Tax Fairness For Americans Abroad Act of 2018 – A Residency-Based Taxation Bill
Congressman Holding Introduces “Tax Fairness For Americans Abroad Act of 2018 (H.R. 7358)” – A Residency-Based Taxation Bill
On December 20, 2018 Congressman Holding (Republican-North Carolina), a member of the influential House Ways & Means Committee, 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.
A more detailed summary of the bill prepared by ACA can be found here: https://www.americansabroad.org/aca-explains-tfaa-rbt-bill/. This was prepared by ACA as a service to the community.
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” approach to 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!
The Tax Fairness for Americans Abroad Act of 2018 (TFAA) is a critical first step in getting legislation for tax reform for Americans abroad passed. Much work still needs to be done; hearings need to be held and more refinements to the legislation must be made. Key concerns that the House Ways & Means Committee and legislators will be focused on will be the cost of the legislation, ideally it should be as close as possible to revenue neutrality, meaning that it doesn’t cost the Treasury anything in lost revenue, and insuring that it is tight against abuse. More education to Congress on the community of Americans abroad and their needs must be done. All this is key in order to bring in co-sponsors to legislation and insure its passage.
The New 116th Congress. ACA is keeping a close watch and monitoring the new committees assignments in the 116th Congress. There are new faces and new players, many will need to be educated on the community of Americans living and working overseas. This will be an important job for ACA, but with our 24/7 presence in Washington, DC, ACA is positioned to make this happen. We are a phone call or taxi ride away from Congress, able to bring the expertise of our DC advocacy, tax and legal team directly to the offices working on tax reform legislation.
A New Bill Number. Currently the Tax Fairness for Americans Abroad Act of 2018 has been assigned an HR (House of Representatives) number –7358. This number is good for the 115th Congress, however, in January of 2019 the 116th Congress began and the legislation will need to be re-introduced with a new HR number. This is purely an administrative process that should happen shortly.
Refinements to the Bill. ACA has been deeply involved in the push to develop a legislative proposal for residency-based taxation and will continue with that work. ACA has been working with Representative Holding’s office and providing it with our thinking and data on the community of Americans overseas. ACA’s RBT “vanilla” approach side-by-side analysis is critical for the advancement of legislation, as it highlights all the specific areas of the tax code that need to be considered for reform under a residency-based system. The current bill is written with somewhat general language. However, the tax-writing committees will need to run through the code, item by item, to determine how income streams will be treated for taxation (see more on this below).
The importance of ACA's past advocacy work. A key piece of knowledge for Congress will be ACA’s revenue estimates for our “vanilla” approach to RBT. This work includes data on the makeup of the community of Americans overseas, their tax filing status and asset makeup, as well as demographic data. The analysis was prepared by District Economics Group (DEG), a Washington, DC-based economic consulting group. This data will be invaluable when hearings on the legislation are held. ACA is hopeful that hearings will be held so that the House Ways & Means Committee can review the proposed bill, ask questions and gather data. ACA will continue to use the data we developed and share this with offices we meet with and stakeholders that we bring on board.
Why Hearing are needed. Having the US House Ways & Means Committee hold hearings on the wide-range of tax issues facing US citizens living and working overseas is the next step in the process. This is supported by Representative Holding and other Members of Congress. ACA is a key player in the push for hearings, advocating to offices to support hearings, collecting data and information on the problems and issues, updating current research – ACA revenue estimates – and fielding new research.
Hearings need to be held so that the committe can hear about the wide range of tax compliance issues facing the overseas Americans community from skateholders and citizens. With knowledge form hearings, the tax-writing committees and legislators will start to look at specifics of the legislation. Specific treatment of items like Social Security income, income associated with the new “transition tax” and GILTI, and different types of PFIC income, will need more consideration and details will need to be worked out to determine how these income streams will be taxed under a new residency-based regime.
ACA’s knowledge and data on the subject matter will be an important asset in this process.ACA has been on the forfront of getting the information on the bill out to the community and getting Representative Holding feedback from the community. An important initiative by ACA was the production of webcasts on March 13th and 14th with Representative Holding’s Tax Counsel, Matt Stross, providing detailed updates and next steps for the legislation here. ACA will be hosting another webcast for the Canadian market on June 18th.
Working with stakeholders. There are other organizations working and interested in tax reform for Americans overseas, and ACA has worked along side these groups; Association of Americans Resident Overseas (AARO), Democrats Abroad, Republicans Overseas (RO) and various US Chambers of Commerce, notably the Asia Pacific Chambers of Commerce (APCAC). ACA has also worked with Americans for Tax Reform (ATR) and we will continue to work together with everyone. We will begin bringing in new stakeholders in order to grow the consortium of advocates for tax reform.
Cultivating supporters and co-sponsors. ACA will continue to meet with the supporters of tax reform that have already been cultivated, and ACA will begin to bring on new legislators as co-sponsors of the legislation. ACA’s position as a non-partisan organization allows us to work both sides of the aisle. This is important when educating and cultivate co-sponsors. ACA is an independent voice on the subject and respected in Congress for bringing solutions to problems that are in the best interests of the community without political bias.
What can you do today to support ACA and efforts for tax reform.
1. Write your Representatives in Congress and ask that the US House Ways & Means Committee hold hearings.
2. Support ACA. ACA, with no political affiliation, and working only in the interest of the community, is ideally positioned to advocate for TFAA.
Click here to see how your donation will be used to help ACA's advocacy efforts.