Tax Fairness for Americans Abroad Act HR 7358
Yesterday afternoon, in the midst of all sorts of border wall funding related chaos across Capitol Hill, Rep. George Holding (R-NC) introduced the Tax Fairness for Americans Abroad Act HR 7358 on the floor of the U.S. House of Representatives. The bill would enact a switch from our current system of citizenship-based taxation to residency-based taxation, a move that would benefit nearly all Americans living abroad. A summary of the bill and its provisions, as well as a link to the bill itself, can be found here. Please spread the word to fellow members and on your social media platforms!
Though the bill is not perfect, it is a milestone in our expat tax advocacy work; we now have a legislative framework for refining and clarifying work in the 116th Congress on a bill implementing residency based taxation that will satisfy our key ambitions, including: accommodating of all Americans abroad, easy to transition into, protected from abuse by tax evaders and bad actors, and revenue-neutral to the federal government.
As our statement says, we have liaised continuously with House Democrats on the development and introduction of the bill and we look forward to picking this up with them again in January.
H.R. 7358 – Tax Fairness for Americans Abroad Act of 2018
The proposal outlined below would effectively end the current citizenship-based taxation system and transition to a system that provides territoriality for individuals – often referred to as residence- based taxation. By taking this first step toward ending the onerous burdens of citizenship-based taxation, Americans will become more competitive in the international job market and free to pursue opportunities around the world.
Under this new system, qualified nonresident citizens will no longer be taxed by the U.S. on their foreign source income while they are resident abroad; however, they will remain subject to tax on their U.S. source income.
Eligibility
In order to obtain qualified nonresident citizen status, an individual must be a nonresident citizen and make an election to be taxed as such. Individuals will make an annual election to certify they remain in compliance with the eligibility requirements.
Under this proposal, a nonresident citizen is defined as in individual that:
• Is a citizen of the United States,
• Has a tax home in a foreign country,
• Is in full compliance with U.S. income tax laws for the previous 3 years, and • Either:
a) establishes that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
b) is present in a foreign country or countries during at least 330 full days during such taxable year
Tax Treatment
Once an individual meets the qualifications to become a nonresident citizen, they may elect to be taxed as a qualified nonresident citizen.
Those electing to be taxed as qualified nonresident citizens will be exempt from taxation on, and shall exclude from gross income, their foreign source income. This includes both foreign earned income (as defined in section 911(b)) and foreign unearned income (defined as income other than foreign earned income that is sourced outside the U.S).
Under this proposal a qualified nonresident citizen will remain subject to tax on any U.S. source income.
While individuals will not be taxed on gain from the sale of foreign personal property attributable to their time as a qualified nonresident citizen, they will still be taxed on any gain attributable to their time as a resident of the U.S. In other words, if an individual holds a foreign asset prior to their election of qualified nonresident citizen status and then sells said asset while they are a qualified nonresident citizen, the individual will only owe U.S. tax on the portion of gain attributable to the period prior to their change in status.
H.R. 7358 – Tax Fairness for Americans Abroad Act of 2018 Tax Fairness for Americans Abroad Act – Summary
This bill would take the first step toward ending citizenship-based taxation by essentially taxing only those individuals that are resident in the United States or have income that is connected to the United States.
Under this bill, nonresident citizens that make an election to be taxed as qualified nonresident citizens will be exempt from taxation on, and will exclude from gross income, their foreign source income. All nonresident citizens will, however, remain subject to tax on any U.S. source income.
Current Law – Citizenship-Based Taxation
Our system of citizenship-based taxation, which taxes all citizens regardless of where the income is earned or where the citizen resides, places a unique burden on American citizens. This form of taxation stands in stark contrast to the rest of the world, as nearly every other country has adopted some form of territorial or residence-based taxation, and thus only taxes the income of individuals resident in the respective country – Eritrea is the only other country that operates a citizenship-based taxation regime.
In addition to creating costly and onerous compliance requirements, citizenship-based taxation often subjects many Americans abroad to double taxation and can severely hamper their ability to save for retirement. Further, citizenship-based taxation places increased burdens on Americans working abroad, which discourages businesses from hiring U.S. citizens for jobs in foreign jurisdictions. In fact, it can often cost as much as 40% more to hire an American than their foreign counterpart.
Benefit of the Tax Fairness for Americans Abroad Act
The Tax Fairness for American Abroad Act would create a tax regime that is simpler, fairer, and more competitive for Americans around the world. This bill takes a meaningful step to address the discriminatory double taxation of Americans abroad as well as ease the burden of dual tax filing requirements. Further, this bill will ensure that Americans around the world are able to accurately plan and save for their future without the fear of punishing tax liabilities.
American citizens abroad promote U.S. businesses, support U.S. exports, and represent U.S. interests throughout communities around the globe. By leveling the competitive playing field, this bill will allow more Americans to enter into the global workforce, thus encouraging both domestic job growth and increased reliance on U.S. products and services in global operations.