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Residence-Based Taxation Proposed For Americans Abroad

by Mike Godfrey, Tax-News.com, Washington

23 April 2015


American Citizens Abroad (ACA) has submitted a proposal to the US Senate Finance Committee individual and international tax reform working groups for the enactment of residence-based taxation (RBT) for American expatriates.

It said lawmakers should enact RBT instead of the present citizenship-based taxation (CBT) because it would reduce compliance burdens for expatriates, provide more efficient taxation, and improve competitiveness.

Under the current CBT, Americans abroad remain subject to US taxation as though they were still US residents. Under RBT, only US residents, whether Americans or foreigners, are subject to US income, estate, and gift taxation, while Americans resident abroad are taxed under essentially the same rules applicable to nonresident aliens.

It was pointed out in ACA's submission that "the IRS has recognized that the vast majority of Americans residing overseas do not owe US taxes; according to the National Taxpayer Advocate, about 82 percent of all Americans abroad owed no US taxes. For most Americans abroad, the real hardship of CBT is the cost, time, and legal risks involved in compliance."

ACA proposes that, as part of a general tax reform package, an election should be provided to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions – for example, a minimum three-year period of residence abroad.

Americans abroad would still be taxed through a system of withholding taxes on passive US source income (such as dividends, rents, and pensions), capital gains taxes on US real estate, and normal income taxation on income earned in a trade or business in the United States. They would also remain subject to US estate tax on assets located there, including real estate and securities.

ACA believes that RBT would "match CBT in tax revenue generation; reduce the administrative workload and enforcement costs of the Internal Revenue Service (IRS); provide for a more efficient, equitable taxation of Americans abroad; align US law with that of all other nations; and free overseas citizens from the CBT and Foreign Account Tax Compliance Act straitjacket which imposes unreasonable compliance burdens and prevents many from accessing required financial services."

ACA has previously accepted that an exit tax could be imposed on taxpayers electing RBT, where they would pay a capital gains tax on assets deemed to have been sold at the time of election. However, it suggests that such a tax should be subject to conditions where it would be "viewed as an anti-abuse measure aimed at wealthy individuals who might consider leaving the US for tax reasons, not as a source of US tax revenue."

For example, there should be a high USD5m threshold over a narrow range of total assets or average income over five years exceeding USD160,000, and unrealized capital gains exceeding USD700,000, before the deemed capital gains are taxed, it said, adding that that would "ensure that the vast majority of Americans will not have their savings impacted by the exit tax and will remain free to emigrate and to return to the US without undue financial burden."

TAGS: individuals | expatriates | inheritance tax | compliance | tax | investment | business | pensions | tax compliance | law | tax thresholds | withholding tax | gift tax | United States | dividends | tax reform | exit tax | individual income tax | Expats | Tax

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