A Pennsylvanian in Japan feels the uniquely American pain of being a U.S. citizen abroad

“My retirement investments are foreign to the United States, but local to me. As a tax resident of both Japan and the United States, I get the worst of both tax systems.”

— A Pennsylvanian in Japan

Dear Congress,

Citizenship-based taxation is not an abstract concept for an American abroad, it’s a daily reminder that my government—and only my government—treats me as a second-class citizen just because life took me abroad.

I went to college in Philadelphia and lived in the 3rd Congressional District of Pennsylvania for four years. I studied Japanese in school, then moved to Tokyo when I graduated in May 2001. I have been living and working in Japan ever since.

I came to Japan with just a few suitcases and have never worked a day in my life in the U.S., so everything I’ve ever earned connects back to Japan. I am a tax resident of Japan, and my worldwide income is subject to full taxation under the laws of Japan at rates of up to 55%. The tax rates are high, but Japanese taxes are very straightforward and simple to file. I don’t owe any U.S. tax on my salary income due to foreign tax credits. Since my employment income is generated in Japan and denominated in Yen, as are all of my living expenses, I need to organize my financial and retirement planning here in Japan.

The problem I have is that most attempts at responsible financial/retirement planning here in Japan are frustrated by the need to comply with U.S. tax laws, which often apply to Japanese financial transactions in incomprehensible ways.

20 years of financial discrimination

Here are just a few examples based on more than 20 years of experience living abroad:

1. I sold my first apartment for a slight loss in Yen terms, then was shocked to find out that due to the rules requiring all individual taxpayers to use the U.S. dollar as their “functional currency” for tax reporting, I actually had a large gain on the sale when computed in dollar terms due to the fluctuation in the Yen/Dollar rate during the five years I had owned the place. Can you imagine the feeling of real tax being assessed on a phantom gain that didn’t actually put any money in my pocket?

2. When I was younger, I invested in several mutual funds through my bank here in Japan. I was completely unaware that the United States categorizes a foreign mutual fund as a “Passive Foreign Investment Company” (PFIC), even if it is just the local version of a Blackrock or a PIMCO fund that is also sold in the United States. The IRS requires each mutual fund to be treated as a PFIC and filed on a separate Form 8621, requiring reams of computations. PFICS are also subjected to punitive taxation on “excess distributions,” – none of which applies to an equivalent U.S.-based financial product. It cost me $14,000 in accounting fees to extricate myself from the funds, most of which I ended up selling for a loss.

3. Do you know how hard it is for non-resident U.S. citizens to open financial accounts — both in the United States and abroad?

   1. I can’t open accounts in the U.S. because I have no address in the United States. (PNC Bank shut down my checking account and credit card once they found out I had moved away from Philadelphia.)

   2. Since the implementation of FATCA, it has also become difficult for Americans to access financial services in our countries of residence because foreign financial institutions do not want to deal with the onerous and complex reporting that the United States requires them to do on any U.S. citizen customers. Since the implementation of FATCA, I have been denied service by one bank (Citibank Japan) and two life insurance companies (Alico and MetLife Japan)—just because I am a U.S. citizen. This is a real hardship for non-resident U.S. citizens.

   3. There are complex disclosures required for all types of non-U.S. financial products. Did you know that local pension programs might get caught up in onerous reporting requirements designed to apply to “foreign trusts”? Did you know that there is a special excise tax on purchases of foreign life insurance? These things aren’t “foreign” to me. They are necessities to protect my family and responsibly prepare for retirement. Again, the equivalent financial products in the U.S. are not subject to these requirements. They are easy to report to the IRS. Those of us living abroad are punished by tax rules which don’t fit our financial lives—only because the United States, alone among democratic countries, insists on taxing its citizens regardless whether or not they live in the country.

   4. The IRS is either unwilling or unable to administer this complex system of extraterritorial taxation, and international taxpayers are underserved as a consequence. With a foreign address I cannot access the online systems; there are no toll-free numbers that work from Japan; I have to call at odd hours of the day to try to reach someone, and they often cannot answer even the most rudimentary questions about international tax matters. It is extremely difficult to find a knowledgeable tax preparer, and the compliance costs are egregious. My annual accounting fees have frequently been higher than the ultimate amount of my U.S. Federal tax liability.

   5. I’m really worried about what kind of complexities will be waiting for me when I retire and need to survive off of financial income from my savings. Foreign Tax Credits seem to only work for salary income, so I fear that I will be subjected to a lot of double taxation. The high accounting fees will become even more of a burden. I’m also worried about the impact on my wife, who is Japanese, because of all the ways that “non-U.S. citizen spouses” are treated differently than U.S.-born spouses. We’ve made an election to file joint returns, meaning that we have to track and report all of her income in the same way as that of a U.S. citizen. However, since she is a “non-U.S. citizen spouse,” I am limited in my ability to transfer assets into her name as a gift or as a part of my estate after my death. That is incredibly unfair and worrisome in case she outlives me.

Worst of both worlds

In conclusion, the U.S. tax system makes it difficult for me to save, invest, participate in pension plans and generally behave in a financially responsible way. This is because all of these essential activities need to take place in my country of residence—in Japan—and not in the United States. My retirement investments are foreign to the United States, but local to me. As a tax resident of both Japan and the United States, I get the worst of both tax systems.

The United States is the only democratic country in the world that imposes extraterritorial taxation on the foreign-source income of its non-resident citizens. I urge you to support Rep. Darin LaHood’s Residence-Based Taxation for Americans Abroad Act to end the pain and misery that current U.S. law imposes on people who should be America’s ambassadors overseas.

Sincerely,

An American abroad