Yet another reason to renounce U.S. citizenship: Medicare tax on unearned income

Obama's 3.8% tax on unearned income - it's true!

The situation is indeed dismal. I don’t understand everything in the following article,  but I can see that this is going to:

1. Add more bureaucracy and cost to filing your U.S. tax return – it is not clear how this is intended to impact expats (if they are considered at all);

2. Clearly interfere with your ability to invest and plan for retirement. The U.S. has become a nation of forms and bureaucracy.

The U.S. government is aliready taxing unearned and undistributed gains when it comes to PFICs (and perhaps more). Stop for a moment and think what this means. The idea behind income taxation is that a certain percentage of what you receive as INCOME is to go to the government as your contribution toward running the government. In its most simple terms, this means that (imagine a tax rate of 20%) that if you receive $100 then $20 goes to the government. The taxpayer does not receive all of that he was paid. When it comes to taxing “unearned income”, one needs to ask the following question:

Where does the money come from to pay the tax? In some cases, it could mean the forced sale of the asset. Let’s consider the following theoretical example:

You own a $100 of stock. The value of the stock increases to $150 during the year. You have a gain of $50 that has not been realized. If the stock were to be sold, then you would have a profit of $50. That $50 would be taxed as income. To tax the “unrealized gain” is to pretend that the stock has been sold, even though it has not. If the government is to tax that $50 at a rate of 3.8% that means that one would have to pay a tax of $3.80 per $100 of unrealized gain or $1.90 on the $50. This might not sound like much, but one must ask: where does the $1.90 come from? If the gain is realized, the money (at least in theory) exists to pay the tax. But, if the gain  is not realized, there is no obvious source of revenue from which the tax can be paid. In theory, this means that the asset could/would have to be sold to generate the money to pay the tax. In addition, you can bet that 3.8% is just the beginning. In addition,  this kind of tax provision means that people will spend more time on tax planning than on investment analysis. For example, if unearned gains are taxed, this means that a rational investor would favor income producing investments over growth investments (that pay little in the form of dividends). In fact, it would be dangerous to your financial health to invest in assets that grow in value. This is fatal to an economy that depends on growth.

Finally, it is obvious that a tax on unearned income is a form of  “class warfare” – Let the rich pay! But, it is not the rich (whatever that means) who will pay. (What it really is: Let’s make those who invested their money rather than spent thier money pay.)   When it comes to tax: everybody should pay. If more money is needed to fund Obamacare, then there should be a general tax increase to pay for it. Perhaps, you enact a national sales tax. If everybody, benefits from Obamacare then everybody should pay. (By the way compliance with Obamacare is to policed by the IRS – creating another frightening level of bureaucracy.) It is immoral,  unjust and bad economic policy to  force those who invested, to empty their retirement accounts to pay for Obamacare (sound familiar?).  Furthermore, Congross should not  hide this tax increase in a piece of legislation (just like what was done in FATCA). You may recall that Nancy Pelosi famously announced that (rather than read the legislation) that Obamcare should be passed so that the American people could learn what was in it. Tax increases are serious business and should be:

1. Announced and understood by everybody; and

2. Affect everyone.

The democratic process has  become a game – the purpose of the game is to force somebody else to pay your bills. This is not just a problem in the U.S. However, the level of obfuscation and corruption in the U.S. is without precedent in the modern world.

 In any event, have a look at the following article. After having read the first two paragraphs you will see that it is essential that you get out of the U.S. tax system. To remain a U.S. citizen and stay in the U.S. tax system will:

– force you to pay taxes on gains you have not received  (where does the money come from for this);

– force you to spend too much time thinking about taxes.

It is clearly time for the people to take the government back from the political parties.

It’s clear that when it comes to U.S. public policy, there’s:

Dumb, dumber and Obama!

Read the following and then attempting to understand it, go out and pay some parisitic accountant or lawyer (who probably doesn’t understand it either) to explain it to you.

“Planning for the New 3.8% Medicare Tax on Unearned Income


by Karl L. Fava, CPA, CVA, MBA, and Kenneth L. Rubin, CPA 
Published July 01, 2011

Effective in 2013, the Health Care and Education Reconciliation Act of 20101 will subject some individuals to a 3.8% Medicare contribution tax on unearned income. This new tax will apply to single taxpayers with a modified adjusted gross income (MAGI) in excess of $200,000 and married taxpayers with a MAGI in excess of $250,000 if filing a joint return, or $125,000 if filing a separate return. The provision is contained in new Sec. 1411, Unearned Income Medicare Contribution. Congress added the provision as a means of raising revenue to pay for health care reform. It targets wealthier taxpayers, as can be seen by the thresholds at which the tax applies.

MAGI is defined as:

adjusted gross income increased by the excess of—

(1) the amount excluded from gross income under section 911(a)(1), over

(2) the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) with respect to the amounts described in paragraph (1).2

For most individuals, MAGI will be their adjusted gross income unless they are U.S. citizens or residents living abroad and have foreign earned income. The tax is equal to 3.8% of the lesser of net investment income or the amount by which MAGI exceeds the threshold.”

Read the complete article here.


7 thoughts on “Yet another reason to renounce U.S. citizenship: Medicare tax on unearned income

  1. Petros

    So called unearned income is an easy target for class-envy mongering politicians. It is not surprising. One can of course set up a business, like a corporation; then pay yourself a “salary”. I’m set up to do that. But of course, this too is found to be illegal and you have all kinds of filing requirements. So good thing I ain’t victim any more. I’ve relinquished my citizenship. My corporation is now free of all filing requirements.

    Alternatively, if you have a spouse who is not US citizen, he or she can set up the holding corporation for investing, and then pay yourself a salary from the unearned income. That then falls under the earned income exclusion. But there are restrictions. You’re not supposed to be an officer in the corporation (I think) and you can’t own 10% or more. But gosh, if you make a mistake on any of the rule, their ready to take your life savings, throw you in jail, and throw out the key. Because their crooks in Washington D.C. and they have nothing better to do than threaten Americans living in foreign countries, while the politicians and their buddies divide the spoils. The US federal government has become the most corrupt government in the history of the world.

    1. renounceuscitizenship Post author

      Thanks for your comment – have rewriten and added to this. It is reached the point where one must choose between:

      – having a life; and

      – being a citizen of the United States of America

      One cannot be both.

      I don’t know why the people inside the country can’t see this.

  2. CA Freeb

    Every red cent that ever comes to you whether it is from inheritance, a lemonaide stand, or you find a dime on the sidewalk is going to have to go on some form and be taxed. Soon your children will have a tax I.D. number so their allowance can be taxed. I only think I’m joking there because given the recent way this government is behaving on these matters I don’t think I’m far off at all. And if your child is a foreign person the tax will be higher.

    1. renounceuscitizenship Post author

      “foreign” person – the nation that was built on the backs of so called “foreign persons” is very suspicious of them. From the perspective of the U.S. – all “foreign persons” want a Green Card. By the time this is over the U.S. will be the least desirable country for immigration. Consider the way that OVDI and FBAR have affected U.S. immigrants. Consider how turning in your Green Card will trigger the 877A exit tax. Consider the inability of the U.S. to pay for Social Security, etc. Consider how (as in the case in many Western countries) there are not enough younger people to support the older people.

      Prediction: Within a decade the U.S. will be offering a tax holiday to those “foreign” potential immigrants to get them to even consider coming to the U.S.

      1. renounceuscitizenship Post author

        Funny, just came across this interesting editorial in the Toronto Globe and Mail:

        (The comments to this article are interesting and worth reading.)

        The editorial discusses Newt Gingrich’s plan to possibly make U.S. illegal immigrants legal. He assumes that they all want to be legal. To be “legal” makes them a U.S. person for tax purposes – has anybody considered that many of these illegal immigrants are perfectly happy to remain illegal. If any of them know about the effects of FBAR and OVDI on legal immigrants to the U.S., these sol called “illegals” may be perfectly happy to remain illegal. See:

        The article ends with the following:

        “It is unhealthy for any country to have millions of people living in legal limbo. Mr. Gingrich is right not to play down his concern with this issue, and (if he wins his party’s nomination) not to wait until the general election to raise it. A fair settlement will be reached only if public opinion is won over. Mr. Gingrich is contributing toward that end by persisting in arguing for the regularization of the status of millions of otherwise law-abiding people.”

        Let’s delete everything in this paragraph except the first and last sentences. We are left with:

        “It is unhealthy for any country to have millions of people living in legal limbo. Mr. Gingrich is contributing toward that end by persisting in arguing for the regularization of the status of millions of otherwise law-abiding people.”

        Can any U.S. expats caught up in the IRS reign of terror relate to this?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.