Double Taxation of Americans resident aboard: ACA

Last updated on December 10, 2022

American Citizens Abroad (ACA) wrote to the IRS informing the agency about “what appears to be a drafting oversight in the preparation of the Affordable Care Act that leads to double taxation of Americans resident abroad.”

Tax News shares how the Affordable Care Act, also known as Obamacare, affects the taxation of Americans living overseas: “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.”

The tax’s threshold amount for individuals is only US $125,000 for married taxpayers filing separately. The ACA believes that this threshold is easily reached by many American citizens who live abroad and are 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 writes in its letter to the IRS. “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.”

It should be noted that double taxation will not take place in the 24 foreign countries that have Totalization Agreements (agreements that prevent double taxation with respect to social security taxes) with the United States. In addition, anyone “married filing separately” with income less than the $125,000 threshold will not be affected by the double taxation.

Tax News raises an important point about the additional Medicare tax that also affects Americans living abroad: “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.”

“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?’”

The tax problems of Americans living abroad do not seem to end. The Foreign Account Tax Compliance Act (FATCA) has already made Americans unattractive to foreign financial institutions (FFIs). Recently, many U.S. citizens living overseas have renounced their U.S. citizenship to avoid the new tax burdens. The impact of the new tax duties on FFIs and Americans living overseas will be seen after the beginning of the new year when FATCA comes into full effect.