Call To Cut Double Taxation Of Americans Resident Abroad
Monday, December 9, 2013
American Citizens Abroad (ACA) has written to the United States Treasury Secretary
Jack Lew, and other interested stakeholders in the Treasury Department, the
Internal Revenue Service and Congress, calling for a correction to "what
appears to be a drafting oversight in the preparation of the Affordable Care
Act that leads to double taxation of Americans resident abroad."
Firstly, it has been found that the 3.8 percent Net Investment Income Tax (NIIT),
or Medicare contribution tax, which is to be imposed against individuals, estates
and trusts on their investment income, will not be able to be reduced by the
application of foreign tax credits, and Americans resident abroad whose income
reaches the tax's thresholds would be required to pay NIIT over and above all
foreign taxes already paid on the income.
Furthermore, as the threshold amount for individuals is only USD125,000 for
married taxpayers filing separately, it is said that the NIIT threshold will
be reached by many Americans living abroad and married to foreigners.
"It is all the more exceptional and contrary to normal tax practice in
that these taxes finance the health care programs in the US, which Americans
abroad do not access, as their health care is covered in the country of residence,"
the ACA adds. "In the final drafting of the Affordable Care Act, the specific
situation of Americans resident abroad was recognized as the law states that
Americans resident abroad are not subject to the penalty in the law for not
having a US health insurance plan."
The 0.9 percent Additional Medicare Tax is also part of the revenue raising
measures of the Affordable Care Act, and applies to an employee's wages and self-employment
income subject to the Federal Insurance Contribution Act (FICA). It is imposed
on Americans resident abroad, and it is not clear in its regulations if it may
be attenuated by the Totalization Agreements that the US has completed with
other countries for the purpose of avoiding the double taxation of income with
respect to social security taxes.
However, it is noted in the letter that, even if the Totalization Agreements
do apply to prevent double taxation, such agreements exist with only 24 countries,
and will not therefore apply to many Americans resident abroad, particularly
since the threshold for "married filing separately" is, again, only
The ACA concludes that the required contribution to US FICA taxes, particularly
by self-employed Americans abroad, "leads to double taxation for many,
putting American entrepreneurs abroad at a significant competitive disadvantage.
… Americans abroad are subject to similar if not higher FICA type taxes
in the country of residence. How can American entrepreneurs be competitive with
more than 30 percent FICA type taxes?"
Therefore, the ACA requests that, when Treasury finalizes the relevant regulations,
it should allow Americans abroad to apply foreign tax credits against the NIIT,
while they should also be exempted from the Additional Medicare Tax. If the
corrections require legislation, the ACA asks Treasury to encourage Congress
to adopt legislation accordingly.