Tax Fairness for Americans Abroad Act
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 qualified nonresident citizen 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.
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.