Tuesday, February 8, 2011

The Dilemma of our Daughter's Citizenship

A question for parents: imagine for your newborn child you're informed that you have the right to choose a potential of lifetime debt for your child in order to give her some benefits she may never enjoy. Would you do this? Would you do this if you found out that she can choose that lifetime of debt for herself when she's 18? Phrased like this, of course you wouldn't, but it's exactly the dilemma I'm facing now and it's the sort of dilemma parent's should never have to face.

As you no doubt know (assuming you read this blog), I am an American, my wife is French, and our daughter was born Saturday morning here in Amsterdam. Yesterday I registered our daughter's birth with Statsdeel West and our daughter now has an international birth certificate. If we remain in the Netherlands until she's 18, she may choose Dutch citizenship if she wishes. She automatically has French citizenship (via my wife) and I was told I have to register her birth with the US consulate and this registration will automatically give her US citizenship. That's where the problem arises. Update: it turns out that under US law, my daughter is automatically a US citizen. The question is actually whether or not I should register her and alert the US authorities to her existence.

The US is in dubious company here
Photo by http://www.kremlin.ru/
As I've pointed out previously in this blog, the practice of taxing citizens abroad is rare. In fact, it's rare enough that I've yet to see evidence that any country other than the United States does this. I hear conflicting reports of which countries do and do not tax citizens abroad. Aside from the US, the only country which is consistently mentioned is North Korea, but there is never a source. In fact, I cannot find any information linking back to source material to prove which countries do and do not tax citizens abroad. The short list of possible candidates appear to be:
  • North Korea
  • Libya
  • Eritrea
  • The Philippines
  • The former USSR
All things considered, that's a pretty sad list of countries to be in bed with. Not that I expect international tax experts to read this blog, but if anyone can provide any confirmation regarding which countries do and do not tax citizens abroad, I'd be most grateful. The closest authoritative source I've seen is an article from the Economist which states "Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live." Of course, they offer no source, either.

But getting back to the issue at hand, I've been reading quite a bit to find out if IRS international tax requirements apply to my daughter. Given that I can find no exemption whatsoever for my daughter's situation, should I choose her citizenship for her or should I let her choose it when she's 18? I live in Europe now and have no intention of moving back to the US, so that's not an issue while she's living with us, but by the time she's an adult, I've no idea how the law might change.

Tax Forms
She didn't ask for this
Photo by KOMUnews
Further, it turns out that the financial exemptions that citizens abroad receive on their US taxes only applies to earned income. Any "unearned" income can be taxed at the full rate, unless the US has a tax treaty with the country she resides in. She may be even be able to escape this by retaining her French citizenship and relinquishing her US citizenship because the US claims the right to potentially tax her for up to 10 years after giving up her citizenship the expatriation tax. As far as I know, the US is the only country which tries to impose income tax on foreigners living in other countries.

For those who think I'm worrying about nothing, not only did I previously mention a UK gentleman I know who discovered that he owes a huge amount of money to the US government because he happens to be a US citizen (apparently his father registered him at the US embassy after he was born, the same situation I'm facing). I'm also discovering that others are finding themselves in the same predicament.

Of course I want my daughter to have US citizenship, but do I really want to burden her with a tax obligation to a country she won't be raised in and may never live or work in?

18 comments:

  1. Apparently US immigration frown very heavily on people who try to go in with their non-US passport when they're entitled to US citizenship, so that might be a factor if you're intending to show off your daughter to your relatives.

    And really, tax is tax. There's no avoiding it. If life is about travel and rich experiences, are you going to stop her from visiting Disneyland after she turns 18?

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  2. Interesting. I'm guessing that *you* have to file US federal tax forms, and that in order to claim your daughter as a dependent you will have to put her SSN on your 1040. Does that require that she be a US citizen?

    On the other hand, my younger sister lives in Canada and so must file US taxes, but because she and her husband have children and apparently get some form of credit for the Canadian taxes they pay, they actually receive a check from Uncle Sam (not really a refund as they're not currently paying or having taxes withheld).

    If it seems like you would get such a tax-credit-refund-thingy, maybe you could set that aside for your daughter to offset any taxes she might owe at a later time.

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  3. @Tom: ah, I hadn't thought of that yet. I think she can just get a tax id number and not require the SSN. I'll have to check that out, too.

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  4. Realistically though, how much income would *she* have as a minor between now and 18 (heck even through university if you want to say she decides at 25). Larger income starts to kick in from 30s onward statistically ... IIRC??

    Then combine that with countries she is likely to be living in and match to tax treaties, you may find that no taxes are owed (assuming they are higher tax %s than the US). Sure there is the HUGE PITA with filing the damn forms but after that it works out.

    But on a non-tax question: what is the odds she will want to move to the bay area and start her own company? University in the US perhaps down the line to understand that side of the family? IMHO, give her the ability to decide later w/o having to deal with US immigration

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  5. @Mark: the issue isn't the income she could have as a minor. The issue is that she has a lifetime of potential debt to a country she won't be living in. If we let her decide at 18, she can make up her own mind, though I know the US is like many other countries in considering the possibility of shutting off immigration routes. If I don't declare her, will she lose this? I can't possibly know.

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  6. I just asked one of our immigration attorneys the overseas tax question. He works with our clients on HIB and other immigration issues when they want to hire someone from overseas. He said that to the best of his knowledge, you are correct. The US is the only country in the world that taxes its overseas citizens on overseas income.
    -SeanT

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  7. Doesn't the US citizen get tax credit for the taxes paid to foreign governments? That's a bit of a mitigating factor.

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  8. @Michael R: how would you feel if you woke up one morning and a foreign government claimed that you owed them tens of thousands of dollars in back taxes, but don't worry, the tax credit means it could have been worse?

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  9. Checking with my residing in Beijing sister-in-law about her situation.

    @Ovid, the rhetorical question answers itself. Note that being aware of the potential and filing returns to get credit for foreign tax paid could make it a moot point. Which was my point.

    It is a thorny problem, loosely equating to how much is US citizenship and passport worth?

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  10. I am Curtis wife :-)

    @ Michael: By itself it does not worth much - at least for me. Except that it's Curtis nationality, culture... It's who he is, and as a parent it's something that you would like to give/ share with your child.

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  11. @Leila, yeah, I figured out the relationship. Despite it being the nationality and Culture of Curtis it won't be Lily-Rose's nationality and a dilute part of her culture. Much like Danish, Norwegian and Scottish cultures are a dilute part of my culture.

    FWIW - I don't believe she'll ever experience a tax burden as long as she is aware of the compulsion to file a return and pays taxes elsewhere. Not that my future predicting skills are all that high...

    (Wonderful name)

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  12. @Michael: I think you're still missing the point :)

    Why should she have to go to the hassle of filing paperwork with a foreign government to prove she doesn't owe them any taxes? Why should she face the legal consequences for this?

    Also, it's highly likely she will face a tax burden. From my reading of the law, the bulk of the exemptions are on earned income. Any other source of income (dividends, interest, capital gains, settlements, alimony, child support, etc.) is not covered under that $91,000 US exemption.

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  13. Something else you should be aware of if you are a US Citizen living abroad. If you have any bank accounts whose total exceeds $10,000 at any time during the year, you must declare them. If you fail to do so, you are subject to a fine of at least $10,000 and face possible criminal prosecution. There is also a punitive tax on investments in so-called PFICs (passive foreign investment companies), whereby you are taxed on the gains made every year - even if you never withdraw any money from the funds in that year.

    I have been living in the UK for over 15 years and have just discovered this. I'm trying not to panic, as over the years, I have had many savings accounts, bonds, unit trusts, etc in my name - in many cases because my husband is a higher rate taxpayer in the UK and I am not. Seemed prudent at the time, but we may be paying the price now.

    Be warned...

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  14. I'm a US citizen who has lived in Canada since 1970. My husband was a Canadian citizen and our adult daughter was born in Canada and lived here always.

    Reading all the news about the Aug. 31 Voluntary Disclosure deadline, we found to our dismay that she is a US citizen simply because I am. As such she has the same responsibility to file US tax forms and report on her "foreign" Canadian financial holdings despite the fact that she has never lived in the States. We deliberately chose not to register her birth at the US consulate, because we were told by the consulate when she was a child in the 70's that she could make the choice when she was 18. That sounded as though if she didn't want US citizenship that was her choice, but apparently that is not the case and she is faced with filing 6 years of tax forms and begging for leniency from the IRS and Treas. Dept. She will owe no tax due to the exemption and hopefully she won't be penalized for our misunderstanding based on poor advice.

    Still it's very frustrating, unjust and a lot of bother for no real purpose. She made up her mind when she was 18 she didn't want it, but apparently by then she would have been liable for the expatriate tax rule if she'd known she was a US citizen and chose to renounce it. Coming and going, the long arm of the IRS has you.

    BTW Ovid:

    Sources of income such as dividends, interest, capital gains, etc. can be offset by using a different form - Foreign Tax Credit 1116 - rather than the Foreign Earned Income exemption - form 2555. It's more complicated but covers just about everything. Rather than a flat exemption, it deducts the taxes you already paid outside the US from what you would have paid in the US. With higher taxes in Canada I never owe anything. I suspect it would be the same in France or England.

    A practical suggestion that doesn't speak to the ideology of grabbiness of the US tax on worldwide income and sucking our children into it even if they weren't born in and never lived in the States.


    I'm glad I found this blog and I feel much better for venting. Good luck to you

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  15. Ovid
    As for your question: Should your daughter get US citizenship? By my reading she may already have it, and it's all dependent on your status.

    We're contacting the consulate to be sure, but it's likely that our adult daughter is a US citizen though born in Canada, never registered as a child at the US consulate, never lived in the US and never applied as an adult for citizenship. Because I was born and lived in the US past age 19 and she was born in the '70s, that automatically makes her a US citizen, and there's not much she can do about it.

    Though we're not happy about all the tax filing that it brings, item 14 in the following link convinced us, and I guess we'll just have to deal with it. You might also want to click on the 'Joe Grasmick' link within that for a table that lays it all out clearly.

    http://www.richw.org/dualcit/faq.html#borndual

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  16. Hi,

    I'd like to know what you decided to do. My daughter was born last year and I haven't registered her. To my understanding, it is true that she is automatically a US citizen and there is no way to get rid of it. But if she's not registered, the US has no way of knowing she exists.

    I'm taking the wait and see approach as US laws keep changing. Maybe citizenship will be worthwhile in another 17 years, but for now, no way. Not only are there all these ridiculous tax returns to file, but our banks won't open accounts to US citizens because they'd rather not deal with IRS regulations. So unless she actually wants to live in the US, I see no benefit to being a citizen, just headache and grief.

    Thanks. Stan

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    1. Do you claim her on your tax returns? I'm assuming you don't, but if you did, that might be a link to her.

      However, she can probably safely get rid of her US citizenship under US law if: (1) the expatriate became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and has been a U.S. resident for not more than 10 taxable years during the 15 taxable year period ending with the taxable year during which the expatriation date occurs; or

      (2) the expatriate relinquishes U.S. citizenship before the age of 18 1/2 and has been a U.S. resident for not more than 10 taxable years before the date of relinquishment.


      Note the interesting (and awful) wording. This looks like an escape clause, but if, for example, she's Swedish and moves to Germany, because she's now taxed under German law and not Swedish law, the "get out" clause doesn't appear to apply unless she gives up her US citizenship before 18 1/2 years old.

      I've no idea if the IRS would hold her to this or if this law will still be in place when she is an adult.

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    2. No, I don't claim her on my tax return.

      I believe the two clauses you refer to only exempt her from the "covered expat" and exit tax rule. She still has to go thru the consulate process to get rid of the citizenship. The parent is not allowed to do it for her, only the child can and must be old enough to understand the process. I've spoken to lawyers about it, and she must realistically be about 16 before being considered mature enough to understand. So technically under US law, this citizenship is automatically forced on the child (with all the US laws and regulations) with no way of getting rid of it.

      And as you suggested, the US is constantly changing the rules, and usually for the worse in expat cases. They also change them retroactively so there is no chance to react (such as the HEART act in 2008). It may be even more difficult than now to get rid of when she becomes an adult. Hence, I chose to not register her at all as we have no plans of living in the US.

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