An American in Germany feels the oppressive impact of U.S. double taxation

“The U.S. legal regime is not about catching “fatcat” evaders. Ordinary middle-class expats like me, who do not have the wealth to hire top-rate accountants, tax lawyers, and structure sophisticated offshore accounts and trusts, are the ones being squeezed.”

— Tendai Mukau

Dear Members of Congress,

I am a U.S. citizen originally from California’s 52nd district, where I still vote. Five years ago, I moved abroad on a one-way ticket to pursue my longstanding dream of making Europe my new home. Since then, I have become a German citizen, hold an elected position in my domestic party, and intend to make Europe my permanent home. Despite the fact that I draw upon no services in the United States, spend nearly no time there anymore, have no plans to move back, diligently paid my U.S. taxes while living in America, and now already pay exorbitant taxes in Germany – higher than I ever paid in the U.S., I’ve now experienced the consequences of the mere “crime” of being born a U.S. citizen living outside the U.S.: endless tax compliance headaches and even double taxation.

The U.S. government’s tax system is designed to punish American expats with the goal that we never come out ahead. Far from protecting citizens or ensuring fairness, “our” government which allegedly protects our interests, guarantees that Americans abroad always pay the most locally—and then lose any benefit from tax-advantaged rules in their new countries. Essentially, it ensures that we always have the worst of both worlds.

For context, Germany’s average personal tax rate is significantly higher than the effective tax burden on a median U.S. household and I pay nearly half of my income in taxes and social contributions (the U.S. overall collects far less tax relative to GDP than European countries). In other words, I did not move abroad to dodge taxes; if anything, I pay much more here. Yet the U.S. still insists on taxing me too, piling one tax system on top of another.

The U.S. legal regime is not about catching “fatcat” evaders. Ordinary middle-class expats like me, who do not have the wealth to hire top-rate accountants, tax lawyers, and structure sophisticated offshore accounts and trusts, are the ones being squeezed. Tax treaties are supposed to prevent double taxation, but they have a big loophole: a “saving clause” that lets the U.S. tax its citizens as if the treaty didn’t exist. Practical result: if Germany doesn’t tax something, the U.S. will – with no offset.

Worst of both worlds

A practical example well illustrates the point: Under German law, while I certainly pay far more (short-term capital gains are taxed under the hyper-progressive earned income regime plus solidarity tax in addition to a host of other additional taxes), personal digital currency gains are (at least for now) remarkably tax-free if the asset is sold after a holding period of more than one year. The United States, by contrast, treats cryptocurrency as property and taxes capital gains regardless of holding period. What does this mean? The U.S. Treasury sees long-term digital asset gains as a tax-free “loophole” allowing them to disapply the general provisions of the Germany-USA DTA to tax them. The U.S. says, “You’re not taxed there? Pay Uncle Sam.” The German Finanzamt’s perspective is that they are not taxable and thus no tax credit is applied.

A fair and civilized system would at least allow a tax credit of taxes paid in one country to another, but in this case it does not exist. I am therefore paying enormous tax and social contributions on my income, and that taxed income is subject to additional domestic tax and social contributions when invested or used to purchase goods and services (19% VAT), and I also face additional U.S. government tax, to the point where the near majority of my hard-earned labor merely finances one government or another. Had I at least been a German without U.S. citizenship, I’d be subject only to Germany’s exorbitant tax rates; but because I am an American abroad, I get two bills for the same tab. Truly, I’m living under two tax regimes simultaneously, subject to the worst of both worlds.

FATCA means financial exclusion

On top of double taxation, the Foreign Account Tax Compliance Act (FATCA) has harmed me in very tangible ways. While living in Switzerland as a graduate student, I went to open a simple checking account for daily life. I was flatly denied – the bank employee frankly told me that they do not do business with Americans. Why? Because of FATCA. This U.S. law demands foreign banks ferret out and report U.S. customers or else face draconian U.S. penalties, so many banks conclude it’s not worth the hassle or risk. I was stunned and humiliated; I wasn’t asking for a loan or shady offshore services, just a normal bank account to pay rent and bills as a broke student. Yet thanks to U.S. policy, I was treated as an unacceptable risk by a foreign bank.

So much for the supposed benefits of U.S. citizenship – my own government’s law turned me into a pariah customer abroad at a time where, living as a student in Switzerland, a simple bank account would have clearly helped. Even when I opened my bank account in Germany, due to the U.S. government’s repressive regime, it was made clear to me that I would not benefit from the privacy protections afforded to other residents. Nope. My bank will share every detail with the U.S. government as required under the “negotiated” agreement.

From the banks’ perspective, this is understandable. U.S. law casts a ridiculously wide net – even accounts with a few thousand dollars must be reported. Foreign financial institutions face a 30% withholding penalty on all U.S. transactions if they don’t hand over American account data. Unsurprisingly, banks react by “de-risking” – which means no Americans allowed. This outcome, driven directly by U.S. law, injures U.S. citizens abroad – precisely the opposite of what a government is supposed to do to its citizens.

American abroad? Meet Kafka

I’m far from alone. Many U.S. citizens in Europe are being denied basic banking services because banks don’t want the FATCA burden or legal uncertainty. Among those affected are so-called “Accidental Americans” – people who happened to be born in the U.S. (or born to U.S. parent(s)) but left the U.S. as infants or long ago, who often didn’t even realize their U.S. citizenship status. They have zero ties to the U.S. – no economic or social connection – yet FATCA forces European banks to treat them as U.S. persons. Such individuals have seen accounts closed or denied, mortgages refused, and lives upended. It’s hard to imagine a more Kafkaesque nightmare: one day you learn that due to an accident of birth, you’re expected to comply with complex U.S. tax filings and your local bank doesn’t want you as a customer unless you can prove to the IRS that you’re clean.

Is this really how the U.S. government should treat its citizens overseas? FATCA was ostensibly passed to catch wealthy tax evaders hiding money abroad, but in practice it’s punishing ordinary law-abiding Americans. We expect our government to protect our interests, not make us radioactive to banks in our countries of residence.

Huge compliance burden

Being an ordinary, law-abiding American abroad has turned into a part-time job of paperwork and stress. Every year I must file two sets of tax returns (one to Germany, one to the U.S.) along with a slew of confusing IRS forms disclosing every aspect of my finances. Foreign bank accounts? I report them on annual FBARs to FinCEN (under threat of harsh penalties). Have a foreign mutual fund for retirement? That’s a PFIC to the IRS, entailing nightmarish forms and potential punitive taxes. Hold a share in a foreign startup or business? That triggers Form 5471 (foreign corporation reporting) which can easily run 10+ pages and massive accounting costs. It never ends – dozens of forms, intricately technical rules, and one false move can cost you dearly.

The compliance burden is ruinous and dehumanizing. Apart from the enormous financial costs, the time and stress imposed on expats attempting to remain compliant with these onerous obligations cannot be underestimated. Working a demanding job during the week, the expectation is that weekends are sacred time to recharge, develop personal relationships, enjoy life – unless of course you are a U.S. citizen.

Many a weekend – many – has been ruined as I sit inside parsing IRS instructions instead of doing something, literally anything else, worthwhile with my time. I feel less like a citizen and more like a perpetual suspect and colonial subject who must constantly prove to the IRS that I’m not a tax cheat, despite living a normal life abroad. Ordinary families should not need teams of international tax attorneys to simply exist. This system has turned into legalized, systemic torment and harassment of Americans abroad who, like me, are doing everything possible to stay compliant. And if I ever get married, I will have to worry about ensnaring my spouse in this morass.

Double taxation looms worldwide

I shudder to think how much worse it is for U.S. citizens in countries without a U.S. tax treaty or intergovernmental FATCA agreement. At least I’m in Germany, which negotiated a tepid framework for avoiding double taxation. Americans in, say, Thailand, or UAE, or anywhere with no treaty – I can only imagine the nightmare of potentially full double taxation and FATCA reporting with no local government buffers.

And woe betide anyone who slips up. The penalties are grotesquely out of proportion to any tax owed (often no tax is owed, yet penalties can still hit for filing mistakes). For example, if I mis-file or forget one annual FBAR form for my bank accounts, I could face a $10,000 fine. The mental toll of knowing one slip-up could financially ruin you is extreme. I live in dread every tax season that I might overlook some obscure form or rule and invite a crushing penalty. The U.S. tax code as applied to expats is so complex even professionals struggle – yet the onus is on us to get it 100% right or else.

Taxation without representation?

This feels like taxation and regulation without representation or benefit. I receive no meaningful services from the U.S. government in return for all these filings and payments. The roads, schools, and social programs my U.S. taxes fund are all stateside, not here. The argument that we benefit from “protection” of the United States government leaves much to be desired, to say the least. The local U.S. consulate will charge hefty fees even for emergency assistance – no joke, it was advised on the Department of State website that I would need to sign a promissory note (loan) if I ever needed evacuation in a crisis. In the wake of the U.S. government’s manifestly incompetent withdrawal from Afghanistan, we saw how “reliable” that lifeline is to American citizens. I would also be interested in asking the U.S. citizens held in captivity in Gaza for years how they feel the U.S. has protected them and represented their interests. We’re treated as milk cows to be squeezed (or worse, potential criminals), not as valued members of the national community. It truly feels like the social contract between the U.S. and its citizens abroad has been broken.

What makes all this even more infuriating is that it’s unnecessary. The supposed rationale for FATCA and citizenship-based taxation is to catch rich tax evaders, but the same goals could be achieved in far less onerous ways. In fact, a comprehensive multilateral system already exists: the OECD’s Common Reporting Standard (CRS) for automatic exchange of financial information. Every other major country uses residence-based taxation, cooperating via treaties and the CRS to tackle evasion, but does so in an arguably balanced, reciprocal manner.

The United States is nearly alone in the world in taxing non-resident citizens, apart from two dictatorships, Eritrea and Myanmar. I find this particularly ironic as the U.S., founded in part on the basis of tax injustice against British subjects, now treats me and my fellow expats as permanent tax subjects. Most expats are not demanding special treatment or benefits. We simply wish to be left alone without having to take the extreme step of renouncing our citizenship, a complicated, extremely expensive, and emotionally fraught measure. Nevertheless, the pain has become too much for many, and some have chosen to renounce their U.S. citizenship.

Second-class citizens

Rather than addressing the cause of these renunciations, the U.S. Government has instead acted with animus towards its former citizens, raising the renunciation fee nearly sixfold and publishing a public “blacklist” of those who have relinquished their citizenship, a policy of state-sponsored “doxing” which cannot possibly serve any legitimate purpose and functions to humiliate and spite.

Taxpayers may proffer reasonable arguments about the proper rate of taxation. People residing in the jurisdictions in which they may avail themselves of government services or park their property in such countries benefiting from protections and purposefully avoid paying what they should, while benefitting from a country’s services, should be punished. However, if we believe in the principle that one is in control of his or her own destiny, this current regime cannot stand. Those who purposefully chose to leave the jurisdiction of the United States should not be subject to its tax jurisdiction. This violates the principles of comity, undermines the U.S. as an ostensible provider of liberty, and is manifestly unfair.

I therefore urge you to support Rep. Darin LaHood’s Residence-Based Taxation for Americans Abroad Act as the solution to these many problems, to end this injustice and restore fairness for millions of U.S. citizens living overseas.

Sincerely,

Tendai Mukau