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Washington, D.C. – U.S. Representative Darin LaHood (R-IL), a member of the House Committee on Ways and Means, introduced the Residence-Based Taxation for Americans Abroad Act, a bill that would implement a residence-based taxation system for U.S. citizens currently living overseas.

Today, the United States is the only major country that uses citizenship-based taxation, a system that levies taxes on individuals regardless of where they live or whether they earn income in the United States. This bill would permit Americans living overseas to elect to be treated as a non-resident American, allowing them to be subject to U.S. tax only on U.S.-sourced income and gains.

According to recent estimates, more than 5 million U.S. citizens are currently living abroad. This group includes both Americans that were born and raised in the United States 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.

This issue has received more attention in recent years and was a priority for President-elect Trump during the campaign trail earlier this fall. In an exclusive with The Wall Street Journal in October, President Trump stated, “I support ending the double taxation of overseas Americans.”

“This is a non-partisan issue that impacts U.S. citizens with roots in districts across the country. In today’s world, 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,” said Rep. LaHood. “I look forward to working with President-elect Trump and my House colleagues on both sides of the aisle to modernize our tax code to ensure Americans are not punished for living and working abroad.”

“For the first time in our lifetimes, Americans abroad can see the light at the end of the long, dark tunnel that has cost them huge amounts in accounting fees, ruined relationships, and made it impossible for them to live normal lives,” said Brandon Mitchener, Executive Director of Tax Fairness for Americans Abroad. "We thank Mr. LaHood for his leadership and look forward to working with him to collect feedback on this non-partisan approach and to help advance the bill to the president’s desk next year.”

Rep. LaHood has worked closely with Tax Fairness for Americans Abroad (TFFAA) in the drafting of this bill. TFFAA is a U.S. non-profit organization whose Board members have deep personal experience navigating the pitfalls of U.S. tax and financial services laws that affect Americans abroad. The organization’s sole mission is to advocate for a U.S. tax system for Americans abroad that is based on residence and source, not citizenship.

Today’s introduction provides an opportunity for stakeholders and Americans currently living abroad to provide feedback ahead of reintroduction in the 119th Congress. Rep. LaHood is hopeful the bill can be considered in a reconciliation package next year. Text for the bill can be found here.

Key Features of the Residence-Based Taxation for Americans Abroad Act:

• The bill establishes an elective process for a U.S. citizen living abroad to be treated as a non-resident without having to renounce his or her U.S. citizenship.
  
  • Under this new tax regime, 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 located in the U.S. (such as rent from real-estate investments), 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.
  • 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.

• Once the election is made, it would be effective for the current and all future taxable years until terminated (either by the non-resident American self-withdrawing the election or if the individual again becomes a U.S. resident for tax purposes).
  • Since the election is intended for Americans living abroad over the long term, the bill requires the non-resident American to live abroad for at least three years from the election date or the election would be reversed entirely.

• For purposes of Foreign Account Tax Compliance Act (FATCA) only, a non-resident American would be able to apply to the IRS for a certificate of non-residency to use with foreign financial institutions.
  
  • By allowing the non-resident American to establish that he or she is not a “specific United States person,” foreign financial institutions would not be required to undertake burdensome reporting requirements under FATCA, which frequently discourage them from offering banking services to Americans living and working abroad.
  • Similarly, the non-resident American would be exempt from certain reporting requirements (and substantial associated penalties) with respect to foreign assets and transactions, including Foreign Bank and Financial Accounts Reports (FBAR).

• To help ensure fiscal balance and prevent abuse, the electing individual must also pay a departure tax on deferred income, with certain exceptions.
  • An election would require the individual to pay a departure tax based on deferred income, treating all property as if sold for fair market value on the day before the election with the gains and losses taken into account for purposes of determining the departure tax.
    • Once the departure tax is paid, the individual’s basis in each asset subject to tax would be the fair market value (stepped up basis).
  • The bill provides three exceptions to the departure tax, for an individual who:
    • Has a net worth (i.e., fair market value of all assets over liabilities) of less than the applicable estate tax exemption amount ($13.61 million for 2024, $13.99 million for 2025); or
    • Is a tax resident of a foreign country where the individual has regularly, normally, or customarily lived for three of the past five years, and such individual certifies that he or she has been in compliance with U.S. tax requirements for the three years prior to the bill’s introduction; or
    • Has not been a U.S. resident at any time since turning 25 years old or after March 28, 2010 (date that FATCA was adopted) through the date of enactment of the bill.

 

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