Tuesday, April 15, 2008

Taxing Day

Today, April 15, is tax filing day for Americans. What many Americans and New Zealanders like may not know is that expat Americans still have to file US tax returns, even though they don’t necessarily pay any US taxes.

New Zealand and the United States have a tax treaty, which means that taxpayers aren’t double-taxed—they pay taxes to only one country. Any American planning on staying here permanently is probably only paying income tax to New Zealand. But they still have to file a US tax return, along with another form declaring their NZ income so it can be excluded from US income tax.

Naturally, it’s not as simple as that. The US only allows a certain amount of NZ income to be excluded (currently US$85,700, and indexed to inflation). Some expat Americans may have other income (like investments, for example) that may still be taxed by the US (be sure to see a competent tax professional for advice). For most expat Amercians, the main burden is the is the filing requirment.

There are only two ways to escape this burden: Renounce US citizenship or die. Neither one strikes me as a workable solution.

As a side note, the US online tax-paying system is positively antique compared to New Zealand. Many lower-level taxpayers can “file online” for free, however, that’s not open to taxpayers who live in foreign countries, and the taxpayer has to choose among several companies to file the form for them.

Here, of course, we can fill out our forms (much, much simpler than the US, to start out with) online quickly and easily—and directly with Inland Revenue. Mind you, most NZ taxpayers don’t file income tax returns at all, since the system is now finely tuned so neither tax nor a refund is owed.

I like New Zealand’s system much better than America’s. But like everyone else, I’m not keen on paying taxes to anyone. Who is?


d said...

Generally, the US is only interested in "earned" income (i.e. wages, self-employment income etc), and will not tax foreign investments.

However, if a person is self-employed in a foreign country, they are still required to pay FICA on their US Federal Tax Return. Ridiculous, I say!

I should note that US citizens living abroad have an automatic 2 month extension to file their tax returns, although it is not an extension to pay any amounts due (and any amounts due paid at the extension date will be subject to interest from April 15th to the fling date).

Finally, all US citizens (no matter where they live) have to report - separately - any foreign bank accounts (i.e. outside of the US) that they have signature authority over and/or a balance of $10,000 or more by filing a special form by June 30th each year.

Is my profession showing? ;)

Arthur Schenck said...

Profession showing? Maybe, but I wish that more expats had easy access to that sort of information. Even after all these years, I never heard that about bank accounts--never. Guess I'm lucky I'm not rich.

As for self-employed, I reckon a person with standing could argue (in court) that by ratifying a tax treaty, Congress intended to allow ALL foreign resident US citizens to be exempt from double-taxation. But that's just my opinion, and I'm neither a lawyer nor a tax professional (jeez, I'm sick of disclaimers!).

What I find disheartening, though, is the positively anal nature of US tax authorities. New Zealand is nothing like that!

Roger Owen Green said...

I don't mind paying taxes when it's for feeding the hungry, etc. I just hate it when it's for paying for some stupid, F***ing war I opposed from the beginning.

d said...

Yes! The NZ tax system is great in its simplicity. The IRD even makes you explain to them why you feel you need to file a tax return when you call up for a form.

However, there are many tax cuts in the US (i.e. itemized deductions) that are there to promote certain social activities such as buying houses and contributing money and clothes to charity.

The IRS has many publications that explain tax concepts in a way that is more understandable to those who are not accountants.

For expats, the publication is Publication 54. It explains Self-Employment tax obligations as well as the bank account thing.