WHAT WE ARE FIGHTING FOR: Tax Relief for Americans Abroad in the 2021 Budget Reconciliation Bill

Americans abroad need action from Congress to eliminate double taxation, remove barriers to banking, saving and investing and simplify filing. We have been talking to Congress for many years about a switch to Residency Based Taxation (RBT). Americans abroad won’t be taxed fairly and on a par with the rest of the world until we have RBT.

Work is on-going on a model to introduce RBT that would provide lasting relief to Americans abroad and not create tax loopholes. We support that work wholeheartedly, as RBT is still the goal that Democrats Abroad has in it sights. We commit to continuing the work to persuade Congress to embrace RBT, but we cannot let this critical year for ground-breaking legislation finish without achieving some practical, consequential tax relief for Americans abroad.

We believe Congress can adopt and enact these reforms for Americans abroad this year. 

A FILING MODIFICATION FOR AMERICANS ABROAD WHO OWE NO TAX

Democrats Abroad proposes a short form certification for Americans abroad who owe no U.S. tax to greatly simplify filing

  • Americans abroad bear onerous tax compliance responsibilities, facing taxation firstly by their country of residence and then by the U.S.
  • Filing taxes from abroad requires understanding and navigating the convergence of the U.S. and a non-U.S. tax system, including bilateral tax treaties and totalization (social security) agreements.
  • Filing from abroad is inordinately complex and IRS support is vastly insufficient to enable Americans Abroad to easily comply.
  • Nearly 60% of Americans filing from abroad pay tax return preparers to complete their U.S. reports and returns. More than 60% pay more than $500 for tax return preparation services, in some case much more. This compares to the U.S. average of $175-$275.
  • Most Americans filing from abroad hire the services of expensive tax return preparers to produce returns that commonly show they owe no U.S. tax.[1]
  • The IRS has already established categories of Americans who do not have to file at all.
  • This proposal has the purpose of greatly simplifying filing for those who clearly owe no tax: filers with ordinary income, taking the standard deductions and FEIE and claiming Child Tax Credits and credits for foreign tax already paid. They can prepare an annual, short form certification declaring these amounts.
  • This reform has no revenue impact but will save the IRS resources that it would otherwise employ to support Americans abroad to maintain U.S. tax compliance.

A GILTI TAX EXEMPTION FOR AMERICANS ABROAD WITH INCOME UNDER $400,000

Democrats Abroad proposes an exemption from the GILTI tax for American business owners abroad with income under $400,000.  

  • Although GILTI tax was designed as a tax on the profits of the overseas subsidiaries of large U.S. multinational corporations, it also, unfortunately, applies to the small to medium size businesses of ordinary Americans living, working, raising families and retiring abroad.
  • GILTI has been implemented inequitably from the start, with corporations entitled to offsets, deductions and discounts inaccessible to individual small business owners. Most report a tax rate greater than 21%.
  • The complex formula to calculate GILTI tax suggests that it was never intended for the profits of small businesses.
  • Due to GILTI Tax, U.S. tax compliance costs increased by more than 20% for most of the small to medium size business owners in the study.
  • The U.S. Treasury’s retroactive regulatory relief is very expensive to access and so has provided support to very few of those for whom it was intended. DA’S 2021 research suggests fewer than one in four are taking the Sec. 962 election relief.
  • Most Americans abroad with small businesses hit by GILTI Tax are ordinary working class people raising families and saving for the future.
  • GILTI Tax and tax compliance is putting pressure on the small businesses of Americans abroad that does not exist for the businesses they compete with. 7% of responses were from Americans abroad who closed or sold their business because of GILTI Tax.
  • An exemption from GILTI tax for American business owners abroad with income under $400,000 will protect them from the GILTI tax increases expected to be included in the 2021 Budget Reconciliation Bill.
  • This is in line with the government’s ambition to create tax policy that ensures large corporations and the wealthy pay their fair share and protects Americans with income under $400,000 from tax increases. 

UPDATES TO FOREIGN FINANCIAL ACCOUNT REPORTING

Democrats Abroad proposes updates to the Foreign Financial Account Reporting requirements for Americans abroad to ease compliance and improve tax enforcement focus on bad actors.

  • FBAR is the report that Americans use to disclose their foreign financial accounts.[2] Rules guiding the implementation of FBAR reporting have not been adjusted since the provision was enacted in the Bank Secrecy Act of 1970 (BSA).
  • Court cases involving FBAR violations are not rare; FBAR is clearly instrumental in the apprehension of those using unreported offshore accounts to hide assessable income. The perpetrators, however, are invariably citizens living inside the U.S. rather than living abroad.
  • Americans abroad need financial accounts in their country of residence to pay their bills and save for the future. It is clear Americans abroad are not using those accounts for nefarious purposes. The same cannot be said of U.S.-based Americans who hold accounts offshore.
  • The FBAR’s $10,000 reporting threshold has been set at the same level for more than 50 years.[3] We recommend the FBAR implementation rules be amended to adjust the reporting threshold for inflation and include annual CPI adjustments.
  • We also recommend that the IRS establish a separate reporting threshold for Americans living abroad. Retaining the existing threshold (with CPI adjustments) for U.S.-based holders of foreign financial accounts keeps the report’s focus on bad actors. Creating a higher reporting threshold for Americans who live in the places where they hold foreign financial accounts is a very reasonable, common sense reform.[4]
  • Many Americans abroad file both an FBAR report and a FATCA report. They provide the exact same foreign financial account information annually to two agencies of the very same U.S. federal government department. This is not a reasonable demand and we ask the U.S. Treasury to eliminate the duplication between the FBAR and FATCA reports for Americans abroad.
  • To ease and improve compliance we ask that the U.S. Treasury 1) restore the option to submit paper FBAR filings, for those who lack computers, computer skills or reliable internet connections, and 2) provide for FBAR reporting in Spanish and other languages.
  • Importantly, we ask for modification of the out-of-proportion penalties for non-willful failure to file FBAR disclosures of foreign financial accounts. Filing is not easy (and, due to technology inaccessibility, is not possible for some) and advice about filing has been inadequate, causing many to be out of compliance. Conversely, the fines for non-wilful compliance lapses are inordinately high and unfair. Modifications are needed.
  • Further, we re-affirm our long-standing support for the Overseas Americans Financial Access Act, which would exempt from all FATCA reporting the foreign financial accounts of Americans abroad in the countries where they live. Tax cheats to not hide assessable income in countries where the live and already pay tax.

These reforms are consistent with the Build Back Better vision:

  • They facilitate access to essential banking services and so help create the financial and social infrastructure necessary for Americans to create opportunities for themselves and their families;
  • They can be modified to exempt certain individuals from eligibility and ensure they enhance existing tax enforcement mechanisms.
  • They will focus policy on bad actors and provide relief to those who have long suffered unintended adverse consequences.
  • They help everyone to pay their fair share.

DEMOCRATS ABROAD TAXATION TASK FORCE

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[1] 60% of Americans abroad have income under $100,000. Overseas residency makes them eligible for the Foreign Earned Income Exclusion ($108,700 in 2021) and for Foreign Tax Credits for tax already paid.

[2] Americans abroad with account balances in foreign financial institutions that exceed $10,000 report their foreign accounts on the FBAR form submitted through the FinCEN FBAR reporting portal.

Americans abroad with account balances in foreign financial institutes that exceed $250,000** report the same foreign account information to the IRS on Form 8938, pursuant to the Foreign Account Tax Compliance Act (FATCA). FATCA is a double-disclosure regime; foreign financial institutions that bank Americans abroad also report this information to the IRS.

[3] If the FBAR filing threshold had been indexed for inflation then the reporting threshold would now be around $90,000.

[4] In fact, the IRS has already implemented a bifurcated reporting threshold for FATCA foreign financial account reporting. The FATCA reporting threshold is set at $50,000 for U.S. based Americans with foreign financial accounts, and at a level five times higher for Americans abroad.