New U.S. Bill Could Ease Expats’ Double Taxation – Eventually

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Potential new American legislation could free expats from double taxation.

Recent proposed legislation could finally be the first step to removing U.S. taxes on worldwide income for non-resident Americans.

U.S. Representative Darin LaHood, a Republican from Illinois, has introduced the “Residence-Based Taxation for Americans Abroad Act,” a bill that would implement a residence-based taxation system for U.S. citizens living overseas.

The United States is one of the few countries, and the only major nation, that enforces citizenship-based taxation. For non-resident Americans, this bill could mean burdensome reporting requirements in both their country of residence and the U.S. – not to mention potential double taxation.

His bill comes with conditions for taxpayers to qualify and is unlikely to eventually pass on its own, but LaHood hopes to make the proposal part of a larger American tax package in the future.

RBT and the bill’s points

According to recent estimates, more than 5 million U.S. citizens live abroad, including Americans who were born and raised in the U.S. but have since moved abroad indefinitely, as well as “accidental Americans,” or individuals who hold dual citizenship in the United States and a foreign country but are unaware of their status as U.S. citizens.

Under the Act, U.S. citizens (not holders of green cards) residing overseas would generally no longer be classified as individuals subject to American income tax and taxed like non-resident aliens (aka residency-based taxation, or RBT).

U.S. President Trump said during his campaign that he supported ending the double taxation of overseas Americans, and LaHood calls the issue non-partisan. “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,” LaHood said in his announcement of the bill. 

Features of the Americans Abroad Act include:

• An elective process for U.S. citizens living abroad to be treated as a non-resident without having to renounce U.S. citizenship. Individuals need to make a one-time election and continually meet residency and other requirements.
• An electing taxpayer would be subject to U.S. tax only on U.S.-sourced income and gains (such as income from ownership in a U.S. business), distributions from U.S. retirement and deferred compensation plans, income from assets physically in the U.S. and other U.S.-sourced income or gains.
• The electing individual would be treated for tax purposes like a foreign individual residing outside the United States with U.S.-sourced income. Residents in a “tax haven” nation could also qualify.
• An electing individual must certify compliance with U.S. tax obligations for the five years prior to the election date, with exceptions for certain existing, long-term Americans abroad.

Filing relief, tax and exemptions

The bill would exempt electee taxpayers from certain filing requirements, including the Internal Revenue Service (IRS) forms 8938 (“Statement of Specified Foreign Financial Assets”) and 5471 (“Information Return of U.S. Persons With Respect to Certain Foreign Corporations) and U.S. Treasury’s Financial Crimes Enforcement Network Form 114, “Report of Foreign Bank and Financial Accounts” (aka the FBAR).

Electing individuals and U.S. citizens born in a foreign country after the date of enactment of the bill (which may or may not happen within the next few years) could also apply to the IRS for a certificate of non-residency. This certificate, potentially a key document to ease administrative burdens, establishes that taxpayers aren’t “specified United States persons” for purposes of the Foreign Account Tax Compliance Act (FATCA).

Foreign banks and other financial institutions would then also be freed from often burdensome reporting under FATCA, which has sometimes made these institutions hesitant to work with U.S. citizens living and working abroad.

Some electees would have to pay a “transition tax,” similar to the expatriation tax but only applying to individuals with net worth exceeding the U.S. estate tax exemption ($13.99 million for 2025, though this could be approximately halved if the 2017 Tax Cuts and Jobs Act [TCJA] provision isn’t renewed). The tax would be on a deemed sale of all their property as if it were sold for its fair market value on the day before their election. This tax, LaHood says, would “help ensure fiscal balance and prevent abuse.”

Exempted property would include deferred compensation items, specified tax deferred accounts, interests in non-grantor trusts, real property in the U.S. and foreign real property that has been owned and used as the individual’s principal residence for periods aggregating two years or more in the five years prior to the election.

Those who haven’t been a U.S. resident at any time since turning 25 years old or after March 28, 2010 (the date FATCA was adopted) through the date of enactment of the bill are also exempt.

Future of the bill

The advocacy group American Citizens Abroad says, “this long-awaited legislation is a critical step forward,” adding that introduction of this legislation is “intended to set the groundwork for tax language that will ultimately be included in a new bill in the next Congress,” which was sworn in on Jan. 3. It is not expected that this bill will be passed before the current Congress recesses.

Observers point out that U.S. expats come from many states and constitute relatively small numbers of voters, a potential problem for passage of the bill. Republican-dominated Washington may also already have its hands full defunding the IRS, extending the TCJA and otherwise rewriting large portions of the American tax code.

LaHood has said he hopes the bill can be considered in a reconciliation package next year.

Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.

About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors.

Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.

Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.

Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).

Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.

In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique) and the Silver award for Accountancy Firm of the Year at the Magic Circle Awards. Furthermore, Alicea has consistently secured her position in the Global Elite Directory for four consecutive years, being recognized as a Private Client Global Elite Advisor and is currently listed for 2024 as a Non-Legal Adviser. This exclusive directory annually highlights the world’s elite lawyers and outstanding wealth advisors serving ultra-high net-worth clients.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.