The Ridiculous Story of a Pilot and his Taxes

What is so frustrating is that it is still happening. There are enough US citizens being screwed by this law. Is there no way we can ban together and fight this? I cannot be okay to violate people’s privacy this way. And punish them for leaving the US.

Rachel:

This is a very interesting post that illustrates a number of the absurdities inflicted on Americans abroad.

First, your post demonstrates how Americans abroad are taxed differently depending on which country they live in. You make reference to the problems that the pilot has the with the Hong Kong pension. You note correctly that under U.S. tax law the pension is NOT considered to be a pension at all. As such it is taxable under U.S. law. The U.S. has NO tax treaty with Hong Kong (unless it is included in the China treaty – which I have not investigated) that would mitigate this problem. But, what is interesting is that if the pilot lived in Canada then he would have the benefit of the Canada U.S. tax treaty which would mitigate the pension problem. Americans abroad are taxed incredibly punitively. But the degree of punitivenness depends on he country where the American resides. Obviously Americans in Canada are taxed less punitively than Americans living in Hong Kong (or other countries where the U.S. has a tax treaty).

Second, you have identified a very serious problem with the the FEIE (Internal Revenue Code S. 911) works. Income subject to the FEIE must be FOREIGN. It’s not where you live. It’s where the income was earned.

You can see the IRS explanation of this principle by searching: “U.S. Citizens Performing Services in Foreign and International Airspace” – there is an actual IRS page on this.

Third, it would be interesting to investigate whether (assuming that the pilot must pay taxes to Hong Kong on his full income) whether the Hong Kong taxes apportioned to the flight time over International Waters would be allowable as a Foreign Tax Credit against U.S. taxes. (See S. 901 of the Internal Revenue Code). Perhaps someone else could comment on this particular issue. Because Hong Kong has lower taxes than the U.S., the best case scenario (I think) would be that the pilot would end up paying a lower percentage (after taking a possible foreign tax credit) of tax directly to the USA.

Fourth, the problems for U.S. pilots in Hong Kong may be even worse. A June 2, 2014 post by Virgina La Torre Jeker includes:

“Starting in June, we understand that Cathay Pacific Airlines will commence withholding 30 per cent of its American pilots’ salary every month. The withholding will be for US taxes and will be passed on to the US Internal Revenue Service (IRS). In addition, Cathay will remit the pilots’ personal information to the IRS so that the proper records will be maintained and tax credit given to the taxpayer-pilot. It has been reported that the move will affect about 18% of the cockpit crew. …

US Tax Shock

It may come as a shock to foreign (non-US) companies and other foreign businesses to learn that they may have US tax withholding obligations with respect to their US employees, even if the foreign business is not in any way involved in US activity. Pursuant to the US Internal Revenue Code, an employer is required to withhold federal income and social security taxes from the wages of its US employees. Every quarter, the employer must file a Form 941, the Employer’s Quarterly Tax Return, reporting the amount of income and social security tax withheld during the period. A Federal Tax Deposit Form must be filed with the remittance of the withholding taxes the month following the close of each quarter.

Foreign Employers Supposed to Withhold US Tax on Wages Paid to US Employees

With certain exceptions, every employer making payment of “wages” to US employees is required to deduct and withhold upon those wages an income tax determined in accordance with IRS procedures.

For income tax withholding purposes, “wages” is defined, with certain exceptions, as all remuneration for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. The term “wages” includes remuneration for services performed by a citizen or resident of the United States as an employee of a nonresident alien individual, foreign partnership, or foreign corporation whether or not such alien individual or foreign entity is engaged in a trade or business within the United States. Thus, for example, a foreign corporation without any US activities is responsible for income tax withholding on wages paid to its US person employees.

There are two possible exceptions to income tax withholding that may apply to US citizen employees. Generally, these are for amounts paid to US citizens (note, not to green card holders) when the amounts are covered by the foreign earned income / housing exclusions of Code section 911. There is also an exception for amounts on which the employer is required to withhold income tax by the laws of any foreign country or United States possession.”

Finally, it is increasingly clear to me that unless one intends to return to the United States the only real option (as you know) is to renounce U.S. citizenship. The U.S. government is well aware of these problems and has chosen to not act. This means that either the abuse of Americans abroad is deliberate (which is quite possible) or the result of indifference (a form of extreme abuse).

It’s simple either renounce U.S. citizenship or move back to the United States.

Ridiculous sums up the whole FATCA situation and the scenarios you’ve written about here! I love Viv’s comment above which seems to sum up neatly one aspect of a complicated situation. As retirees living outside the US we’ve continued to file our taxes annually without any undue hardship but it will be interesting to see how the future unfolds now that we have residency visas. And, in another tax twist, we need to file paperwork in Portugal demonstrating that we pay taxes in the US so that we can be exempt from paying taxes in Portugal. It’s all so complicated to be law abiding citizens, isn’t it?

More hypocritical nonsense from the Land if the Fee and the Home of the Depraved.

The U.S. system of citizenship-based taxation is the moral equivalent of slavery – period. It is completely indefensible and has no place in the modern world.

Good lord… reading stuff like this makes me so mad. I don’t understand why our government lack such common sense that it’s absolutely absurd. If I were Ben, I would definitely denounce my citizenship – taxation without representation! I wonder what would happen if he just refused to report his taxes? Would they throw him in jail the moment he lands on US soil? Common sense… not in America.

An American here in Belgium will net less of his salary than any other nationality. This is before the USA has stuck out it’s grubby paw for a slice. The reason is that a bonus payment is frequently paid via a SICAV. That’s basically an open ended investment trust. The reason for this is that it can be withdrawn at an advantageous tax rate compared to if it was paid via payroll. Yes you guessed it. The SICAV, being a complex financial product is closed to “US persons”, and so the American gets hit with confiscatory payroll taxes on bonuses.
What the USA has done and is doing with it’s tax code and FATCA is the greatest scandal this planet has seen in a very long time, and one the general public are blissfully unaware of.