“The ship Unity, William Glover, Master, Will sail in a Week. Has very good Accommodations for Passengers. Healthy young MEN and WOMEN, as indentured Servants will meet with good Encouragement, and be well treated on board this Vessel. Apply as above.”
Thousands of advertisements like this one appeared in English newspapers prior to the American Revolution, enticing disgruntled and/or restless Britons to work for a few years (usually five) as slaves in exchange for free passage across the Atlantic. Admittedly, this call-to-action isn’t exactly the Siren’s Song, and that’s one reason the system declined after Bacon’s Rebellion in 1676. But in earlier times, up to 90 percent of American colonists in some areas made the trans-Atlantic voyage as indentured servants. A few also made the journey as alternatives to prison sentences in England (i.e. you can spend the next few years in the Tower of London or in Virginia), a choice which speaks volumes about the conditions in many parts of early America.
Today, the flow has reversed, and millions of people leave the United States to live and work in foreign countries. Surveys show that most of these individuals make the move because of marital or employment reasons. These people are still subject to U.S. taxes, because the IRS is one of the few taxing authorities in the world that taxes nonresident citizens; a few states do the same thing.
Federal Programs
Regular wages and self-employment income, but not asset-based income like rents or royalties, are subject to a $101,300 exclusion for tax year 2016; certain taxpayers may also deduct 16 percent of their housing expenses, up to $16,129. To qualify for the Foreign Earned Income Exclusion, taxpayers must meet one of two tests:
- Bona Fide Resident: The taxpayer must retain U.S. citizenship and reside in a foreign country for all the previous tax year. The IRS says the residence must be “uninterrupted,” but a few weeks away from home, especially if scattered over more than one or two periods, should not be a deal-breaker, especially if the taxpayer kept the same foreign address. Simply living in a foreign country for a year does not render BFR status.
- Physical Presence: U.S. taxpayers who physically reside in another country for at least 330 days during a twelve-month period are eligible for the FEIE regardless of the domicile/residence question. In some cases, the IRS will waive the minimum time if you had to leave early “because of war, civil unrest, or similar adverse conditions in that country.” Taxpayers who fall short of the 330-day threshold can file extensions, so when they file their returns, they are FEIE eligible.
Since the applicable law changed in 2006, the FEIE is now a credit as opposed to an exclusion. For that reason, taxpayers probably cannot claim the FEIE and the Foreign Tax Credit on the same return. Essentially, the IRS does not double tax income earned abroad. So, if taxpayers paid income tax to a foreign country, they are entitled to offsets on their 1040s. That’s one of the main reasons the expat return deadline is on June 15 as opposed to April 15 (or April 18 this year). There are some very complicated compliance issues. For example, the amount of the foreign tax is not necessarily the same amount as the FTC, largely because there are apportionment issues in terms of interest income and capital gains taxes, the taxpayer may be entitled to a refund, and contributions to most foreign charitable organizations (unless they are in Israel, Canada, or Mexico) are not tax-deductible in the U.S.
Private Plans
Essentially to ease the pain of a foreign relocation, many U.S. companies offer their own programs to reduce or eliminate the extra tax burden, or at least cut down on the paperwork.
- Tax Equalization: The expat employee keeps paying withholding to the employer; the “hypo tax” helps ensure that the expat pays the same amount of tax, even if it is to two different governments. If the withholding calculation is off, the company normally pays the difference.
- Tax Protection: Rather than go through the hypo tax hassle, the employer simply agrees to pay the difference between last year’s taxes and this year’s taxes, if any. The expat does all the paperwork and basically bears all the risk.
Tax treaties and foreign tax systems also come into play here, and these distinctions must be accounted for in the tax relief plan.
One Response
“Re: Paying U.S. Taxes As An Expat: The New Indentured Servitude?
Thousands of advertisements like this one appeared in English newspapers prior to the American Revolution, enticing disgruntled and/or restless Britons to work for a few years (usually five) as slaves in exchange for free passage across the Atlantic.”
I find your reference to the “usually five” years of “indentured servitude interesting. Yes, history does have a way of repeating itself. I am reminded of the December 2016 proposal from ACA (“American Citizens Abroad”) that proposes that after five years of indentured servitude that, Americans abroad may request to be freed from the servitude of U.S. citizenship AKA “place of birth taxation”.
Specifically, the December 2016 ACA proposal reads that in order to cease “indentured servitude” that:
“In order to qualify for residency-based taxation, same residency test as
current section 911, except individual must have met the test for the most
recent 5 taxable years prior to the year of claiming non-resident American
status.”
You can read it yourself here:
https://www.americansabroad.org/news/aca-publishes-detailed-descr-of-its-rbt-proposal-and-announces-coalition-to-score-rbt-proposal/