Americans living outside the United States may soon be able to stop paying taxes in the US thanks to a bill introduced in Congress that would allow them to switch to a residence-based taxation model.
The bill – entitled the Residence-Based Taxation for Americans Abroad Act – was put forward by Republic Representative Darin LaHood of Illinois. US citizens living overseas have for years denounced the complicated and costly process of remaining compliant with the tax system. The proposal would see them treated as non-residents without losing citizenship.
"In its current form, the bill would create an optional procedure that Americans abroad can start so they would no longer be US tax residents," Rebecca Lammers, Chair of the Democrats Abroad Taxation Task Force, told The Brussels Times.
The US tax system is currently based on citizenship rather than residency. In practice, this means that Americans living abroad and so-called "accidental Americans" (those who have American nationality because they were born in the United States but have no other ties to the country) must still declare American taxes – a system they have repeatedly denounced.
Not a tax loophole
Under LaHood's proposal, Americans born and living abroad or who have lived in a foreign country since 2010 or since reaching the age of 25 would be able to opt into residency-based taxation. Americans who move abroad going forward could also opt for residence-based taxation after a transition period, subject to an exit tax on high net-wealth individuals to prevent tax evasion.
Should the bill pass, Americans abroad would no longer have to file US tax returns when they do not owe any US tax. They would be provided with a certificate that they can show banks, Lammers said. "That would hopefully alleviate some of the banking access issues that Americans abroad have experienced due to the FATCA anti-tax evasion measure."
Expats with US-source income – such as real estate, investment or retirement income – would still need to pay US taxes on most of that income. "The bill is specifically designed to ensure that the wealthy do not use this as a tax loophole. We are still in the process of reviewing the bill but it seems tight against abuse."
A man waving an American flag. Credit: Belga / Yorick Jansens
While residence-based tax bills that were introduced in the past did not go anywhere, this particular bill is gathering momentum, Lammers says. "To make the bill bipartisan we are looking for a House Democrat co-sponsor. We are in ongoing conversations with Democrats in D.C."
Americans living abroad still have to file taxes with the Internal Revenue Service (IRS), which can cost hundreds of dollars to complete even though about 60% do not owe taxes. This applies to millions of Americans living abroad, including so-called "accidental Americans" who sometimes are unaware they even hold dual citizenship.
"For the first time in our lives, Americans abroad can see the light at the end of the long, dark tunnel that has cost them huge amounts in accounting fees, ruined relationships, and made it impossible for them to live normal lives," said Brandon Mitchener, Executive Director of Tax Fairness for Americans Abroad.
The bill has not yet passed but has been introduced with the intention of soliciting feedback to reintroduce it with amendments next year. "We are very encouraged. It is very much a step in the right direction."
