Americans are taxed on the basis of their citizenship, not residency. A US citizen, no matter where he or she resides and regardless of the type and source of income, is subject to US federal income tax, if certain income thresholds are met, and that individual must file a tax return with all the associated forms and schedules and, as called for, pay tax.
One of the associated forms requires reporting of information about specified foreign financial assets, including foreign deposit and custodial accounts and certain other foreign assets. Rules provide, as part of the regular income tax return, a foreign earned income exclusion, which can include a housing cost amount. Tax credits can be claimed to offset US tax, but not to the extent of foreign taxes that are allocable to excluded income. This benefit, in effect, is a type of partial residency-based tax treatment for some individuals. Upon an individual’s death, if the individual was a US citizen, his or her estate, if it is of a certain size, must file an estate tax return and pay estate tax with respect to its worldwide assets. A US citizen is generally subject to gift taxation, regardless of where the individual resides and where the assets are situated. Special rules deal with the tax treatment of expatriation. In addition, if certain thresholds are met, a US citizen must report foreign bank account information.
On December 20, 2018, Congressman George Holding (R) North Carolina, introduced the Tax Fairness for Americans Abroad Act of 2018 (H.R. 7358). The goal of the legislation is to replace the current citizenship-based taxation with residency-based taxation. In general, this, (the TFAA) would enact, alongside existing section 911, an alternative for Qualified Nonresident Citizens (QNCs) of the US living abroad.
With limited exceptions, the foreign-source income of Qualified Nonresident Citizens will be taxed like nonresident aliens, that is to say not taxed by the US. QNCs would remain US taxpayers and fully taxable, and subject to normal filing requirements, on US-source income.
The American Citizens Abroad explanation of TFAA outlines the tax treatment of both foreign earned and foreign unearned income. “The explanation is an attempt to lay out all the various income streams and assess how the proposed TFAA legislation will be applied to these income streams, how they will be taxed by the US, and what will not be taxed by the US,” said Marylouise Serrato, ACA Executive Director.
“The explanation is by no means an official technical explanation, and it should not be attributed to any degree to any person other than ACA,” added Charles Bruce, ACA Legal Counsel. “It’s important for the community and those working on the legislation to have a complete outline of the various areas of the current tax code that might be affected by the bill and how these changes might play out. The Holding bill lays down an important marker.
“ACA is obviously very much interested in helping develop and enact a final bill. Working on background subjects and then the drafting details, ACA is now turning to pushing for adoption of residency-based taxation,” said Marylouise Serrato.
ACA was the first organization to develop an approach to residency-based taxation (RBT) and to run unofficial revenue estimates on that approach. The work was widely presented to the offices that developed
TFAA, and ACA data and knowledge, we believe, was very valuable to that process. The American Citizens Abroad looks forward to continuing to develop its thinking on the subject of tax reform for Americans abroad and working with Members of Congress, the Administration and stakeholders of all stripes.
American Citizens Abroad’s (ACA, Inc.) mission is to educate, advocate and inform both the US Government and US Citizens living and working abroad on issues of concern to the overseas American community. Contact: [email protected], +1 202 322 8441.