Monday, January 28, 2013

Expatriates And The New ObamaCare Taxes

What is our government going to do next to U.S. expats?

An expat is an American who lives – and possibly works – overseas. An expat has domiciled in a foreign country. How does this happen? One easy way is the military or foreign service. One has reason to be overseas, enjoys the lifestyle and develops roots in another country. I have family, for example, that are unlikely to return to the United States. Why would they? They have lived overseas for decades.

Remember the 3.8% ObamaCare tax on net investment income? This one applies if you are single and have over $200,000 of income or are married and have over $250,000. It is an additional tax on your “investment income”, a term that is still being defined. For our purposes, let us just say that it includes interest and dividends.

A quick example. You are American, single, live and work in Canada, make $200,000 and have $40,000 in dividends. First, congratulations, even though you are a bad person for being successful. Second, the additional ObamaCare tax on your dividends will be $40,000 times 3.8% or $1,520.

You say to me: Steve, my taxes in Canada are higher than in the United States. I know that the U.S. allows a foreign tax credit. Since I paid Canadian tax, I should get a dollar-for-dollar credit. I won’t owe anything, right?”

For many years that would have been right. It appears that it is no longer right, however.

The reason is that the ObamaCare 3.8% tax may not be a “creditable” tax. That means that the foreign tax credit cannot reduce it. It appears that you will be writing a check to Uncle Sam for $1,520, no matter what taxes you paid Canada.

What a mess for American expats.

Since we have waded into these waters, let us also mention the additional 0.9% Medicare tax. That tax also applies at $200,000/$250,000, but it applies to your earned income. Think salary and bonus.

Here is the problem: the United States has a totalization agreement with 24 countries (I believe) to sidestep expats paying into two national retirement programs. There is a totalization agreement between the U.S. and U.K., for example. You will pay U.S. social security or U.K. national insurance, but not both. If the 0.9% were actually a “Medicare” tax, then it would (likely) be picked up under the totalization agreement. An American expat subject to U.K. national insurance would then not be subject to the ObamaCare 0.9% tax.

But then ... who knows for sure? There is no coherence to this rave, other than Washington’s ongoing obsession with taking more of your money. This is not a healthy system. 

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