Message to financial planners: The rules are NOT the same for U.S. citizens living abroad

I have previously posted on the problem of investments that are effectively prohibited to U.S. citizens living outside the U.S.

The following comment which recently appeared at the Isaac Brock Society is (IMHO) deserving of a separate post. Amazing how helpful the Atossa article has been. Seems that all “Peter Dunns” are very helpful too.

Updated. You can follow the responses to this comment:


@ the other Peter Dunn – Thank you for inviting the original Peter Dunn on your program. Perhaps more people in America will learn that taxpaying US citizens who were proud to be Americans are being forced to give up their citizenship to survive.

As an American residing overseas who has elected to maintain US citizenship in spite of the business case against it, I would like to advise you to please, please, never give financial planning advice to an American who is planning a move overseas or resides overseas. You will have to relearn almost everything that you knew about financial planning advice.

The rules for overseas Americans are unnecessarily different and cumbersome. It is expensive to comply with them. Penalties for innocent errors are life altering. The rules have been designed to prevent high net worth US residents from hiding their wealth overseas. The rules have also been designed as tax concessions for particular US industries. The interests and realities of the average American who lives overseas has never been considered.

While you mention the Foreign Earned Income Exemption (FEIE) of USD 92,500 that probably makes US resident Americans salivate and wish they could get something like that, realize we need this because we are taxed in our countries of residence already. It is a way of preventing us from being taxed twice. If taxes are lower than in the US, it is likely there is some kind of consumption tax in that country (which we do not have in the US) and overseas US citizens need this exemption to be able to live at the same standard their local counterparts do.

The FEIE only applies to earned income. When it comes to investments, here is where many Americans who were residing overseas following the financial advice that was ingrained into them from their time in America have been creamed. Just a few of the ways are (and I repeat, these are only a few):

• Mutual funds – never ever invest in a foreign mutual fund as an overseas resident. It is not illegal, but in a 1986 concession to the US mutual fund industry, the paperwork was made so complex that it is difficult to do the calculations yourself. The IRS estimates that per mutual fund, the time needed is: Recordkeeping: 13 hrs., 37 min; learning about the law or the form: 8 hrs., 38 min; preparing and sending the form to the IRS: 9 hrs., 14 min. So you run up expensive accounting fees. Additionally, the mutual fund needs to be taxed as if you sold it each year which can mean that you pay tax on phantom gains.

• Forget about retirement planning by joining a tax free retirement plan in your country of residence. The US does not recognize the tax free nature of foreign IRAs. So you get taxed on it every year by the US and taxed on it when you finally take the distribution by the country you reside in.

• So now you say, well then just invest your money in the US. Thanks to the Patriot Act and Know Your Customer rules, many overseas Americans are having their US bank accounts closed because they have a foreign address. Being a US citizen does not help you to obtain or keep a bank account in the US.

• Report every foreign bank account, life insurance policy, debit card (including foreign pre-paid phone cards and supermarket customer cards) and its highest balance to the IRS. This will also eat up your time in record keeping.

• If you make a reporting error with respect to your bank accounts and do like many hapless overseas US citizens did during 2010 and 2011 and follow the recommended procedures for correcting the omission, you will be told that the current policy is to treat anyone who makes this kind of mistake as the equivalent of a US resident tax evader and you will be expected to pay 5% to 25% of your overseas assets (and an overseas US citizen may only have foreign assets) – even when there is no tax loss or minimal tax associated with the error.

To add insult to injury, due to citizenship taxation, many foreign citizens who find that they have a US parent or even grandparent, even though they have never lived in America and have never requested any of the services supplied to US citizens, are now being told by the IRS that they are considered US citizens and their penalty for not knowing this will be to give the IRS 5% of all their life savings and all will be fine and good.

Amanda Klekowski von Koppenfels from the University of Kent, Brussels, has recently done a study of overseas Americans to find out more about them. She surveryed over 800 overseas Americans and found that the main reason they are overseas is because of their partner or their family. The second reason is employment. Americans overseas are mostly overseas because of family or work, not to evade taxation.

Citizenship taxation is bad policy. It is hurting decent tax paying law abiding US citizens who happen to reside overseas. It if forcing many to take actions they never thought they would take. As one recent renounciant told the State Department official when he told her she was no longer American, “I will always be American. I will always carry that with me. I am just no longer an American citizen.”


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