Push to end US double taxation gains momentum with new bill

US expatriates' hopes for an end to double taxation gained new momentum on Wednesday, as a politician introduced a bill in the House of Representatives that would allow citizens living abroad to switch to a residence-based taxation model.

The bill, put forward by Representative Darin LaHood of Illinois, is in line with president-elect Donald Trump's campaign pledge to end double taxation for Americans living abroad, who for years have complained about the complicated and costly process to remain compliant with the tax system.

News of the bill's introduction was first reported by The Wall Street Journal.

The US is the only major country in the world that taxes its citizens based on citizenship instead of residency. Americans living abroad still have to file taxes with the Internal Revenue Service, which can cost hundreds of dollars to complete even though about 60 per cent do not owe taxes, according to the Taxpayer Advocate Service.

Those obligations apply to millions of Americans living abroad – estimates range from 3.9 million to 5.5 million – including so-called accidental Americans who are unaware they hold dual citizenship.

Residence-Based Taxation for Americans Abroad Act

The new bill, called the Residence-Based Taxation for Americans Abroad Act, would establish a process through which Americans living overseas can elect to be treated as a non-resident without having to renounce their citizenship.

By doing so and moving to a residence-based tax model, their foreign-based income would be exempt from US taxes. Those with US-sourced income including real estate, investments and retirement income would still have to pay US taxes.

“In today’s world, Americans choose to live and work abroad for a host of reasons, and that does not mean that they should be subject to more onerous tax and compliance burdens,” Mr LaHood said in a statement.

America's wealthiest – those with a net worth higher than $13.61 million – would have to pay a departure tax if they opt out of the US system.

Those with a net worth of less than that amount and citizens who have not lived in the US since they turned 25 years old or since March 2010 could avoid the departure tax. Americans who have been tax compliant with the US in the past three to five years could also avoid it.

Income tax

• Are you liable for income tax while living in the UAE?
• How UAE’s high-net-worth individuals can avoid tax and financial pitfalls

The introduction of the bill received bipartisan support from groups advocating for Americans living abroad. Solomon Yue, president of Republicans Overseas, told The National that the bill “really shows momentum” on Mr Trump's campaign pledge. Mr Trump made the pledge in a statement to Republicans Overseas in October.

“We welcome any member of congress for supporting president Trump's pledge to end double taxation for overseas Americans,” Mr Yue said.

Tax loopholes

Democrats Abroad also welcomed the introduction of the bill and highlighted the bill's efforts to ensure it would not create loopholes for those hoping to evade US taxes.

“I’m extremely proud of the role Democrats Abroad has played in elevating the issue of the unfair tax burdens faced by ordinary Americans abroad and proposing ways to address them,” Rebecca Lammers, chairwoman of the Democrats Abroad Taxation Task Force, said in a statement.

Mr LaHood worked closely with Tax Fairness for Americans Abroad, a non-profit organisation, to draft the bill. Paris-based lawyer Laura Snyder said the bill was the result of direct work of TFFAA and its non-partisan organisations Stop Extraterritorial American Taxation and the Association of Americans Resident Overseas.

“The introduction of this bill is a milestone,” Ms Snyder, who holds positions in both organisations, told The National in a statement.

Mr LaHood told the Journal he hopes the bill can be included as part of tax legislation when Congress begins its new session next year.