Imagine the following two people:
We are comparing “Homelander Ted” to “Expat Benedict Arnold”.
Assume that “Homelander Ted” lives and works in the Homeland and purchases in ONLY U.S. dollars. He would not consider using any other currency.
Assume the Expat Benedict Arnold” (having escaped from the Homeland) lives and works in Canada and purchases in ONLY Canadian dollars. He would NOT consider using any other currency.
Assume that each of “Homelander Ted” and “Expat Benedict Arnold” own a home in their respective countries of residence, have employment income, engage in personal finance which includes retirement planning. “Homelander Ted” commits “personal finance” ONLY in the Homeland. “Expat Benedict Arnold” commits “personal finance abroad”.
Assume that “Homelander Ted” and “Expat Benedict Arnold” have financial situations that are comparable in their respective countries of residence.
To be specific both of them:
1. Have a principal residence in that they have owned for more than two years and that was sold on November 30 of the year. Assume further that there was NO capital gain measured in local currency. Assume that the sale included a discharge of an existing mortgage and that interest was paid on the mortgage up to the November 30 sale. Assume further that they each carry a “casualty” insurance policy on the property.
2. Have employment income and have pensions provided under the terms of their respective employment contracts.
3. Have and use mutual funds as a retirement planning vehicle.
4. Have a 401(k) plan in the USA and an RRSP in Canada.
5. Have spouses and must consider whether to use the “married filing separately” or the “married” filing category. “Expat Benedict Arnold” is married to an “alien”.
6. Give their respective spouses a gift of $500,000 on January 1 of the year.
U.S. Tax owing – versus TAX MITIGATION PROVISIONS
Assume further that each of “Homelander Ted” and “Expat Benedict Arnold” each prepare a U.S. tax return. Imagine that the Internal Revenue Code does NOT have (TAX MITIGATION PROVISIONS) either the Foreign Earned Income Exclusion (Internal Revenue Code S. 911) or the Foreign Tax Credits (Internal Revenue Code 901). Imagine further that there is no U.S. Tax Treaty that mitigates tax payable to the USA under these circumstances.
The question is how much tax “Expat Benedict Arnold” would be required to pay the U.S. Government if there were no TAX MITIGATION provisions.
How likely is that without the TAX MITIGATION PROVISIONS that the “Expat Benedict Arnold” would be required to pay HIGHER U.S. taxes than “Homelander Ted”. In other words:
Does the Internal Revenue Code:
First, impose higher taxes on “Expat Benedict Arnold” for the crime of committing “personal finance abroad“?
Second, mitigate those higher taxes through one of the TAX MITIGATION PROVISIONS described above?
Are U.S. Taxes (not including foreign taxes) actually higher for Americans abroad than for Homelanders?
Please consider the questions (without considering tax paid by “Expat Benedict Arnold” to Canada) in the following poll: