TFFAA reaches out to Republican tax teams ahead of 2025 tax debate

The U.S. Congress

In the run-up to next year’s broad debate on U.S. tax policy, Tax Fairness for Americans Abroad has reached out to 10 teams of Republicans in Congress to help educate them about the often negative impact of U.S. tax policies on Americans abroad. The outreach will help the members get ready for next year and has met a very positive reception.

The tax teams cover broad issues such as Global Competitiveness, the New Economy, Innovation, Supply Chains, Working Families, Main Street and Rural America—all of which are relevant for many Americans abroad.

The text of our submission appears below.

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Dear Ways and Means Tax Teams,

Tax Fairness for Americans Abroad (TFFAA) represents the millions of U.S. citizens who live outside the United States and who are fed up with unfair, extraterritorial U.S. taxation, and related financial reporting obligations that effectively make them second-class citizens. We are a volunteer and non-partisan organization, united by a fundamental belief in fairness and equal treatment under the law. To that end, we have developed a proposal that will alleviate the tax burden that Americans abroad face while also establishing guardrails to prevent abuse.

Overview

Americans abroad come from diverse backgrounds. Some Americans living outside the United States moved abroad for work, while others moved for family reasons or to retire. Some moved with their parents at a young age, and many have never even lived in the United States because they were born to U.S. parents abroad. Our common denominator is that we are all subject to the extraordinary reach of the U.S. tax code. We are ordinary, hard-working – and in some cases retired – Americans, no richer or poorer than Americans who live in the United States today. Nevertheless, we face a lifetime of double tax filing obligations, high compliance costs, financial discrimination, and sometimes outright double taxation, simply for being American. We believe that the only effective way to solve these problems is to transition the U.S. tax code from the current Citizenship Based Taxation (CBT) – where Americans are taxed on their worldwide income whether they reside in the United States or not – to one based on U.S. residence and U.S. income.

The data show that transitioning from CBT to RBT is a sound policy decision. Approximately 62% of Americans abroad reported zero tax liability during the tax years 2016 to 2021.[1] This is not surprising, as most Americans living abroad are low- or middle-income, including many retirees. For most of these Americans, their income falls within the limited foreign-income exclusion[2] or they qualify for a U.S. foreign tax credit for the taxes paid in the country where they actually earn their living (in many cases paying a higher tax rate than in the United States).

Moreover, Americans abroad can end up paying more than twice what it costs U.S. residents to prepare and file their taxes each year, under threat of potentially life-altering financial penalties, which have minimal correlation to taxes owed or ability to pay. Despite having no or very little tax liability, most Americans living abroad pay high fees for tax preparation services just to comply with punitive U.S. tax laws.

Our Proposal

We are calling on Congress to replace this unfair CBT system with Residence-Based Taxation (RBT), just like every other developed country in the world. We already pay taxes in the countries where we live, and we should not have to declare our non-U.S. sourced income, face financial discrimination, and be subject to disproportionate penalties just because we live abroad. The RBT system we propose would allow U.S. citizens to pay taxes in the country in which they live on the income they earn in that country.  Our RBT system would be the opposite of CBT, which requires individuals to declare income and potentially pay taxes to a country of which they are a citizen but in which they do not live and in many cases have not lived for many years. Without meaningful change, U.S. tax rules will continue to impose significant and discriminatory burdens directly and indirectly on U.S. citizens living abroad.

Our proposal aims to bring the United States in line with the global standard of taxing income based on residence and source by removing citizenship as a criterion in the definition of tax residency. We propose to create an opt-in procedure for U.S. citizens living abroad or moving abroad to be taxed as only as non-residents. For new expatriates, the procedure would require establishing proof of residence in a foreign country and being up-to-date on filing their U.S. tax returns. Americans who complete this procedure would still be subject to U.S. tax on U.S.-sourced income.

Benefits and Guardrails

Our proposal would help Americans living abroad who already owe no U.S. tax, as well as “accidental” Americans and those who have most of their income and assets outside of the United States. The proposal creates meaningful compliance requirements to prevent short-term residents abroad from taking advantage of the opt-in system simply to avoid U.S. taxes. Additionally, U.S. citizens living abroad who have income and assets within the United States will continue to owe taxes to the United States on any associated income or capital gains. The opt-in system would enable U.S. citizens living abroad to make the best financial decision for their particular situation, as some citizens may benefit from electing to be a non-resident while others may find it preferable to continue as a U.S. resident under an existing tax treaty between their country of residence and the United States.

We also propose certain guardrails to prevent high-income individuals from taking advantage of the opt-in RBT system. For these Americans, opting into RBT would come with a cost – a tax on assets that would have been taxed by the United States in the future had they remained a U.S. resident. An electing non-resident who decides to return to live in the United States in the future would again be subject to U.S. tax on his or her worldwide income. Finally, only long-term residents abroad and “accidental” Americans would be immediately eligible to terminate their U.S. tax residency without a departure tax or the obligation to remedy past non-compliance. These guardrails will eliminate tax loopholes for the very wealthy and prevent individuals from engaging in deliberate tax evasion. Finally, the proposal allows for the United States to maintain its enforcement efforts to prevent international money laundering.

As Congress considers tax policy changes next year, we encourage you and members of the House Ways and Means Committee to consider the serious issues facing Americans living abroad, which former President Trump recently recognized with his proposal to end double taxation of Americans abroad. TFFAA and its members remain willing and able to serve as a resource and help educate members and congressional staff about this important issue and our proposed solution.

Sincerely,

Brandon Mitchener

Executive Director

Tax Fairness for Americans Abroad

[1] National Taxpayer Advocate's 2023 Annual Report to Congress Most Serious Problem #9: Compliance Challenges For Taxpayers Abroad, Page 117 https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2024/01/ARC23_MSP_09_Compliance-Abroad.pdf

[2] Section 911 of the Internal Revenue Code, 26 U.S.C. 911.