TAX FAIRNESS FOR AMERICANS ABROAD ACT OF 2018 – A RESIDENCY-BASED TAXATION BILL
Congressman Holding Introduces “Tax Fairness ForAmericans Abroad Act of 2018 (H.R. 7358)” – A Residency-Based Taxation Bill
Congressman Holding (Republican-North Carolina), a member of the influential House Ways & Means Committee, today introduced a tax bill that is a critical first step toward transitioning from the current citizenship-based taxation system to a system that provides residence-based taxation for individuals – sometimes referred to as territorial tax for individuals. By taking this first step toward ending the onerous burdens of citizenship-based taxation, Americans will become more competitive in the international job market and free to pursue opportunities around the world. Compliancy costs and the burden of exposure to double taxation will be significantly reduced, and tax fairness will be restored for US citizens living and working overseas.
Under the Tax Fairness for Americans Abroad Act (H.R. 7358) nonresident US citizens, who make an election to be taxed as a qualified nonresident citizen, will exclude from income, and therefore be exempt from taxation on, their foreign source income. All nonresident US citizens, however, will remain subject to tax on any US source income.
The basic principle of the bill mirrors the thinking behind ACA’s residency-based taxation (RBT) approach, that is, separating foreign-source and US-source income and excluding from US taxation specified foreign-source income earned when a US citizen is a qualified resident abroad. As can be seen in the bill language, the toggle switch determining whether an individual is taxable on US income – and not on foreign income – is residency. A summary outline of the act can be found here.
Qualifying for nonresident citizen status
Under the bill, in order to qualify for “qualified nonresident citizen status”, a US citizen must be a nonresident US citizen and make an election to be taxed as such. Individuals will make an election and establish that they meet certain foreign residency requirements.
Under this proposal, a nonresident citizen is defined as in individual that:
- Is a citizen of the United States,
- Has a tax home in a foreign country,
- Is in full compliance with U.S. income tax laws for the previous 3 years, and
- establishes that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
- is present in a foreign country or countries during at least 330 full days during such taxable year.
What is taxed and what is not taxed under the Tax Fairness for Americans Abroad Act?
Once an individual satisfies the requirements to become a qualified nonresident citizen, they can elect to be taxed under new section 911A (Alternative For Nonresident Citizens Of The United States Living Abroad). This is an election and is not mandatory as some individuals may prefer to remain under the existing tax rules in section 911 (citizens or residents of the United States living abroad), which include the exclusions for foreign earned income and housing cost amount.
Those electing to be taxed under the new rules will exclude from gross income, and, therefore, be exempt from taxation on, their foreign source income. This includes both foreign earned income (essentially as defined in existing section 911(b)) and foreign unearned income (defined in new provisions essentially as income other than foreign earned income that is sourced outside the US). Special rules can apply to income from the sale of personal property attributable to periods when the individual qualified under these new provisions. A qualified nonresident citizen will remain subject to tax on any US source income.
How was this legislative proposal developed?
Congressman Holding has long been a proponent of tax reform for Americans living and working overseas. He and his staff have been working on draft legislation since December of last year when it became apparent that some form of residency-based taxation would not be added to the recent Tax Cuts and Jobs Act. ACA, together with other overseas organizations – AmChams (such as American Chambers of Commerce in Asia Pacific APCAC), Association of Americans Resident Overseas, Democrats Abroad, and Republicans Overseas – regularly met and provided Congressman Holding with input, data and suggestions on tax law changes, informing and otherwise educating him and his staff on the critical tax and compliance problems facing Americans living and working overseas.
Documents such as ACA’s side-by-side “vanilla” approachto RBT and the revenue estimation work produced by District Economics Group (DEG), under contract with ACA to “score” RBT for revenue neutrality, as well as critical baseline data on the asset composition and size of the overseas community, were vitally important to development of the legislative proposal. All of this helped Congressman Holding’s office and the relevant tax-writing staffs on Capitol Hill working on development of the legislation.
Throughout the process, ACA maintained close relationships with the tax-writing committees, Joint Committee on Taxation (JCT), Senate Finance Committee and House Ways & Means Committee. We met regularly with the tax-writing committees, legislators and directly with Congressman Holding’s office to build momentum for a bill. ACA’s presence in Washington, DC and ability to be a direct 24/7 resource for Congress and the various committees was undoubtedly a highly valuable asset.
Collectively the work of all the groups involved and stakeholders, such as, Americans for Tax Reform and others, was instrumental in getting this legislation drafted and introduced.
What happens now and how does the Tax Fairness for Americans Abroad Act get enacted into law?
The work to educate, advocate and inform the new Congress about the Tax Fairness for Americans Abroad Act (H.R. 7358) needs to continue and expand in 2019. Now that the bill has been introduced, the real work of “selling it” begins. This means carefully planned and strongly executed lobbying – not a dirty word in this context!
We believe that hearings on the bill will be held before the House Ways & Means Committee so as to “air” all the issues and give Members the opportunity to ask all the relevant questions and examine all the data – the revenue implications of the bill, the mechanics of the bill, the profile, including demography, of the Americans overseas community. ACA’s work on the subject, we expect, will be part of the knowledge and data presented.
Additional details will need to be ironed out as the current bill language only provides an outline and basic understanding of the new regime. It is intended, we understand, to “put down a marker” and establish a basic, but very important, approach. As legislators review the bill, there will be areas and topics, we believe, that will be spelled out in greater detail. Clarifications, for example, with respect to the treatment of certain income will probably be added.
ACA will work closely with Congressman Holding and other Members that we expect will join him as co-sponsors. ACA is working to build support among other Members as well as the Administration. This is a critically important step toward enactment of the bill. ACA is continuing to develop the detailed data and other information underlying everyone’s efforts to push for passage in the new Congress starting in January. ACA will continue to attend meetings with stakeholders and Congress and dialogue with other advocacy groups.
ACA will work to educate the media, the public, the Administration, the Congress, especially the tax-writing committees, on the importance of enacting this legislation. Most importantly the community of Americans living and working overseas must get behind and vigorously support the bill and efforts to advance the bill through the passage process.