Double taxation costs Americans abroad a shocking amount—even if they don’t owe any U.S. taxes

Dear Congress,

Double taxation costs Americans living abroad a shocking amount—even when they don’t owe any U.S. taxes.

Only the Internal Revenue Service has the full picture, because American citizens who file U.S. tax returns from abroad have to declare the sources of their income and whether any taxes were already paid on that income.

But there is an easier way to document at least some of the opportunity cost of double taxation—even for people who don’t owe U.S. taxes. It’s the cost, over time, of the thousands of dollars people spend on U.S. tax preparation double-work that they don’t have to spend on something else. Crucially, this is money that their American friends and relatives living in the United States don’t have to pay, because they only have to file one tax return. And it’s money that their colleagues and neighbors abroad don’t have to pay because they only have to file one tax return.

As loyal readers of this blog already know, U.S. law requires Americans living abroad to file an American tax return and pay U.S. income tax on top of whatever they already declare and owe to the countries in which they live. This is called citizenship-based taxation, and is a system enforced only by the United States and Eritrea.

So how much money are we talking?

That depends how long you live abroad. But the chart above shows that we’re quickly talking about “real money.” After 10 years it would pay for a nice family vacation or a used car. After 20 years it would pay for four years of college tuition. After 30 years it would buy a house in most U.S. states.

That’s because the average American who files a U.S. tax return from abroad pays about $2,500 a year in specialized accounting support. Most people consider this expense necessary given the complexity of filing tax returns in two different tax jurisdictions, plus the enormous penalties that the IRS can slap you with if you make a mistake on your return. Most people conclude it’s better to leave the tax preparation to someone who knows where the traps are.

We then calculated those accounting fees over the years after factoring in inflation and investment returns. The orange line represents the inflation-adjusted balance, or roughly the amount you would have amassed if you had left that money in an interest-bearing savings account instead of spending it on accounting fees. The green line represents the wealth you would have accumulated if you invested that money in a mutual fund that tracks the performance of the S&P 500.

This chart doesn’t even capture all the damage done. If an American citizen abroad has a company, he or she needs to file two U.S. tax returns—one as an individual, and one for the company—whether or not either has any U.S. income—on top of their two local returns. That’s four income tax returns a year for the ‘pleasure’ of being an American abroad.

Double taxation needs to end

The bottom line is that the longer an American lives abroad, the more the U.S. government policy of taxing American citizens abroad twice costs them.

Rep. Darin LaHood’s Residence-Based Taxation for Americans Abroad Act, introduced in December, would end this historic injustice by allowing Americans abroad to opt to only pay taxes in their country of residence. A recent survey showed that an estimated 97% of Americans who live abroad would opt for residence-based taxation if given the chance.

Tax Fairness for Americans Abroad calls on Congress to support Rep. LaHood’s bill and ensure its speedy passage as part of this year’s tax reforms. Then-presidential candidate Donald Trump promised to end the historic aberration of double taxation. It’s time for him and Congress to deliver on that promise.

Sincerely,

Tax Fairness for Americans Abroad

P.S. If you are an American living abroad and support this campaign, please write or call your members of Congress to urge them to support the LaHood bill! Please also consider making a donation to this campaign, which, if successful, would allow you to finally invest your savings for yourself and your future instead of spending it on unnecessary accounting fees.

P.P.S. If you are an accountant helping U.S. citizens abroad, please don’t take this personally! We appreciate all the work you do for us, and are convinced that there will always be significant demand from Americans abroad even if the LaHood bill succeeds. That’s because there will be some Americans who choose not to opt out of U.S. taxation because they already benefit from a favorable bilateral tax treaty, do not yet qualify to opt out, or need help deciding which path to take.

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*Assumptions:

The figure of $2,500 is frequently mentioned as an average annual cost of accounting support for Americans who live abroad, and is way higher than what Americans in the United States spend on average. The figure comes from American Citizens Abroad and has been cited by the National Taxpayer Advocate (See footnote in the PDF of our Americans by the Numbers fact sheet).

Savings Account: 1.5% annual interest rate, compounded annually.

Stock Market: 11.5% average annual return, compounded annually.

Annual Contribution: $2,500 at the end of each year.