In December 2018, legislative proposals were introduced in the United States House of Representatives intended to alleviate the tax burden on the approximately 9 million American expatriates currently residing abroad but who largely remain within the US tax net.
Taxation By Citizenship
The United States is almost unique in the world in that it taxes individuals on the basis of citizenship rather than residence. This means that U.S. citizens must file U.S. tax returns and pay U.S. tax on their worldwide income, even if they do not live in or travel to the U.S. This is in addition to any taxation they may be subject to in their jurisdictions of residence.
Double taxation is, however, mitigated to a certain extent by the existence of the two main exclusions from U.S. tax. Under the foreign earned income exclusion (FEIE), U.S. expats may qualify to exclude from income a certain amount of foreign earnings that is adjusted annually for inflation. In 2019, this exclusion is $105,900 ($104,100 for 2018).
In addition, U.S. expats can exclude or deduct certain foreign housing amounts, which is tied to the FEIE amount. Housing expenses include reasonable expenses actually paid or incurred for housing in a foreign country for the claimant, their spouse and dependents.
Additionally, U.S. taxpayers in higher tax countries are able to eliminate their U.S. tax liability using the foreign tax credit, which is intended to prevent double taxation when foreign income is taxed by both the U.S. and a foreign country.
Where expats do owe taxes, they may have to make estimated tax payments on a quarterly basis.
The Holding Bill
The Tax Fairness for Americans Abroad Act of 2018, introduced in the House by George Holding, a South Carolina Republican, on December 20, would seek to improve the tax situation of Americans living, working and travelling abroad by introducing an alternative regime alongside the existing foreign earned income and housing cost exclusions. This would enable non-resident U.S. citizens to elect to be taxed as "qualified non-resident citizens." As such they would be able to exclude (and be exempt from) foreign earned income, without limit, and specified foreign unearned income related to their foreign residency (time abroad). However, all non-resident citizens would remain subject to tax on any U.S. source income.
According to American Citizens Abroad (ACA), an advocacy group for American expats, which has long campaigned for residency-based tax rules in the U.S., Holding’s proposals would create a tax regime "that is simpler, fairer, and more competitive for Americans around the world.
This bill takes a meaningful step to address the discriminatory double taxation of Americans abroad, eases the burden of dual tax filing requirements, and ensures that Americans around the world are able to accurately plan and save for their future without the fear of punishing tax liabilities
the ACA stated.
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The Wait Continues?
Unfortunately for U.S. expats, the wait for a less onerous tax regime continues, for Holding’s bill was not voted on and expired at the end of the 115th Congress in early January 2019. However, bills of a similar nature have been introduced in Congress at regular intervals in recent years, and pressure for a long-awaited overhaul of the basis of taxation for US citizens is likely to be maintained in 2019.