Why The 3.8% NIIT (”Net Investment Income Tax”) Is Especially Unjust For Americans Abroad

August 4, 2023 - Participants Include:

 

Virginia La Torre Jeker - @VLJeker

 

John Richardson - @Expatriationlaw

 

On July 27, 2023 Virginia La Torre Jeker published a blog post about the 3.8% NIIT ("Net Investment Income Tax"). The post is an excellent discussion of the "Net Investment Income Tax" generally and how it impacts Americans abroad specifically.

As a general principle the NIIT unfairly discriminates agains Americans abroad in (at least) the following ways:

1. The NIIT applies to those who use "married filing separately" category at a lower threshold ($125,000) than to those who use "married filing jointly" ($250,000). Because a higher percentage of Americans living outside the USA use the "married filing separately" category, the NIIT applies to a higher percentage of Americans abroad.

2. Because the US foreign tax credit rules do not allow foreign tax paid on investment income to be used as a foreign tax credit, the NIIT is virtually guaranteed to cause double taxation for Americans abroad. It is in effect a 3.8% US surcharge on non-U.S. investment income.

3. The NIIT applies to both PFIC (non-US mutual fund income) and CFC (Subpart F income) causing additional hardship for Americans abroad.

4. While exempting income from U.S. 401K (and similar U.S. income) from the NIIT, but applying the NIIT to non-U.S. tax deferred accounts (example Canadian RRSP) it further penalizes Americans abroad.

Incidentally, the purpose of the NIIT was to fund healthcare for U.S. residents. This healthcare is NOT available to Americans abroad.

Therefore, the NIIT is another particularly egregious example of U.S. citizenship-based taxation.