Planning on Living Overseas? Beware the Expats’ Tax Dilemma
It is true that I have an abnormal relationship with my two passports. They are revered like dual sparkling Hope diamonds, only more valuable. When traveling, I irrationally feel safer knowing they’re tucked away in my pocket. And when far from home, I flip the pages strolling down memory lane remembering those who shared my travels, or the years I spent abroad as an expatriate.
No doubt this abnormality is genetic: inherited squarely from my parents. It stems from the fact that I clearly remember the day my mother became naturalized when I was five. I also remember my father’s recounted story of the day he became a U.S. citizen shortly after World War II in a dusty little spit of a town in central Georgia. After proudly serving in the U.S. Army, he was ultimately buried in a VA cemetery. In my father’s case, that prized U.S. passport quite literally saved his life and those of his parents and siblings.
With this DNA double helix, I couldn’t possibly imagine a situation where I would ever even consider voluntarily giving up my treasured blue-and-gold. Though honestly, I admit that I am now more than just a bit shaken.
American expatriates — those U.S. citizens who live outside our borders — are a fairly unique lot with no one-size-fits-all or “average” expat. Some go abroad for work, some for love, some for adventure, some for a change of the usual and sundry, some to escape, and some, for reasons which include elements of all of the above. However, one common thread runs through the fiber of most expats: by default, they become de facto private citizen American diplomats, no foreign service examination required or taken.
It can take a few months, or a few years. Often it just creeps up on you without much visceral notice. You’re at a party and someone says something about the U.S. It could be cultural, social, economic, agricultural, or technical. All of a sudden, all heads turn toward you to respond. You may know didley squat about the Chicago futures market, where in the South okra grows, or why Las Vegas isn’t Nevada’s capital. However, you are certainly expected to know, or at least to opine on vast topics, some of which you could frankly care less. Moreover, one often finds oneself in the odd predicament of defending certain policies or politicians that you abhor or never voted for, simply because you are the only American present. And somehow, you are compelled to do it. It seemingly goes with the territoire.
Sometimes though, this simply cannot be done. The Foreign Account Tax Compliance Act (“FATCA”) approved in 2010, and amended several times, most significantly in 2014, was aimed at reeling in tax evaders and money launderers. It imposes strict reporting requirements on U.S. citizens with significant assets overseas. FATCA also requires that all foreign banks disclose to the U.S. government information on accounts held by Americans.
Collaterally, FATCA has resulted in American expats being denied bank and brokerage accounts, business loans and mortgages by foreign institutions that don’t want the burden of dealing with FATCA. Some have had their retirement accounts summarily closed by foreign banks unwilling or unable to comply. In some instances, expats have been compelled to disclose financial information about loved ones even if they are not U.S. citizens. This has resulted in many foreign spouses removing themselves from shared bank accounts. Often, foreign banks simply refuse to do any business at all with families where one spouse is an American expat.
This is not a tiny problem. To put it in context, there are around 6 million U.S. citizens residing abroad, many of whom live fairly ordinary lives on fairly ordinary foreign soil. The U.S. is one of the few countries in the world that has worldwide taxation. So if you are a U.S. citizen, regardless of what country you reside in or work, you are subject to U.S taxes.
Reigning in tax evaders, launderers, and those seeking to avoid the reach of our laws by funneling funds overseas, if proven to be factually true, is appropriate, logical, and sensible. However, what is totally inappropriate, illogical and not sensible is making life incredibly difficult, and in several cases making American expats obscenely vulnerable, in order to catch a few crooks.
In one case, a New Yorker married a German, and for the past 35 years lived in Germany with her husband and the couple’s three children. She was forced to keep all of the couple’s retirement funds in her husband’s name only in order to reduce the risk that the financial institution would close their accounts because she’s a U.S. citizen.
What a Morton’s Fork: put all of your assets in a non-U.S. spouse’s name to avoid financial ruin because of FATCA, or risk financial devastation if something happens to your non-U.S. spouse, or the marriage, for whatever reason, ends.
In another case, a U.S. citizen moved in 2001 to Switzerland following the dot.com bust and the loss of his California job. A now successful and employed homeowner there with a Swiss mortgage, after FATCA he was unable to secure additional financing for the purchase of a retirement home in Florida. Ultimately, he secured American financing, but he is now concerned that FATCA will adversely affect his long time Swiss mortgage on his primary residence.
As a result, many long-time expats are making the heart wrenching decision to give up their U.S. citizenship. That’s what the California dot-commer did and that is what the New Yorker is considering. I can barely imagine the turmoil and conflict in making such a decision.
Reducing tax fraud is important and commendable, but the net result of the FATCA legislation appears to be complete over-kill, akin to torching a 500-acre farm because a few marijuana plants were found. As former U.S. Supreme Court Justice Potter Stewart wrote back in 1964 in an entirely different context, “I know it when I see it.” A U.S. citizen residing abroad should not have to choose between giving up their American citizenship and otherwise possessing the normal financial relationships which we have come to expect following years of hard work, payment of taxes, and voting, even from afar. It also does not take into account that Americans residing overseas provide an invaluable and unpaid service to our country; that of private citizen diplomats in their host country. They may also often be the only American that some foreigners get to know.
These awful choices could have so easily been mine. I could have so easily stayed in France, Hong Kong or Japan, but for several reasons returned to the U.S. Although I love and trust my husband, without a doubt I would be utterly unable to throw caution to the wind and remove my name from our assets. I also love and cherish beyond measure my two U.S. Passports. Though given the choices these American expats and countless others have and will face going forward as mandatory compliance with FATCA becomes entrenched in their everyday lives, I can now say that had I been living abroad and in their shoes, I too, for the very first time in my life, would at least consider the possibility of permanently saying au revoir. Sorry folks.
Julie L. Kessler is a journalist, attorney, and the author of the award-winning memoir: “Fifty-Fifty, The Clarity of Hindsight.” Her work has appeared in several major publications, including The LA Times, The SF Examiner, The Asia Times, The Jerusalem Post, The Honolulu Star-Advertiser, Travel&Leisure and Money Inc among many, many others. She can be reached at Julie@VagabondLawyer.com.
