There is no TL:DR
Compliance with US tax is simple when the expat is working, earning below the FEIE limit, and has few UK financial accounts. A 1040, a 2555, and maybe a schedule B. If they are a US ‘Homelander’, ie: an American ‘temporarily’ living abroad with every intention of returning someday to the land of the free, filing makes sense. That includes those who have been here for decades but still intend to return to the US someday. No one would disagree with this. Only 18% of USCs filing a tax return from abroad owe any US tax and the figure is probably less for those in the UK. This type of individual probably represents the majority of Americans in the UK. And talk of renunciation makes absolutely no sense.
A problem starts developing when ‘temporarily’ turns into ‘forever’. A problem definitely exists for the Accidental American who has no ties, family or financial, to the US and they have no desire to ever live in the US (Yes, there are people who do not foster a dream of living in the land of milk and honey). For the long term permanent expat compliance with US taxation starts to become intrusive, particularly for financial stability. So, they do have an option to renounce.
Or do they? Do they still have vulnerable family in the US (parents, for example) that may require an extended period of assistance? What if they can’t afford to renounce? Not only because they lack sufficient funds, but also those who may have been successful (a good final salary pension, some cash in the bank, and a home they’ve owned in the Southeast for 20 years). They likewise cannot afford to renounce unless they ‘lose’ some assets or suffer financial annihilation. Stroke, Dementia, Alzheimer’s; does your NRA spouse know how to complete your US tax return if you are unable? The child who is mentally challenged? You can’t renounce unless you are of sound mind and can comprehend what you are undertaking. For some, US compliance is a trap they cannot escape from.
In the civilised world (that also happens to be the rest of the entire world) voting, the right to return to the homeland, and having a passport is not tied to paying ones tax to the homeland as an expat.
But the American ‘temporarily’ living in the UK with that simple tax return of 1040, 2555, and Sch. B has nothing to fear. They know what is required and there is no problem for them. Why should they be concerned about tax reform, or the desire not to have a US tax compliance obligation?
The current reform initiative is only in the preliminary stages. Nothing has been decided and anything may change, IF tax reform were to happen. So, don’t take this as anything other than uninformed ramblings, but if the USC has rental income from a US or UK property, or they own more than 10% of a UK business, it might be wise to pay some attention to the proposals. The section 121 exclusion may change from 2 years/5 years to 5 years/8 years. Again, nothing has been decided and reform may not happen. Many of us thought FATCA wouldn’t happen, and it did. Surely there would be some carve out for expats, but there wasn’t. Again, as of now, none of the proposals are solidified, and some of the above may have already been side lined (if the understanding of the unclarified proposals were even correctly understood in the first place).
The great thing about being subject to homelander taxation for expats is the constant knowledge that all rules could change at any time.
As for the RBT proposals of the original post, at present things are not looking particularly good, although there are amendments in the Senate Bill which may offer a TTFI structure for expats. As proposed, this would be great for those with few or no US financial assets. Attempt to understand what is being proposed, but what will happen, will happen. I dream of a last minute RBT, revenue positive as an offset, rider attached to the final Bill just prior to passage. There’s a certain satisfying symmetry after FATCA.
A musing:
If TTFI or RBT do not happen with this reform, look for renunciations to rise (perhaps dramatically) up to each Embassies allowed quota. Also, (and tax professionals look away now!) there may an increase of those for who the “BS bucket is full” and who may simply just drop out, even if they have a compliance record with the IRS. Enough eventually becomes enough. IRS resources (or lack of) may inadvertently allow non-compliance to not be worth the effort for those who are not ‘Homelanders temporarily living in the UK’ and who have no assets or ties to the Homeland forever.
BTW, after the above articles of the original post appeared and talk was positive, a series of articles appeared related to the 3rd quarter list of renunciations (on course for another record breaking year). In this post truth era were narrative is more powerful than facts, they made it clear all US expats contemplating renouncing were the rich, jet-setting, yacht owning, tax evading layabouts who didn’t want to pay their fair share and were eager to quit the US (from the unfortunate name of one on the list, a Mr. Quiter). I want to know why all of you US expats on UK Yankee have been holding out regards your yachts and private jets and your true lifestyle? Come on, fess up!
