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ACA proposes that Congress adopt Residence-based Taxation (RBT). ACA’s proposal (one page summary and full report) RBT and Tax Reform has been presented to Congress and key legislative offices such as the Joint Committee on Taxation, the House Ways and Means Committee and the Senate Finance Committee. Congress is under increasing pressure to undertake fundamental tax reform and ACA’s proposal is now part of that discussion.

Executive Summary

The current Citizenship-based Taxation (CBT) puts Americans and the US economy at a competitive disadvantage. The US tax law discourages US companies from sending Americans abroad to promote US business, creates a major handicap for American entrepreneurs overseas and penalizes Americans working and living abroad.

CBT is very complex and costly to administer for both the taxpayers and the IRS. Tax filing from abroad is significantly more costly than domestic tax filing, even when no tax is due. CBT is grossly unfair as Americans abroad can pay taxes twice on the same income due not only to inherent incompatibilities between US and foreign tax rules but also to US legislation that imposes double taxation.

With CBT Americans abroad can also be subject to tax on phantom capital gains due to the long-term decline in the value of the US dollar. Americans abroad are fiscally penalized when investing in foreign tax-free pension funds which are considered taxable under US tax policy. Americans working abroad are highly restricted in local investment opportunities because of US tax rules.

This situation is incompatible with the global economy of the 21st century where the tax policy of most industrialized nations is based on residency and not nationality. CBT works against US economic interests in terms of job creation and increasing exports.

Under RBT, Americans abroad would be taxed by the United States on the same basis as non-resident aliens, primarily through a system of withholding taxes on passive US source income and capital gains taxes on US real estate.

RBT will empower Americans abroad, boosting US export performance and US presence in world markets, particularly by encouraging small and medium-sized companies to initiate international activities. It will create better employment opportunities for Americans, both domestically and internationally.



ACA’s Residence-based taxation when and how will it happen and what can be done while we wait?

Tax reform will most probably be taken up in the next Congress after the 2016 Presidential Elections. What this means it that now is the time to lay the groundwork for Residence-based taxation (RBT) with the Congress and the tax-writing Committees. ACA’s recent work on this can be found here.

In the interim, there are four major areas that can be addressed within the current CBT tax regime that would go a long way to alleviating the problems most Americans abroad face. See ACA’s position papers on these problems and our solutions. ACA is actively advocating for these changes while we also pushing for RBT. 

US Tax Code for the 21st Century - Social Security Taxes

US Tax Code for the 21st Century - NIIT 3.8%

US Tax Code for the 21st Century - Functional Currency

US Tax Code for the 21st Century - Foreign Pensions