Often overlooked and misunderstood by the Congress, US citizens living and working overseas now appear to be poised to benefit from the Administration and Congress’ desire for tax reform. There is a real possibility that new international tax rules will be passed in a greater tax reform overhaul and these rules will no doubt address tax policy for individuals as well as corporations.
Throughout the summer, while Congress was on recess, offices on Capitol Hill continued to work on tax reform. Now Congress is back in DC, and the ball is rolling on tax reform. Republicans have signaled that tax reform is their top priority for this Congress. Clear signs have come from the White House these past weeks indicating a willingness to work with Democrats on tax reform. The stage is set for passage of what could be the most significant tax reform legislation since the Reagan administration.
The GOP blueprints, and recent statements from House Ways & Means Chairman Brady, suggest that changes for tax reform will include a transition from a “worldwide” tax regime to a “territorial” tax system. The blueprint calls out that the treatment of US citizens overseas must also be addressed in this change. Senate Finance Committee Chairman Hatch’s proposal also calls for reconsidering the taxation of US citizens living overseas. Additionally, at Congressional hearings held on tax reform, the need to address the community of US citizens overseas was raised and eliminating citizenship-based taxation is clearly on some Member’s “to do” list.
For the estimated 9 million US citizens living overseas (US State Department estimates) this is a welcome development as, if tax policy were to change, this would mean relief for those individuals from double taxation, onerous compliance requirements and potential penalties that can lead to financial ruin.
Currently, both US corporations and US citizens are subject to tax on their worldwide income, regardless if that income is earned in the US or overseas. This system is often called Citizenship-based taxation (CBT) because it uses citizenship as the determinate of tax liability, not residency. Under Residency-based taxation or RBT, US-source income would be subject to US tax, leaving foreign-source income exempt from US tax. The US is somewhat unique in its approach to taxing based on citizenship, sharing company with the likes of North Korea and Eritrea.
Under the US’s worldwide or CBT tax regime, US citizens abroad are required to not only file and pay taxes in the country of their residency but also file a tax return to the US. The task is daunting as there are a myriad of tax rules and forms. Penalties for incorrect reporting, usually due to not understanding the complex rules, can be disastrous and financially ruinous. Differences between tax regimes in the country of residence and the US can result in double imposition. Additionally, no filing from overseas is a “simple” filing. Many online tax-filing programs will not accept certain foreign documentation. Most individuals require the assistance of a professional tax preparer. Costs for this can run into the thousands of dollars.
For US citizens, Residency-based taxation or RBT would mean they would only be taxed on US-source income. RBT is not brain surgery and can be done easily, without a loss of tax revenue, and without creating loopholes for tax abuse. RBT fits alongside many of the international tax reform proposals currently being developed. American Citizens Abroad (ACA), with 40 years of advocacy on this issue, has led the charge for RBT, proposing a roadmap or outline to Congress showing them how they can get from where the US tax regime is today to where it should be with RBT. ACA’s continues to advocate for RBT with grassroots advocacy and crowdfunding to support revenue estimates for RBT.
RBT is a bipartisan issue. Both sides of the aisle have recognized that something must be done to address the ongoing tax problems of overseas Americans. Tax advocacy groups like Americans for Tax Reform (ATR) have noted that territorial or residential taxation is the right way forward for both corporations and individuals. RBT is not about giving “rich Americans” overseas a pass it’s about putting working Americans on equal footing, allowing them to compete for jobs and create economic opportunity.
RBT is not a dream; it is achievable and now is the time to advocate for it. Real work on the legislation is in progress and revenue estimates are being developed. For more information, go to the American Citizens Abroad website.
