With tax certain to be an important topic in coming weeks ahead of the US elections, for a certain group of Americans – those living overseas – the demands of dealing with their financial affairs can be high. We spoke to a specialist firm about developments.

With the days counting down towards the US elections on 5 November, and tax likely to figure as an issue for voters, the position of expat Americans tends not to get much political attention. That’s unsurprising – there aren’t that many expats. According to the Association of Americans Resident Overseas, there are at least 5.4 million of them, and they’re unlikely to have enough voting clout to count all that much.

Regardless of the numbers, however, for those who want to move abroad or who are already out of the US, a long-standing headache has been obtaining a bank account or other financial service channels. Because the Internal Revenue Service, almost uniquely among major countries, taxes citizens on a worldwide basis, American expats are unloved. They're a compliance problem. 

Their plight became more severe at the end of 2010, when the Barack Obama administration signed the FATCA act (Foreign Account Tax Compliance Act) into law. In the following months, banks such as Deutsche Bank and HSBC closed doors to new US expats. Matters slowly improved and several specialist players, such as Schroders, Maseco, London & Capital and Royal Bank of Canada, offered services to those with US connections. Vontobel and a clutch of Swiss external asset managers have developed US-focused offerings, obtaining SEC licences to do so. But still, the US expat financial experience remains difficult. The advocacy group, American Citizens Abroad, has campaigned for the US to adopt a territorial tax code, such as that used by most nations. 

As far as Katelynn Minott, chief executive officer of Bright!Tax, is concerned, serving US clients' tax and associated tasks has been a brisk source of business since this cloud-based US tax services firm began operating in around 2010. It serves about 6,000 clients who are mostly in Canada, Australia and the UK. Some others have moved to places such as Greece and Portugal.

“Today, there is a growing number of firms in wealth and the wealth management industry focused on Americans living overseas,” Minott told Family Wealth Report in a call. “The trend is to have solutions that are US-based.”

There have been changes. The existing US amnesty programme is a streamlined foreign offshore procedure under which expats sort out tax exemptions without facing harsh penalties. 

Penalties don’t apply regardless of when a person files; the key is that a person should handle these affairs proactively, Minott said. 

“Interest on tax due to the IRS is not waived under the programme. Though more than 80 per cent of our clients under the Streamlined Procedure don’t owe any tax. More than 60 per cent receive refunds from the IRS,” Minott said. 

Nasty surprises
A big problem is that expats can be unaware of what they owe. For example, if they have a UK Individual Savings Account (ISA), earnings in the account must be reported to the IRS; the same applies if an expat owns shares in a non-US company or earns interest from a non-US bank account. 

“Earlier on, there were innocent misunderstandings…it was almost a case of tax therapy and people were genuinely surprised [at the tax situation],” Minott said. 

After FATCA was enacted [in late 2010], awareness of what expats had to report increased. “There is now much more awareness,” she continued. 

“For someone who has to have a residence outside the US, it can be challenging to have assets in a US account. Most big US institutions are freezing assets for Americans living abroad,” Minott said, giving examples of Vanguard and Fidelity. “We saw a lot of clients who were kicked out of US banks.”

Minott referred to a procedure, coming into effect in September 2019, designed for people who have given up US citizenship. They must be compliant for a five-year period leading up to the renunciation of the citizenship. 

Even before the shift to remote working caused by the pandemic four years ago, one trend that has fuelled demand for flexible tax arrangements is the rise of the “digital nomad” – those earning a living online while living outside their country for a period of time. “We are seeing a wave of digital nomads,” Minott said. 

We need to talk about politics
There is an election in the offing, and on the Democrat Party side, Kamala Harris, the vice president, is reported in some quarters to be weighing a capital gains tax on unrealised gains for those with a net worth of more than $100 million. There are occasional calls from the Democrat side for wealth taxes and higher taxes on the wealthy. The Republicans aren’t likely to go down the tax hike route but in a more populist party than in the days of Reagan or the Bushes, they cannot be entirely ruled out. As a result, ultra-high net worth US citizens might start to look overseas. (On a slightly related note, last week this publication looked at the way that divided government, and other checks and balances, come into play in ways that are not always sufficiently appreciated.)

Minott said people from both sides of the political aisle have investigated moving abroad. Some are seeking a lower cost of living and a more attractive lifestyle. Additionally, some people want to have more options for where they live in the world. (Renouncing US citizenship is not easy and requires considerable paperwork and paying an exit tax.)

Double-tax treaties can remove some problems, but they don’t eliminate all frictional costs that expats face in filing returns, Minott added. 

So whether for concerns about tax, or the direction of US policy more broadly, whoever ends up in the Oval Office, it is far from clear that giving up a US passport, or moving overseas for a few years, is an easy solution. Regardless of politics, however, a desire for options and to spend time abroad appears to be keeping these specialist advisory firms busy.