American tax increases for thousands right here in the UK?

Many of the stories in the press today fail to mention that even for many of the lowest earning Americans in the UK, US tax payable on income and gains on many investments will also increase substantially this year.

US law states that the rate of tax applied on “bad investments” is nearly always the maximum rate – whether or not the individual is otherwise subject to tax at this rate. “Bad investments” include all UK unit trusts, investment trusts and similar collective investments – including those held in ISAs.

Additionally, for calendar year 2012 the IRS are now insisting in significantly more reporting of all of these investments.

Technical note: Investments outside of the United States may be taxed under the Passive Foreign Investment Company (or PFIC) regime which can result in an income tax charge at the top Federal rate plus an interest charge. The rate of tax plus interest can be close to 100%, making these investments extremely “unfriendly” from a US tax perspective. The President signed into law in 2010 an obligation for increased reporting of such investments, which the IRS suspended for calendar year 2011 returns, but which seems likely to be mandatory for calendar year 2012 returns due to be filed during 2013.

Many of the stories in the press today fail to mention that even for many of the lowest earning Americans in the UK, US tax payable on income and gains on many investments will also increase substantially this year.

US law states that the rate of tax applied on “bad investments” is nearly always the maximum rate – whether or not the individual is otherwise subject to tax at this rate. “Bad investments” include all UK unit trusts, investment trusts and similar collective investments – including those held in ISAs.

So you might get hit by the income tax rate increase for those earning over $400k a year even if you don't earn that much.........and the tax rate on "bad investments" would go from 35% to 39.6%..........even more reasons to avoid PFICs!

Here is a pretty good webinar on the tax changes affecting American Expats.


Webinar on 2013 US Tax Changes and Investment Strategy for American Expats [nofollow]

So, no Americans should have ISAs?  I think mine is going to earn me about 20.00 pounds this year.   

Arghhhhh.

So, no Americans should have ISAs?  I think mine is going to earn me about 20.00 pounds this year.

Just in case someone misunderstands, a cash ISA is fine (IMHO). It's not tax free in the US, but there are no unfortunate consequences (provided it's reported on 1040 Sch. B, or if applicable, FBARS and 8938). Any other type of ISA may well be toxic, to say the least.

Ok then.  I guess they can have the whole 20.00 I earned from the Cash ISA if they want it. 

Expats are not required to enrol in Obamacare but they are required to pay for it. This article is from Canada but the same issue applies in the UK:

http://www.theglobeandmail.com/report-on-business/international-business/us-business/us-expats-in-canada-face-new-obamacare-health-care-tax/article7372249/

Ok then.  I guess they can have the whole 20.00 I earned from the Cash ISA if they want it. 

The IRS won't take all the 20.00 you earned, but you must include it on your Schedule B and the IRS will tax it.

Expats are not required to enrol in Obamacare but they are required to pay for it. This article is from Canada but the same issue applies in the UK:

http://www.theglobeandmail.com/report-on-business/international-business/us-business/us-expats-in-canada-face-new-obamacare-health-care-tax/article7372249/

The tax only applies to a few high income tax payers and as the US taxes on citizenship rather than residency US expats will have to pay it. US expats pay for lots of things through their taxes that they don't use, if indeed any US tax is due. Obamacare is no different.

The tax only applies to a few high income tax payers and as the US taxes on citizenship rather than residency US expats will have to pay it. US expats pay for lots of things through their taxes that they don't use, if indeed any US tax is due. Obamacare is no different.

You're right nun, we may pay for a lot of things we don't use. The annoyance with this particular tax is that it's another in an expanding list of US tax requirements that can not be offset by foreign tax credits, and is annoying considering our access to the NHS which we have paid towards. Double taxation? Debatable.

And, I wouldn't say it's strictly on a few high earners. Consider the consequences for those who have been here for some time; a gain of $250,000 on the sale of a property is not uncommon, especially London. So, no UK gains tax paid to offset the US gains tax on the sale, and now an additional 3.8% surcharge on that gain (only the amount beyond $250,000?) which also can not be offset. You are right though, the result of such a gain would be the same if the property were in Florida; it's US taxation applied to all US Persons no matter where they reside.

The list of 'you have no choice but to pay taxes (and penalties)' on American expats just keeps growing. Given enough, the expat community may just start paying down the trillions whilst those in the US twiddle their thumbs. I agree with what I think is your point; this has nothing to do with Obamacare specifically, but taxation on citizenship.

there's already a similar problem for expats with medicare. When you reach 65, Medicare A (hospitalization) is free, although you can't use it outside the US. Medicare B (outpatient), however, you have to pay for, even though you can't use it overseas. Every year you're eligible and don't enroll into pay into Medicare B, there's a 10% addition to your rate in the event you eventually do enroll.  The complications for Medigap are the same but even more complex re pre-existing conditions, etc. This applies even though you have the NHS, and even if you also have UK private health insurance, including travel insurance. If you're an expat over 65 who will eventually return to the US you'll probably end up signing up for Medicare B to avoid the penalties, keep your foot in the door, etc. Not pure taxation but same effect - a cost but no need and no benefit.
(The SSA at the embassy tells you to be sure to enroll in medicare A when you reach 65 but it's debatable whether that's very good advice).

The Obamacare tax breaks the horizontal equity principle that advocates of US citizenship taxation tout. The principle is that no US citizen should pay lower taxes (in any category of income) than a homelander. This means that expats always pay the worst case of UK and US taxes.

But the Obamacare tax cannot be offset by UK taxes so you have to pay this in addition to any UK tax. So its worse than worst case. For now this only applies to the relatively rich, but a line has been crossed here.