Tax Fairness for Americans Abroad endorses ambitious proposal for elective residence-based taxation
The Board of Tax Fairness for Americans Abroad has unanimously approved the outlines of a proposal for elective residence-based taxation to free millions of U.S. citizens living outside the country from unfair double taxation and financial discrimination.
The proposal would modernize U.S. tax law by removing citizenship as a criterion in the definition of tax residency and aligning the United States with the global standard of taxing citizens’ income based on residence and source.
It would allow long-term Americans abroad and “accidental Americans" to elect to immediately terminate residency for U.S. federal income tax purposes while allowing them to maintain their U.S. citizenship—just like most other countries have long allowed their citizens to do.
It would also:
Provide relief from the overly complex, onerous and redundant annual filing requirements that currently burden millions of Americans abroad: FBAR and other international financial information reporting would not be required for non-residents.
Prevent non-U.S. financial institutions from discriminating against American citizens.
Allow Americans who benefit from the current system to remain U.S. tax residents.
Allow the United States to continue to tax citizens who have terminated U.S. tax residency on any U.S. source income the same way it already taxes non-residents from other countries today.
Prevent changes of residency from facilitating tax avoidance.
Reduce the workload of the IRS by eliminating the burden of fairly and effectively enforcing the current system of extraterritorial taxation of non-residents and relieving them of the responsibility to provide benefits via the tax code (e.g. non-refundable tax credits) to non-resident citizens.
Allow for revenue neutrality by ensuring the effective taxation of non-residents on their U.S. source income only, while ensuring high-net-worth individuals do not use the new non-resident election to avoid U.S. taxation.
Tax law is highly complex, and some of the details of the proposal will have to be tweaked to ensure that it ends the discrimination against Americans abroad without creating loopholes for tax evasion. We look forward to working with Congress to find a bipartisan, win-win legislative solution in the context of next year’s tax reform.