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Residency Based Taxation
Do you support amending the Internal Revenue Code to abolish taxation based on citizenship and instead adopt Residency Based Taxation, a system in which Americans living outside the U.S. would pay U.S. tax on income generated in the U.S. but would be exempted from reporting to the Internal Revenue Service (IRS) income earned in their country of residence?
- The United States taxes its citizens and residents on their worldwide income based on a principle of citizenship-based taxation, unlike all other industrialized countries that tax income based on a principle of territoriality;
- 90% of individuals who filed a tax return with the IRS from abroad in 2020 earned less than $200,000 , meaning the majority of Americans abroad are working and middle class;
- Non-U.S. financial institutions with U.S. citizen customers often face significant and sometimes impossible compliance burdens linked to U.S. tax residency. This commonly results in refusal or reduction in banking services, with local governments considering this discrimination to be reasonable and necessary.
- Due to unintended adverse Internal Revenue Code treatment, US pensioners, single mothers, disabled, and others eking an existence through non-U.S. pension plans not protected under a treaty, social welfare payments from foreign governments, and other foreign government-provided support are double taxed, first by the country providing this assistance and then by the United States - which taxes income supplied by a foreign entity.
- The United States policy of citizenship-based taxation requires citizens living abroad to report income using extremely complex forms that force American abroad filers to engage expensive expat tax professionals or forces those unable to afford these services into non-compliance;
- Significant numbers of citizens living outside the country incur tax preparation costs in excess of $1,000; far exceeding the average cost to U.S. residents. In 2020, 60% of filings from abroad owed no US tax. Many Americans abroad are forced to pay an accountant to prove they owe no U.S. tax, making it feel like a tax in and of itself;
- Double taxation and onerous tax preparation and compliance costs puts American job seekers abroad at a significant disadvantage to non-American workers;
- Tax equalization increases costs associated with hiring overseas American workers causing multinational corporations, including those headquartered in America, to hire fewer Americans abroad, thus decreasing American exports;
- Whereas, the cost of fairly administering and enforcing CBT far exceeds the revenues it generates;
- Whereas, all other industrialized countries use residence-based taxation (RBT) to tax the income of their citizens and residents, thereby avoiding both double taxation and the need to engage foreign powers in tax enforcement of citizens living abroad;
- Whereas, the findings of an October 2017 survey by Democrats Abroad of U.S. citizens of all political preferences residing abroad indicate that 84% of survey participants support a switch from Citizenship Based Taxation to Residency Based Taxation;
- Whereas, the voting rights of U.S. citizens exist independent of their tax obligations, with the 24th Amendment specifically severing the relationship between taxation and voting rights and later legislation [UOCAVA] protecting the right to vote in federal elections;
- Whereas, under a system of Residency Based Taxation, U.S.-sourced income would remain taxed, as it is for all other non-residents irrespective of citizenship;
- Whereas, the Internal Revenue Service has well-established guidelines for determining that an American is a bona fide resident of a foreign country that may be further strengthened;
- Whereas, according to witness testimonies before a congressional hearing in April of 2017, being subjected to taxation by two jurisdictions and banking service discrimination are the main reasons for Americans living abroad renouncing U.S. citizenship;
- Be it resolved that, Democrats Abroad supports ceasing taxation based on citizenship and supports the universally accepted notion of taxation based on the residence of the taxpayer;
- 2020 IRS Tax Year Statistics for Individuals - Other https://www.irs.gov/pub/irs-soi/20in53oa.xlsx (download).
- Can we please stop paying twice? Reforming the U.S. Tax Code for Americans abroad’ Democrats Abroad, October 2017, https://d3n8a8pro7vhmx.cloudfront.net/democratsabroad/pages/13975/attachments/original/1507632642/Can_We_Please_Stop_Paying_Twice_DEMOCRATS_ABROAD.pdf?1507632642 (download).
- A 2022 Update on Tax and Financial Access Issues of Americans Abroad: Once Uncomfortable, Now Suffocating. Democrats Abroad, November 2022, https://www.democratsabroad.org/2022_report