There has been much speculation among American expat groups
about how the recently
passed US tax rebates / stimulus will impact Americans living outside of
the United States. After all, the US claims the right to tax based on
citizenship rather than residence – so shouldn’t the US provide tax rebates
based on citizenship as well? As you will see in this post, the complexity
introduced by taxing non-residents is not well understood, even by the tax
writing committees in Congress. There appear to be some unintended consequences
in this bill – though for once, some of these consequences benefit rather than
harm non-resident US citizens. All the
more reason for US tax rules to stop at the border – like every other country,
the US should tax on the basis of residence and source, not citizenship.
Many Americans abroad have non-American spouses. While most
will file their US taxes as “Married Filing Separate”, many find it advantageous
to take advantage of the election available under §6013 (g) to
file a joint return with their nonresident alien spouse. Making this election
means that the spouse agrees to be taxed by the US on their worldwide income. Certainly,
that ought to be sufficient to qualify for the $1200 stimulus payment as a US
taxpayer? But no, the §6013(g) election treats the spouse as a US tax resident
for the purpose of computing tax, but not for the stimulus payment.
Another issue that I haven’t seen any analysis on is the
interaction of this credit with the Foreign Earned Income Exclusion (FEIE). My
take is that, since the FEIE reduces Adjusted Gross Income (AGI), and the CARES
Act rebate is phased out at higher levels of AGI, taking the FEIE would
increase the amount of CARES Act rebate. Someone earning more than US$75,000
can exclude foreign earned income, reducing AGI below US$75,0000. I haven’t
seen any analysis of this, but if I am correct, then I’m sure this is an
unintended consequence – but an example of an unintended consequence that actually
favours expats.
US expats will also have to consider how this payment will
be treated by the tax authorities where they live. This may vary country to
country. Some countries may treat this as a tax credit, reducing any US tax
available as a credit against local country income taxes, while others may
treat it as taxable income. Best to consult a qualified tax adviser where you
live.
The bottom line is that the US government should be taking
care of the US economy – not the economies of the countries where US citizens happen
to live. US tax rules should stop at the US border – for both tax liability and
for tax benefits. And, for those who have been sitting on the fence, worrying
about whether they should start complying with US tax law when they are a tax
resident of another country, the stimulus payment will barely cover their
compliance costs – and certainly won’t cover their losses going forward due to
both compliance costs and the cost of
opportunities lost.
From my earlier post on Facebook:
President Trump has now signed the CARES Act, and there is much speculation on how this impacts tax-compliant US expats.
I’ve had a quick read of the relevant portion of the legislation and here’s how it works in a nutshell:
The bill creates a new refundable credit for 2020 tax returns with an advance refund of that credit now (or as soon as the IRS can implement it). This means that eligible taxpayers will receive a refund now from the IRS, then on their 2020 tax return they show the credit reduced by the payment they receive now. The credit is available to US citizens and residents with social security numbers and does not appear to be contingent on having any taxable income.
The amount sent out now is based on the numbers in your 2019 tax return (or 2018 if 2019 hasn’t been filed). Those collecting Social Security who do not have a US tax filing obligation will also receive payments based on the amounts shown on Form SSA-1099.
If your income in 2020 qualifies you for a larger credit than what you receive this year, then you get the additional amount when you file the 2020 return. If your income in 2020 qualifies you for a smaller credit than what you receive now, then the net credit you show on the 2020 return is zero (not negative) – that is, you don’t have to pay back the excess.
So – if you’re not currently in the US tax system, what does this mean for you? The amount of the rebate may be just enough to pay for filing under the streamlined program – but once you file, you are in the system and continued compliance will add costs (not just compliance costs, but the opportunity costs of not being able to invest or save in the same ways as other Aussies). If you’re a temporary expat – planning on returning to the US in future – then this may present a good opportunity to come into compliance. If you’re a permanent expat, then you should be very wary of entering into the US tax system, even with the promised tax credit.
