While the annual tax season can be stressful for filers, the burden is even greater for Americans overseas. About 9 million US citizens live abroad, the US Department of State estimates. Nearly a quarter of U.S. expats are "seriously considering" or "planning" to renounce US citizenship. For those looking to renounce citizenship, more than four in 10 said it was because of US tax filing requirements.
US expats pay US income taxes each year, where they have to report their worldwide income such as wages, benefits, rental income, business profits, etc. US citizens and resident aliens must file their taxes and pay their debts, no matter where they live. The rule means expats may have to file and pay taxes in two places.
Despite the IRS providing mechanisms, including foreign income exemptions and tax credits, many expats are still overwhelmed by reporting requirements. In fact, about two-thirds of US citizens living overseas believe they don't need to file US taxes.
"It can get very complicated very quickly," said Olivier Wagner, founder of 1040 Abroad.
Once the foreign account balance exceeds $10.000, the expat must file a foreign bank report and financial account, known as the FBAR, with the Treasury Department.
Some expats may also be required to disclose foreign financial accounts, such as savings and investments. For example, let's say someone has $5.000 in savings and $4.975 in investments. If their investments increase to $5.025 at any time during the year, they will need to report their accounts.
The so-called FBAR deadline is April 15, but those who miss it get an automatic extension until October 15. In addition to the FBAR, some foreign nationals with accounts over a certain limit may be required to file Form 8938, which is designed to deter tax evaders with overseas accounts.
The threshold for Form 8938 is over $200.000 for a single filer at the end of the year (over $400.000 for married couples filing together) or $300.000 for balances during the year (over $600.000 for couples filing together).
In addition to the greater reporting burden, many expats are frustrated with the US government. In the long run, the coronavirus pandemic may prompt some to stay abroad, with 60% of them disagreeing with their government's approach. In addition, many US citizens feel that the US government does not represent them fairly.
"In the end, many expats just want to live a normal financial life,"Olivier Wagner said. “I think it’s safe to say that the vast majority of Americans living abroad are what we consider middle class. We’re not talking about billionaires living on yachts."
Relinquishment of US citizenship remains uncommon in absolute terms, but it has become more frequent than relinquishment of the citizenship of most other developed countries. Between three thousand and six thousand US citizens have relinquished citizenship each year since 2013, compared to estimates of anywhere between three million and nine million US citizens residing abroad.
The number of relinquishments is up sharply from lows in the 1990s and 2000s, though only about three times as high as in the 1970s. Lawyers believe this growth is mostly driven by accidental Americans who grew up abroad and only became aware of their US citizenship and the tax liabilities for citizens abroad due to ongoing publicity surrounding the 2010 Foreign Account Tax Compliance Act.
Between 2010 and 2015, obtaining a CLN (Credit-Linked Note) began to become a difficult process with high barriers, including nearly year-long waitlists for appointments and the world's most expensive administrative fee, as well as complicated tax treatment.
Legal scholars state that such barriers may constitute a breach of the United States' obligations under international law, and foreign legislatures have called upon the US government to eliminate the fees, taxes and other requirements, particularly with regards to accidental Americans who have few genuine links to the United States.
If you are struggling to file your US taxes each year, then it is wise to hire a specialised US tax advisor. These experts can help you to understand what your tax obligations are depending on your personal situation.