Looking for the Net Investment Income Tax …
The argument for why Americans abroad are required to pay the Obamacare surtax AND why foreign tax credits cannot be applied to offset the tax
Notice that the Obamacare surtax is in S. 1411 of the Internal Revenue Code which is in Chapter 2A (the Chapter dealing with Social Security Taxes and the Unearned Income Medicare Contribution) and NOT Chapter 1 (which deals with Income Taxes). This is the reason why Obamacare taxes cannot be reduced by the S. 901 foreign tax credits which apply ONLY to taxes payable under Chapter 1.
S. 901 (a) Allowance of credit
If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b).
Don’t tax you! Don’t tax me! Tax that offshore American abroad across the sea!”
The Obamacare surtax (like the AMT) kicks in at lower levels of income for those who file “married filing separately”. The “married filing separately” status will make you more likely to pay the Obamacare surtax (and the AMT)!
Q. Are Americans abroad more likely to use the “married filing separately” filing status?
Therefore Americans abroad are more likely to pay the 3.8% Obamacare surtax which is one more form of “double taxation of Americans abroad”.
It gets worse! The Obamacare surtax is payable on Canadian RRSPs but not on U.S. 401(K) plans!
But wait a minute! S. 1411 is in Chapter 2A of the Internal Revenue Code! This section deals with Self employment taxes, medicare taxes, social security and related issues …
The argument for why Americans in countries with totalization agreements do NOT have to pay the Obamacare surtax
Totalization agreements exempt Americans abroad from having to pay self employment taxes. Shouldn’t this mean that totalization agreements exempt Americans abroad from the Obamacare surtax?
This issue has been raised by Toronto based CPA Kevyn Nightengale.
The argument for why Americans abroad living in countries with tax treaties “may” NOT have to pay the Obamacare surtax
Shouldn’t the tax treaty protect Americans abroad from “Obamacare Surtax double taxation?
It’s important to note that the U.S. has many different tax treaties with many different countries. The treaty of relevance would need to be analyzed and carefully considered. In the words of Kevyn Nightingale
– There is no provision in the Internal Revenue Code for a foreign tax credit against this tax. Therefore, any credit would have to be based on the terms of the income tax treaty between the United States and the individual’s country of residence or citizenship. Because none of these treaties currently address the net investment income tax directly and no other authoritative guidance exists, whether these treaties will be considered to allow a foreign tax credit for the net investment income tax is an open question.
– Because of the lack of guidance on the issue, a taxpayer claiming exemption under an SSTA or credit under a treaty should fully disclose the position.
More on how it works: The best way to hide injustice is in complexity. Virginia La Torre Jeker unravels the complexity
(A great analysis of the many ways this can hurt you.)
In conclusion – A protest from American Citizens Abroad (the organization)
A December 5, 2013 press release from ACA included:
ACA, Inc. requests Members of Congress and representatives of the Americans Abroad Caucus to introduce legislation to correct this harmful oversight which results in the pure double taxation of Americans resident abroad. See ACA’s letter http://americansabroad.org/files/3613/8075/8449/treasury-letter-2.pdf
“It is absurd that simply because a law is written under a new chapter number of the Code that foreign tax credits are not applicable against the new U.S. tax.” says Jackie Bugnion, ACA Tax Team Director. “It is all the more problematic since the Affordable Care Act specifically carves out bona fide overseas residents from the law, considering them to be covered by health plans in the country where they reside and exempting them from the penalty fee for not registering with the U.S.
“It is inconsistent that Congress exclude Americans abroad on coverage of the program and yet double tax them to help finance it,” added Marylouise Serrato, Executive Director of ACA. “This ignores the internationally accepted norm of allowing foreign tax credits to mitigate double taxation.”
The 3.8% NIIT is intended to help finance Medicare under the Affordable Care Act. Yet Medicare is not available to Americans residing abroad unless: 1) they have contributed 40 quarters and have paid into the system upon retirement overseas (most have not) and, 2) they return to the United States for medical care. If there is a governmental service which is essentially local, it is medical care. In case of a heart attack or medical emergency, a sick American will not be able to justhop on a plane to the United States in order to obtain treatment.