Residence-Based Taxation Bill Explainer


Overview of the Issue

Americans abroad suffer from a myriad of tax and financial access discrimination issues due to the nature of the U.S. tax code. The Democrats Abroad Taxation Task Force has detailed this discrimination in many reports, surveys, regulatory filings, and statements for the Congressional record. The list of necessary changes to the current tax code would be staggering and require immense effort to implement one issue at a time. In addition, a full switch from the current system (known as Citizen-Based Taxation) to the system most of the world uses (Residency-Based Taxation) is too big of an overhaul to provide the relief required for Americans abroad who need it sooner rather than later. By adopting Elective Residency-Based Taxation, Congress will address the bulk of tax issues facing Americans Abroad without having to adapt all provisions of the tax code to be “compatible” with life outside the United States.

Purpose of the Bill

To exempt U.S. citizens residing long term outside the United States from taxation and reporting requirements on income and assets earned or held outside the United States.

Bill Summary

  • U.S. citizens living abroad long-term could follow a procedure to report and pay tax on U.S. sourced income only. The procedure would require tax residence in a foreign country and up-to-date filing of their U.S. tax returns.
  • High-net-worth individuals would be subject to a departure tax on assets with unrealized gains and deferred income.
  • U.S. citizens living abroad who complete this procedure would still be subject to U.S. tax on U.S.-source income, but they would be relieved of complex and onerous international information reporting requirements, including the Foreign Bank Account Report (FBAR) and FATCA (Foreign Account Tax Compliance Act).
  • U.S. citizens who return to live in the U.S. would again be subject to U.S. tax on their worldwide income.

U.S. citizens living abroad who may benefit from this procedure are those who:

  • Owe little to no U.S. tax and face a high cost of filing.
  • Have most of their income and assets outside the U.S.
  • Were born abroad and have never lived in the United States (e.g., those who identify as an “accidental American”).
  • Intend to remain a non-resident for an extended period of time.

 U.S. citizens who may not benefit from this procedure are those who:

  • Reside abroad on a short-term basis (e.g., on a two-year work assignment with plans to return).
  • Have the majority of their income and assets inside the U.S.
  • Benefit from a preferential tax treaty between their country of residence and the U.S. (e.g., retirees in France who have most of their retirement income in the U.S.)
  • Do not have tax residency established in another country (e.g., “digital nomads”).

Some special cases:

Specific procedures and applicability of the $100 fee will be clarified in future regulations.

  • Current Americans abroad who have lived overseas for at least 3 of the last 5 years and can certify tax compliance are exempt from the departure tax regardless of their wealth level.
  • Those who have continuously resided abroad since age 25 or since the enactment of FATCA in 2010 are exempt from the departure tax regardless of wealth level and past compliance status.
  • U.S. citizen babies born abroad in the future will be born as non-residents and will be issued a CNR at birth.

 

Mock case studies can be viewed here for more information.

This bill is designed to ease reporting and compliance burdens without creating tax loopholes for the rich. Provisions include:

  •  Departure taxes on high net worth individuals
  •  Bona fide tax residency in another country (digital nomads don’t qualify)
  •  Elimination of the “closer connection” loophole
  •  Withholding on U.S. source income
  •  Keeping FATCA in place (enabled by the certificate of non-residence)
  •  Clawback for those who re-establish U.S. residency in less than four years

 

Legislative and Political Next Steps

Introduction in the 118th Congress

  • The goal of introducing the bill at the end of the 118th Congress is to announce that this policy is under serious consideration and to solicit public feedback.
  • Democrats Abroad is one of a handful of stakeholders collecting feedback from our members to help improve the bill. You can submit your feedback here.
  • The bill is in the process of being “scored” by the Joint Committee on Taxation—the government nonpartisan committee of U.S. Congress in charge of evaluating the cost of proposed legislation. The aim is to make the bill “revenue neutral,”  meaning it will neither cost money nor raise revenue for the government.

Factors to Consider to Pass the Bill

  • The chances of a bill like this to be passed on its own is slim; therefore, the goal is to attach the bill to a bigger tax bill.
  • Currently, discussions are underway in Congress for a tax bill that must pass by December 31, 2025, due to certain tax provisions expiring. This is the best opportunity for the Elective Residency-Based Tax bill to get attached to a bigger tax bill that is moving.
  • Legislation is more likely to pass when it garners strong bipartisan support. It’s important to ask all Members of Congress if they will co-sponsor the bill regardless of party affiliation.
  • While there is no guarantee the bill will pass, having more co-sponsors and encouraging constituents to urge their Congressional representatives to co-sponsor the bill increases bipartisan support. This, in turn, raises the likelihood of the bill being attached to the larger 2025 tax legislation, improving its chances of becoming law. 

 

How can I help pass the bill?

  • Give your feedback on the bill here.
  • Volunteer for the Democrats Abroad Taxation Task Force here.

More information

  • Read the bill’s FAQs here.
  • Read the bill text here.
  • Read more about the extensive work of the Democrats Abroad Taxation Task Force here.
  • Join the Democrats Abroad Taxation Task Force mailing list here.

Disclaimer: Democrats Abroad cannot provide individual tax advice. Advice requires consideration of your individual circumstances and needs, none of which can be accomplished with the information provided in these FAQs. We are not tax lawyers, accountants, or advisers. Please consult a professional tax adviser/accountant/return preparer when addressing your personal tax matters. All prospective legislation is subject to change prior to adoption.

If you are in need of tax advice, you can consult the IRS Tax Return Preparer Directory to find an adviser or tax return preparer near you or providing online services to meet your needs and budget: https://irs.treasury.gov/rpo/rpo.jsf

Democrats Abroad accepts no liability for any actions taken or not taken as a result of information obtained from this website or choosing a tax return preparer either from the IRS Directory or elsewhere.