From Democrats Abroad December , 2024

Democrats Abroad welcomes the introduction of the Residence-Based Taxation for Americans Abroad Act from Congressman Darin LaHood (R-IL-16). Years of commitment and dedication by Democrats Abroad has laid important groundwork to raise awareness of American abroad tax issues. This year, the advocacy work of Democrats Abroad, Tax Fairness for Americans Abroad, and other organizations has led to the introduction of this Residency Based Tax (RBT) bill.

U.S. policy to combat overseas tax evasion has inadvertently caught low- and middle-income Americans who live abroad in its dragnet. Americans abroad face a myriad of tax and financial access discrimination including complicated tax returns, having to pay a tax professional and file a tax return when no US tax is due, and inability to save and invest for the future. Some US citizens even consider renouncing their citizenship to escape the burden.

To reduce this burden on Americans abroad and prevent them from having to confront this choice, Members of the Democrats Abroad Taxation Task Force developed an elective RBT policy a year and a half ago, with feedback from Congressional offices.

“I’m extremely proud of the role Democrats Abroad has played in elevating the issue of the unfair tax burdens faced by ordinary Americans abroad and proposing ways to address them. I am encouraged to see a bill introduced that reflects policy outcomes to addressing those burdens. We are ramping up our bipartisan Congressional outreach and laser focused on getting relief for Americans abroad next year,” said Rebecca Lammers, Chair of the Democrats Abroad Taxation Task Force.

Martha McDevitt-Pugh, Chair of Democrats Abroad said, “Democrats Abroad made significant contributions to develop policy that will address the tax and financial access issues faced by Americans abroad. The bill has guardrails to ensure it will not create loopholes for tax cheats. While this bill will not be up for a vote in the 2023-24 Congress, which concludes its business this week, we are hopeful that its provisions will inform tax legislation in 2025. We have heard from Democrats Abroad members that they want Residency Based Taxation. With this bill they would have that choice.”

Residence-Based Taxation for Americans Abroad Act FAQs

What is the Residence-Based Taxation for Americans Abroad Act? What does this mean for me as an American abroad?

The Residence-Based Taxation for Americans Abroad Act is a proposed bill that has been introduced into Congress. If passed into law, it would mean that Americans abroad could decide whether to be taxed under the current system (Citizenship-Based Taxation or CBT) or to terminate U.S. tax residency, remaining liable for U.S. taxes on U.S.-sourced income only (Residence-Based Taxation or RBT). The procedure proposed in this bill is called elective RBT, and the choice is yours.

What is the difference between Citizenship-Based Taxation (“CBT”) and Residence-Based Taxation (“RBT”)?

Under Citizenship-Based Taxation (CBT), the United States requires all U.S. citizens to file and pay taxes on their worldwide income, regardless of where they live. This means Americans living abroad must file taxes in both their country of residence and the U.S., sometimes leading to double taxation, significant complexity, and high compliance costs due to differing tax systems. While U.S. tax law allows for some exclusions and foreign tax credits, it does not eliminate these challenges.

By contrast, with Residence-Based Taxation (RBT)—the global standard— Americans would be taxed only in the country where they live and receive government services. The U.S. could (and would) still tax income sourced from within the United States, but Americans abroad would no longer be taxed by the U.S. on their worldwide income.

Why is Residence-Based Taxation elective in this bill?

A full switch from the current system (CBT) to the system most of the world uses (RBT) is too big of an overhaul to provide the relief required for Americans abroad who need it sooner rather than later. Making it elective gives citizens a choice. If a U.S. citizen plans to reside outside the U.S. for the foreseeable future and receives income from mostly non-U.S. sources, then elective RBT may be advantageous. Elective RBT is not meant for individuals who spend the majority of their time in the U.S. or who live abroad but benefit from the tax treaty with respect to their U.S.-sourced income. These individuals may find it preferable to remain in the current CBT system.

Should I make the RBT election or not?

We appreciate the complexity of the U.S. tax code and that electing to be treated as a non-resident may not be for everyone. Nevertheless, we cannot give you direct tax advice. More information is available in the elective RBT explainer here and mock case studies can be viewed here.

Under elective RBT, would I still pay tax on U.S. source income?

Yes, the U.S. would still tax any income earned within the United States. This would work the same way it does now for non-citizens who don’t live in the U.S. Under elective RBT, Americans abroad with U.S. income would either have taxes withheld at the income source or file a simpler 1040-NR form to report and pay taxes on that income if it is not subject to tax withholding. This process would be much easier than the current system, where Americans must report their worldwide income on a full 1040 form.

Does terminating tax residency mean giving up my U.S. citizenship?

No, an individual completing the elective RBT procedure would separate citizenship from tax residency. Americans abroad who elect to be treated as non-residents would remain U.S. citizens with full rights to freely live in the U.S. at any time in the future (although they would be subject to taxation on worldwide income if they returned to live in the U.S.).

If I become a non-resident, would I still be entitled to my Social Security benefits?

Yes, residency and tax status do not have an effect on Social Security benefits.

If I become a non-resident, would I still be able to vote in U.S. elections?

Yes.

How does the departure tax work? Will I have to pay it?

The elective RBT bill includes a “departure tax” for wealthy individuals with over $13.61 million in net assets. This tax treats unrealized gains as if the assets were sold when switching to non-resident status. Some assets, like foreign pensions, a primary home abroad, and U.S. real estate, are excluded. Special rules would exempt many long-term Americans abroad and “Accidental Americans” from this tax.

Do I need to be up-to-date with my tax filings in order to make the RBT election?

The bill generally requires individuals to certify they are up to date with filing their U.S. tax returns in order to make the RBT election. However, if you have continuously resided outside of the U.S. since the age of 25 or since the enactment of FATCA in 2010, then you may benefit from grandfathering provisions that would exempt individuals from having to remedy past non-compliance.

Can I still receive the Child Tax Credit if I elect to be treated as a non-resident?

No. Under elective RBT, a non-resident no longer files a 1040 and therefore cannot receive any refundable tax credits. This is an example of a situation where citizenship-based taxation could remain attractive.

What happens if I decide to move back to the United States?

U.S. tax residency would be re-established if you meet the same substantial presence rules that apply to non-citizens moving to the U.S. or other qualitative criteria that would indicate a primary residence in the United States. Any departure tax previously paid wouldn’t be refunded, but the tax basis for these assets would be set to when the departure tax was last paid. It may be prudent to consult a tax professional before returning to the United States to prevent unwanted surprises upon your return to the U.S. tax system.

If you return to the U.S. after living abroad for less than three years, your non-resident status would be retroactively reversed, and you would need to refile your taxes as a resident for those years.

Will elective RBT help Americans abroad access financial services in the country where they live?

The elective RBT bill includes a Certificate of Non-Residency and a FATCA non-discrimination provision that is expected to prevent foreign financial institutions from denying service to U.S. citizens who reside in the country where the financial institution operates. It may take some period of time for this to improve, but it would become law.

I am a small business owner. Will elective RBT relieve me from issues with the GILTI tax?

As a non-resident, you wouldn’t have to pay the GILTI tax. Under the new rules, if you choose to be treated as a non-resident, you won’t be classified as a “U.S. shareholder” and won’t need to report or pay this tax.

What are the estate tax implications of the proposed bill?

The bill does not change estate tax, which is separate from income tax. Currently, U.S. citizens, including those living abroad, are taxed on their entire worldwide estate, but a $13.61 million credit helps reduce taxable assets. For non-citizens living outside the U.S., only U.S.-based assets are taxed, with a much smaller $60,000 credit.

Won’t elective RBT create loopholes so that the rich don’t pay their fair share?

No. The bill has been designed to prevent loopholes for the rich and actually closes some existing loopholes to make it tight against abuse. We predict further adjustments will be made when this bill is reintroduced in the 119th Congress.

How much will elective RBT cost the government?

The bill is currently being “scored” by the Joint Committee on Taxation, which will determine the estimate for how much this bill will cost the government. It has been designed to be either revenue neutral or for it to be easily tuned to the point of revenue neutrality, meaning it will neither generate revenue for the government nor cost taxpayers anything.

Is this the end for expat accountants?

No. Accounting as a whole remains a shortage profession, and we expect for there to remain a healthy niche for overseas accountants to provide advice and prepare taxes related to international moves, businesses, and individuals with sophisticated tax positions that depend on U.S. tax residency. This is in addition to working remotely to support U.S.-based accounting practices.

Was this bill introduced because Trump said he would eliminate double taxation for overseas Americans?

Actually, no. This bill is happening because brilliant Americans from all around the world, including members of Democrats Abroad, got together to solve an enormously complex problem. The groundwork was laid over a year and a half ago, and this bill would have been introduced regardless of what Trump said. This bill is intended to do more than merely eliminate double taxation. If passed, it would create a new optional procedure for U.S. citizens living abroad to no longer be subject to U.S. taxation on non-U.S. sourced income.

For more information:

• US Tax Consultants
• Read the Democrats Abroad Taxation Task Force’s bill explainer here.
• Read the bill’s FAQs here.
• Give you feedback on the bill, introduced by Rep LaHood (R, IL-16) here.
• Attend the webinar next Mon, Dec 23 at 1pm ET RSVP here
• Read the bill text here.
• Read more about the extensive work of Democrats Abroad’s Taxation Task Force here.
• Join the Democrats Abroad Taxation Task Force mailing list here.