TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 16, 2013

ObamaCare Tax Will Hit U.S. Citizens Working Abroad

Financial Post:  Obamacare Could Cost Some Canadians a Lot of Money:

In the wee hours of Jan. 1, 2013, as most of the country was catching some shuteye after the previous night’s New Year’s Eve festivities, the U.S. Senate passed the American Taxpayer Relief Tax Act of 2012 or, as some people refer to it, the “fiscal cliff” act.

The legislation contains changes to tax rules which may be relevant to the estimated one million U.S. citizens living in Canada. Under U.S. law, citizens are required to file an income tax return reporting worldwide income no matter where they reside. Most countries, including Canada, have a residency-based taxation system rather than a citizenship-based system.

In the majority of cases, however, U.S. citizens don’t end up owing U.S. federal tax due to offsetting foreign tax credits. For example, under the new legislation, U.S. high-income earners now face a top tax rate of 39.6% for income over $400,000, an increase from 2012’s top 35% rate. By comparison, Canada’s top marginal rate is 29% and kicks in at income of roughly $135,000 in 2013. But when you add in provincial taxes, combined top marginal rates range from 39% to 50%. This means that in nearly all cases, there will be enough Canadian taxes paid to offset any U.S. tax liability owing.

But for those U.S. persons making more than $200,000 in 2013, a separate piece of legislation, the Patient Protection and Affordable Care Act, known informally as “Obamacare,” could prove to be a real cost to some Canadians. The PPACA included a new measure, effective for 2013, called the net investment income tax (NIIT), which imposes a 3.8% surtax on net investment income, including interest, dividends and capital gains.

The problem for dual income tax filers, according to an alert issued by U.S. tax lawyer James Gifford of Moody’s LLP in Calgary, is that “foreign taxes most likely will not be creditable against the 3.8% Obamacare tax on net investment income.” This means that high-income Canadians may have to start writing a cheque to Uncle Sam for the first time in 2013.

Tax | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference ObamaCare Tax Will Hit U.S. Citizens Working Abroad:


"This means that high-income Canadians may have to start writing a cheque to Uncle Sam for the first time in 2013."

Or does he mean, "high-income US citizens residing in Canada" ?

Better yet, "high-income US citizens with investment income, instead of or in addition to earned income, residing in Canada, or anywhere else in the world, including the United States."

Posted by: Bob | Jan 16, 2013 11:29:39 AM

Just a follow on to this story...

From YahooNews...

New tax to fund Obamacare could leave American expats in Canada owing Uncle Sam

“There really is a perfect storm gathering for Americans living outside the U.S.,” said Peter Megoudis, a partner with Deloitte & Touche in Toronto.

There’s no easy answer to the problem. Even dual citizens who renounce their American citizenship have to prove they’re square with the IRS and wealthier citizens are subject to a hefty “exit tax.”

Posted by: Just Me | Jan 17, 2013 1:46:29 AM