Paying Taxes Overseas & Back Home

I think you get a credit towards your US taxes for what you paid overseas.

It is complicated but historically there was a tax advantage to working abroad. I know you always received a tax for foreign taxes paid and addition breaks. Assume it is the same today. For example, I pay foreign taxes on some foreign investment dividends that I receive. That is always a direct off set to other US taxes owned on the dividends. Some individuals giving up citizenship are high net worth/income individuals who are looking for tax havens to reduce there total tax liability. Nothing to do with double taxation but rather trying to avoid even single taxation.

In the US corporate dividends paid to the individual are taxed. There is an argument made that this is double taxation since dividends are paid out of corporate earnings (profit) after taxes have been paid on the earning. If the dividends were not paid, then no additional tax would be collected so the act of distributing the profits to the shareholders should not trigger a taxable action - but it does.

So for anyone renouncing their US citizenship, I wonder if they kind-of already made that break long ago, and that the USA really hasn't been "back home" for them for some time? And presumably they have some other citizenship to fall back on, through marriage or other means, or they'd be an unauthorized - though rich - undocumented visitor in that other country.

I've seen a few articles lately on that sort of thing, and it appears that the I.R.S. has a long reach. I'm not sure if renouncing citizenship by itself will help to avoid paying taxes.

In general, with regard to income, I get a credit on my us taxes for the taxes I pay in Europe

James has it right, simply put. Also, AFAIK, the first $96,000 earned overseas is excluded. If an American citizen has an Italian employer, he/she pays taxes only in Italy on that up to $96K. If one has investments, pensions, Social Security income, one pays taxes in Italy on that and files in the U.S. for exclusion. The U.S. recognizes in each case that the taxes were paid so does not double-tax. I doubt that every country has such a reciprocal agreement. Renouncing citizenship does indeed stop the tax man on a this-point-forward basis. Note also that in Italy each person files as an individual, i.e., not as a married couple. This can be useful in keeping the tax rate down unless both have high incomes.

Taxes here are much higher than in the U.S. overall. Frankly, I cannot imagine turning my back on my country for the sake of taxes.

The think you might look into is if wages earned in a Foreign country are exempt from Social Security and Medicare taxes (FICA)as opposed to Income taxes. Certainly taxes paid for income in another country can offset income tax owed in the US, but SS and Medicare taxes/witholding are not refundable. Perhaps the "first $96K exemption" mentioned above covers this, but generally, to cover SS and Medicare if an employer is not kicking in is about 15-17%

As a dual citizen (and as an accountant) with financial interests overseas I can totally understand why an American living overseas would want to renounce US citizenship. Since the enactment of FATCA of 2010 the IRS and the Dept of Treasury reporting requirements for both individuals and foreign banks with US customers have become expensive and time consuming. Many Italian banks don't want me as a customer simply because I am a "US person". If you are an American living abroad you would have to deal with the same headaches as I do, or worse, and unlike me, who am living in America, they wouldn't even have a chance to enjoy the benefits of being a citizen since they don't live here.
To give you an idea of the reasons, read the two articles below, they are probably better at explaining the reason than I could possibly be in a post.

https://www.sovereignman.com/trends/americans-renouncing-us-citizenship-soars-to-yet-another-record-high-18134/

http://cnsnews.com/news/article/gabrielle-cintorino/tax-laws-pushing-americans-living-abroad-renounce-their-us

"The individuals giving up citizenship are high net worth/income individuals who are looking for tax havens" - That is not necessarily the case. It is usually people who are citizens of the country they live in, have lived there for years or decades and do not see why they should be taxed by a foreign country (the USA) they have not visited in years.
The USA is unique in taxing it's citizens for life, even if they leave the country permanently. It is also unique in giving citizenship to everybody who was born there, even if their parents are not US citizens and are only visiting temporarily.

A well publicised case is the mayor of London, Boris Johnson. His parents were temporarily living in New York when he was born, but moved back to the UK a few months later. The result is the US authorities are trying to tax him, 50 years later, on income in the UK. Details: http://www.theguardian.com/politics/2014/nov/20/boris-johnson-us-tax-bill

Chris F,

Charging Boris U.S. taxes when he's never lived there or earned income in the U.S. is absurd! Perhaps this is a ploy to get him to back off on the outstanding congestion charge bill owed by the U.S. Embassy?

U.S. citizens aren't the only ones renouncing their citizenship. As I recall, Gerard Depardieu renounced his French citizenship over high taxes and moved to Russia, with the help of Putin who expedited the immigration process.

"I think the OP needs to consult a tax attorney. "

Not really. The OP was simply asking how it worked, not asking for legal advise. Laurel, who is in a position to know how it works, answered him. The article in the Guardian said the same as Laurel.

How it's supposed to work and how it ends up working with your local tax office are two different things. I can assure you that I pay tax in both the United States and in France, with the tiniest of credits for my US tax paid, and it's quite brutal.

I have a friend who gave up her U.S. citizenship for precisely this reason. She's certainly NOT wealthy and not looking for any tax haven. just looking for a little relief.

Roberto's right, the IRS's handling of all this has discouraged many European banks from wanting to deal with Americans at all.

Oh just thinking about the whole thing will send me off so I'd better close this comment now!! I love my country but some of our laws are nonsensical!!

The problem with FATCA is that it is not just the individual US citizen that is impacted but close family as well. For instance a couple would have difficulty getting a mortgage if one of the partners has a US passport, the same for pension funds, joint accounts and so on.

It is also not easy to obtain another citizenship. For instance Tina Turner had to pass exams in Swiss history and advanced German before obtaining Swiss citizenship. In German she had to reach a level of B1 which is the level needed to conduct your everyday business through the language, so it requires a high level of commitment to achieve it.

Each US state has different tax requirements for expats as well. Some completely excuse you from state taxes and others, like the state I live in - California - make it very difficult to extricate yourself from tax liability. If you live in California you still are obliged to pay a certain level of taxes if you live overseas (based on income and other factors of course). To get out of paying them you have to liquidate all of your assets in the state, have no businesses, or other financial ties before they will consider you no longer a resident. You basically have to prove that you are leaving and never coming back!
We have friends, fellow Californians, who lived in France for quite a number of years. They didn't make enough to have to pay much US federal income tax but they still had a tax liability to the CA state government. In addition, France has a system where you pay a certain tax rate to them for the first few years you are there but if you stay longer, your rate increases dramatically and you have to pay fully into the French social system. It became too much for them so they ended up moving to Morocco.

Then, some of us live in states with no income tax.

Duke - I'd suggest contacting a Tax Professional