been reporting and try to get into the system.

Douglas Goldstein: When you were in Washington talking to them about the residence based taxation, what did you feel? Do you think there's a possibility we're going to get there, or is it just a nice discussion topic?

Jackie Bugnion: We were pleasantly surprised by the reception in the congressional offices. We found two things. Number one is that many people are very aware of the problematic situation created for Americans overseas by FATCA legislation. Second of all, everybody is talking about tax reform and they recognize the need for tax reform. Our problem is a small element of the major issue in the United States. The United States tax code is just beyond limit. It's out of range right now. When we talk about dissolving our problem, and mainly what we think is it will bring in more revenue to the United States, it will simplify the tax code, it will simplify the administration, it will allow U.S. companies to start once again to hire to represent the nation overseas. It will stop the penalization of Americans residing overseas. The whole is a win-win solution and we've really had a very favorable response. This being said, we have no illusions and it's a very long hard battle to get it integrated into legislation.

Douglas Goldstein: How can people continue to follow your work?

Jackie Bugnion: Please go to our website, which is I also strongly recommend people to write to their legislators in the House of Representatives to try to support H.R. 597 which was introduced by Carolyn Maloney and calls for a serious look into all of the issues concerning Americans overseas.