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 USD125,000.
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. Ö 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.