Reykjavík Grapevine - 08.02.2008, Síða 10

You’re an Icelander, studying at an American uni-
versity, and you’re pregnant. You had planned to
go home to Iceland to have the child. But then
you find out that anyone born in the U.S. is au-
tomatically entitled to U.S. citizenship. American
citizenship might make it easier for your child to
study or work in America later on. Why not stay in
the States for the birth?
It sounds like a good idea. But there’s a
catch: American citizens must report their income
and pay taxes to the United States for their entire
life. No matter where they live. The United States
is just about the only country that taxes its citizens
in this way. Normally, people are taxed only in the
country where they actually live. The American
approach is controversial. Many people think it is
unreasonable. There has been a lot of commotion
about it in the U.S. Congress. The law was recently
changed again - not in overseas taxpayers’ favour,
though. Further changes are likely.
Meanwhile, welcome to February. Tax sea-
son is coming up. American citizens in Iceland
have a double-strength filing headache to look
forward to. And Icelanders who are tempted to
give birth in the United States should think care-
fully about the tax consequences for their chil-
dren when making their plans. There is some
good news. Americans in Iceland can usually
avoid most U.S. income taxes, because U.S. tax
law allows you to take a deduction or credit for
foreign-earned income. But there’s more bad
news than good. You still have to file. And these
deductions and credits only cover a limited set of
circumstances. American citizens in Iceland can
find themselves owing money to the U.S. govern-
ment if they have substantial income from interest,
capital gains, self-employment, or owning a busi-
ness, or if their regular salary is relatively high.
Double Social Security Contributions too
The biggest problem for many Americans in
Iceland is not income tax but social security
contributions (tryggingargjöld). This means the
money that you pay into the old-age pension
system, both in both America and Iceland. If
you work for someone else, your employer
sends this money to the government on your
behalf. If you are self-employed, you pay it all
yourself.
Under United States law, all U.S. citizens, any-
where in the world, who have self-employment in-
come of more than $433 per year must contribute
a part of that income to the United States social
security system, at a rate that normally amounts
to 14.1%. That means that American citizens in
Iceland who run their own unincorporated busi-
nesses - anything from translating to piano lessons
to jewellery making - have to pay twice: 5.79% in
Icelandic social security contributions, and 14.1%
to America too (using IRS Form 1040-SE).
Realising that this kind of situation is not
very workable, the U.S. Social Security Adminis-
tration has made agreements with many countries
under which Americans abroad only have to con-
tribute to one system (local or American), but not
both. These agreements are called social security
totalisation agreements. Every other Nordic and
Western European country, and every other leg-
acy OECD country, now has a totalisation agree-
ment with the United States. Iceland still doesn’t.
The U.S. Embassy in Iceland has recently turned
its attention to this issue, and has had Iceland
placed on the Social Security Administration’s list
of countries with which a totalisation agreement
would be desirable. This is a very welcome step
forward. However, the negotiation process is slow,
and relief for Americans in Iceland is still at least
several years away.
In the meantime, one way to get around the
Social Security problem is by starting an Icelandic
company and becoming its employee, thus having
no self-employment income. The down side is that
besides the regular cost of starting and running
a company, any American who owns a corpora-
tion abroad has to file the dreaded IRS Form 5471.
This form is so complex and time-consuming that
it absolutely requires a tax accountant skilled in
international matters.
The lack of a totalisation agreement has wid-
er effects. Americans who have moved to Iceland,
and Icelanders who have moved to America, do
not always get the full benefit of the two countries’
social security systems after they retire. A written
understanding between the two governments,
dating from 1981 and meant to be provisional, en-
sures that they do receive a very basic level of sup-
port. But a totalisation agreement would ensure
fully fair treatment, not just for mobile workers,
but also for their survivors and dependents.
Frequently Asked Questions
Here are some answers to the tax questions I com-
monly hear from Americans in Iceland (I am not a
tax attorney, though, so please consult one before
making any important decisions):
Q. I grew up in America but have lived here
for quite some time, and quit filing years ago
because I never owed anything. Isn’t that OK,
practically speaking? I can’t imagine that the
IRS cares.
If anything, enforcement is getting tougher. If you
think you might ever use your American citizen-
ship - by moving back or even just travelling back
to the United States - it is especially important to
file. Even if you owe nothing. Jane Bruno, a tax
accountant who specialises in Americans over-
seas, notes that the IRS and the U.S. immigration
authorities are working more closely together. She
says, “I advise my clients who are travelling or re-
locating back to the U.S. to have at least 3 years
of prior tax returns available to show if they are
asked. Just make it a part of your travel packet.”
U.S. passports now include the following warning:
“All U.S. citizens working and residing overseas
are required to file and report on their worldwide
income.”
Q. Come on. Do I really have to pay American
self-employment tax? I mean, the work is barely
worth doing if I lose an extra 14% in tax. And I
am already contributing to the Icelandic system.
Unfortunately, according to the law, the answer
is yes. But there are some things you can do to
minimise your U.S. self-employment tax: (1) Think
broadly and deduct as many business expenses as
you possibly can. (2) Form an Icelandic corpora-
tion and become its employee, if you have enough
turnover to make this worthwhile. (3) Let the So-
cial Security Administration know of your interest
in getting a totalisation agreement signed as soon
as possible, by writing or having your congress-
man write to them using the instructions at www.
ssa.gov/international/agreements_overview.html.
In practice, overlooking a few hundred dollars in
self-employment income on your American tax re-
turns is perhaps unlikely to get you punished, and
is probably a lesser sin than not filing at all. But it
leaves you wide open to penalties from the IRS,
and creates a slippery slope if your self-employ-
ment income grows over the years.
Q. Can’t I get out of this all by renouncing my
United States citizenship?
It’s not that simple. After renouncing your citizen-
ship – a consequential decision that shouldn’t be
taken lightly – you can file Form 8854 with the IRS
in order to signal the end of your tax liability to
the U.S. But if you have not fulfilled your tax ob-
ligations to the United States during the five years
before renunciation, or if you have assets over a
certain level, the U.S. will consider you subject
to U.S. tax at an even higher, penalty rate for ten
years after your renunciation.
Q. Where can I go if I need help from a tax ac-
countant who understands both the U.S. and Ice-
landic systems?
I don’t know of a tax accountant in Iceland with
expertise in the American system, but there are
accountants in America who specialise in expatri-
ate issues. You can contact Jane Bruno through
her website, www.oceanwavestax.com, where she
also sells The Expat’s Guide to U.S. Taxes, an elec-
tronic book designed to help Americans abroad.
The website of American Citizens Abroad, www.
aca.ch, offers news updates, basic tax advice, and
a chance to join in lobbying for simplified income
tax filing for Americans abroad.
Text by Ian Watson
Two Holes in Your Pocket
Meanwhile, welcome to
February. Tax season is
coming up. American
citizens in Iceland have
a double-strength filing
headache to look
forward to
The only certainties in life are death and taxes. For
US citisens, that is true twice over...
Photo by GAS
10 | Reykjavík Grapevine | Issue 02 2008 | Article