Did you hear the President today?

“Today the President laid out a very different vision, one where everyone—no matter who you are, where you’re from, or how big your bank account is—pitches in together to rebuild the foundations of our country and economy.”
Did you hear the President today?

While this sounds, in theory, to be a noble idea worthy of taking into consideration, it is, in practice, troubled with a number of significant hurdles which need to be overcome.

Around 6.2 million American citizens abroad already pitch in together to rebuild the foundations of the countries and economies where they reside outside of America, as explained in Taxation of Americans Abroad.  Asking them to do the same for two countries and two economies puts a greater burden on them than any other group of people, with the exception of the totalitarian nation of Eritrea.

“Congress could amend the Tax Code to end the discriminatory practice of taxing U.S. citizens with a bona-fide residence abroad. However, this appears highly unlikely—U.S. citizens living abroad have essentially zero influence in Congress.”
100 Year Legacy of Expatriation Due to Taxes

In a totalitarian regime, citizens living abroad have essentially zero influence in Congress. America is likely not defined as being a totalitarian regime, and yet Americans abroad are told that they can’t vote when they attempt to register with their address or documents where they live.  To register, they have to ask someone in the US if they can use their address for that purpose. For example, the Massachusetts Voter Registration Form Request requires a US address.  The same applies to Americans abroad who attempt to get an id card or drivers license, as further explained in “Your are an Invalid Resident!

“Approximately 6 to 7 percent of civilians living abroad voted in the 2008 election.  There is evidence that a large portion of the population was not successful in its attempt to participate. The largest problem for Americans abroad is not having their ballot rejected, but ensuring that their ballot is returned on time.”
Overseas Vote Foundation

Even if they can register to vote, they are told that they can’t vote locally or their vote doesn’t count.  Americans abroad are further compensated with their lack of political representation with an up to 50% slash to their US Social Security benefits through the Windfall Elimination Provision.  If they lose their employment abroad, they will be denied unemployment benefits in the US.

“The U.S. Government does not offer an unemployment insurance plan in which overseas Americans could voluntarily enroll to protect themselves upon their return to the United States.”
American Citizens Abroad

The idea of  being together seems to stop at the border, such as with Medicare, or State Farm which writes:

“Each of the investment products and services referred to on the State Farm Mutual Funds web site is intended to be made available to customers or prospective customers residing in the United States. The customer’s U.S. permanent residence address must be a street address.”
State Farm

Yet, it doesn’t end there.  When Americans apply for some bank accounts abroad or even banking services in the States, they may be rejected or treated differently from other Americans.

“As a direct result of existing and newly proposed U.S. regulations, many U.S. and overseas banks have closed accounts held by U.S. citizens living outside of the U.S., and many banking institutions outside the U.S. now refuse to open any new accounts for Americans. Recently enacted legislation from the Treasury and Congress will only worsen this situation.”
Banking Services Denied to U.S. Citizens Abroad

Of course, there are other issues as well, such as Americans abroad being the target of terrorist attacks responding to US foreign policy.  Americans abroad may also be denied residential tuition rates at US colleges.  We can’t even sign up for an American Sweepstakes, get a credit report from AnnualCreditReport.com, buy an app from Barnes & Nobel, watch a video at Amazon or subscribe to Netflix.  Yet, the most serious issue is the excessive government spending on that which does not “rebuild the foundations of our country and economy”:

“Uncle Sam is like the neighborhood wastrel who buys everyone a drink and cosigns everyone’s loans even though he is unemployed. When faced with bankruptcy, he immediately goes down to the bar and buys another round for the road.”
Solving The Debt Crisis: A Military Budget For A Republic

America does not need to be a super power.  Rather, It needs to cut its spending to repay its debts to “rebuild the foundations of our country and economy”.  A 50% slash on Social Security Benefits for all Americans rather than singling out Americans abroad, would qualify under the concept of “pitching in together” and cut spending by $407 billion.  One could even work together more and stop Medicare within the US border too for all Americans, pitching in a few more billion.

Did you hear the President today?  Sadly, I heard no mention of residency-based taxation or even representation for Americans abroad in the House and Senate.  What I did hear appeared to be a collection of bipartisan chatter which stopped in relevance at the border.  Maybe the President should hear Americans today for a change?

Letter to John F. Tierney concerning Foreign Pension Plan Filings

Dear Congressman John F. Tierney,

I’m a member of the American working middle class writing to you again concerning your so-called “Middle Class Fairness Act of 2011”, H.R. 2495, which seeks to double tax the already taxed foreign earned income of around 6 million working middle class Americans, who do not live in America, regardless of their circumstances abroad.  I have not yet received a response from the many other messages that I have written to you, and so I’m writing to you again with more updates on Americans abroad which are relevant to your political interests.

The following is an update on my inquiry for filing foreign pension plans:
US Expatriate Foreign Pension Plans

As before, I am writing to you using your city and your zip code in the contact section of your web page, since its address section still fails to acknowledge that not all Americans live in America and that Americans abroad may choose to be residents of your state while living abroad or when they return to the US.  One would thus think that it would be logical for you to communicate with your American working middle class voter that you seem to claim to represent.

Kind regards,

Your American working middle class friend abroad

US Expatriate Foreign Pension Plans Continued…

The IRS called and left a message while I was at work.  The message stated that it was a one-time attempt to reach me and I was not given a number to return the call.  So, I called the IRS to see if I could return the call.  After holding for about 25 minutes, I spoke with an agent who began making a referral for my referral until I learned that referral responses are mailed out if the one call attempt fails, and that one can expect to receive the (e)mailed response up to 15 days from when the request was made.  The response might be mailed to a US address from which it will then have to be manually forwarded abroad, meaning that it might take up to a month for me to gain more information on how to file a foreign pension plan.  I could have provided the abroad address, but such would be a greater financial burden to the US taxpayer.  While waiting on the phone, I glanced through Publication 575 again, but still didn’t find an answer to my question that I can comprehend.

I suspect that the agent who called me is the same agent that I spoke with concerning an inquiry on how expats can invest into Roth accounts.  While the advice that I got from the agent about  Roth savings was outstanding, I hope that this expert is not the only agent who services 6+ million expats on their retirement savings questions.

A 32 minute long distance international call to the IRS may cost around $3.3, depending upon locality and exchange rates.  This, I believe, is currently not tax deductible but is much less than it used to be.

The Social Security Benefits of the Expat and the “Windfall Elimination Provision”

On 04/03/2012, the Social Security Administration wrote that when I retire at the age of 67, I’ll get a mighty monthly Social Security benefit of $495, partially in exchange for the time spent serving loyally in the United States military.  If I was 67 today, then this benefit would enable me to afford to rent the cheapest one bedroom apartment in San Francisco for only $370 per month, according to WalkScore, and have $125 left over for food, drinks, electricity, health care, transportation, taxes, clothing, etc.

This would be the case if there was no expat penalty, also known as the Windfall Elimination Provision (WEP). On WEP, the Social Security Administration writes:

If you work for an employer who does not withhold Social Security taxes from your salary, such as a government agency or an employer in another country, the pension you get based on that work may reduce your Social Security benefits… The Windfall Elimination Provision primarily affects you if you earned a pension in any job where you did not pay Social Security taxes and you also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit.

According to SSA Publication No. 05-10045, the Windfall Elimination Provision does not apply if:

  • You are a federal worker first hired after December 31, 1983;
  • You were employed on December 31, 1983, by a nonprofit organization that did not withhold Social Security taxes from your pay at first, but then began withholding Social Security taxes from your pay;
  • Your only pension is based on railroad employment;
  • The only work you did where you did not pay Social Security taxes was before 1957; or
  • You have 30 or more years of substantial earnings under Social Security.

This means that WEP applies to my monthly benefit of $495.  So, if I was 67 in 1990, my monthly Social Security benefit of $495 would be cut by $178 (see chart), since I was only allowed to contribute to Social Security for less than 20 years, to $317.  This would mean that I’d be able to rent the cheapest 1 bedroom apartment in San Francisco if I borrowed $53 from the bank.  However, I’d have nothing left for food, drinks, electricity, health care, transportation, taxes, clothing, etc.

Of course, today is not 1990 but rather 2012.  In 2012, the expat Social Security penalty is $383.5 (see chart).  So, if I was 67 today, then my monthly Social Security benefit would be a mighty $112.  This would increase the borrowed money needed to rent the cheapest one bedroom apartment in San Francisco to only $258 per month.  Never mind food, drinks, clothing, utilities, transportation, health care and taxes as well as loan payments and interest, given that nobody would refuse to lend money to an old dude with no job and no money to pay it back.

Yet, I’m not 67 and have another 20 or so more years to go.  Well, in the last 20 years, the expat penalty increased by $205.5.  So, in 2032, the expat penalty will probably be around $383.5+$205.5=$589.  In 2032, my rocking $495 monthly Social Security benefit will be reduced by $589 to -$94, meaning that I’ll only need to get a loan for $464 per month to rent the cheapest one bedroom apartment in San Francisco, assuming that rental rates don’t increase.  Now, that’s one serious benefit!

But, no worries.  Uncle Sam generously “protects” you by only penalizing a maximum of 50% of your Social Security.  Never mind the fact that US expats are denied voluntary participation:

If you get a relatively low pension, you are protected. The reduction in your Social Security benefit cannot be more than one-half of the amount of your pension that is based on earnings after 1956 on which you did not pay Social Security taxes.
SSA Publication No. 05-10045

Oh, that sounds so lovely and refreshing, especially when the remaining 50% gets double-taxed with citizenship-based taxation.  So, I’ll get a whooping $247.5 per month when I retire at the age 67, $2265 less than what will be paid to the average politician.  I’ll only need to get a loan for $122.5 per month to cover the rent of the cheapest one bedroom apartment in San Francisco, assuming that I don’t need to eat, drink, wear clothing, visit the doctor, ride on the Bart or pay taxes.  Not bad, eh?

Suppose that I lived in Thailand.  Uncle Sam has documented that American Expats in Thailand may get a Thai social security benefit from between $50 to $463 per month.  So, a Thai double wammy expat penalty free pension of $463 added to my generous American Social Security expat penalty reduced benefit of $247.5 would give me a rocking double-taxed $710.5 to rent the cheapest one bedroom apartment in San Francisco for $370, loan-free, while having enough change for a bud light (I would need it), some french bread, a pair of pants and maybe even a Bart ticket tax free?  Never mind health care.  Luckily enough for my American-retire-to-America argument, I don’t live in Thailand and thus I might actually be able to rent the cheapest one bedroom apartment in San Francisco, unless the value of the Franc drops to equal that of a baht.

If I was 67 in 1990, Swiss Social Security would range from $895 to $1791, using current figures exchanged in 1990 rates.  Yet, having served in the US military, the Swiss expat penalty would reduce my monthly benefit to between $692 to $1385.  So, the max possible Social Security benefit I could receive in 1990 would be $1633, $880 less per month than what the average American politician will receive.  If I was 67 today, Swiss Social Security would range from $1206 to $2413.  Yet, having served in the US military (did I already say that?), the Swiss expat penalty would reduce my monthly benefit to between $931 to $1864.  So, even with the current low value of the dollar and high value of the Swiss Franc, the double-wammy expat penalty will reduce my total Social Security benefit to between $1178 to $2112 as of today, which is between $401 to $1335 less than the average American politician benefit, even if I contributed more than the max contribution over 30 years and exchange rates were at their best levels as they are today.  As for how the economic situation will be 20 years from today, we have yet to see.

Now, the absolute best case scenario double-wammy reduced expat penalty benefit of $2112 may sound like a good chunk of cash in the shoes of the average American politician.  Yet, the Insight Center for Community Economic Development writes that a senior citizen in San Francisco needs a bare minimum of $2273.5 per month to cover rent, food, transportation and out-of-pocket medical bills.  The Big Mac Index further shows that Switzerland currently has the most overvalued currency and an American senior citizen in Switzerland earning less than $2287 per month would be living below the povery line.  This suggests that the probably is good that American senior citizens benefited with the double-wammy expat penalty will need more than solely social security to escape poverty regardless if they live abroad or are financially assisted by a foreign government to live in America.

Well, I called Social Security to inquire if these calculations were correct and was informed that the WEP penalty only applies to government employees working abroad, contrary to what is claimed in the documentation provided by the Social Security Administration and by many financial experts.  The Social Security Administration also said that my monthly benefit at the age of 67 would be $613.  Yet, this is also incorrect.  The Social Security Benefits Calculator writes that:

delay starting your benefits until age 70, your monthly benefit will be about…$613.00.

So, the Social Security Administration informed me incorrectly on the amount that I would receive when I’m 67 and also incorrectly on the WEP expat penalty.  Well, gee, thanks guys.  By the way, the Swiss Social Security also misinformed me on my 10 year penalty gap, incorrectly telling me that I could not reduce 5 years of it, which I later learned (to late) to not be the case.  Gotta love these government folks and their future planning expertise!  Unlike the US, Switzerland did provide me with the opportunity to avoid the expat penalty via voluntary participation.  Yet, with an average annual income of $13’646 at the time, I was much more concerned with college debt, debt interest, tuition, rent payments, food, taxes and all the other many expenses college kids have to live with.  Fair enough.  These days, I can fill the gap with personal retirement savings based on foreign-earned income, savings which Uncle Sam seeks to triple-tax.  I’ll write more on that later as I dig into the details of it.

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This information is based on my personal experiences and research on the matter.   Each individual free to process this information according to their own choosing and I welcome any questions or challenges to the facts and figures provided.  It is not my intent to inflame, anger, humiliate, misrepresent, misinform or to mischaracterize anyone.   This information is non-partisan, religiously void and patriotically neutral.  I’m simply describing the situation as-is according to how it occurs with the intent of gaining knowledge and sharing such with others.

FBAR & Retirement Savings

I called the FBAR hotline to inquire if retirement savings plans have to be reported.  I wasn’t sure because I figured that such could apply to the following listed exclusions:

  1. Foreign financial accounts owned by an international financial institution;
  2. IRA owners and beneficiaries;
  3. Participants in and beneficiaries of tax-qualified retirement plans;
    http://www.irs.gov/businesses/small/article/0,,id=148849,00.html

I was told that one has to report one’s pensions plans and that the tax software that I used didn’t file the form along with the other forms, even though it seemed like it did.  I was also told that I couldn’t fax in the form, for whatever reason.