US expats hopeful end to double taxation is around the corner

Advocates see next year as major opportunity to bring tax relief to Americans living overseas

The US is the only major economy in the world that taxes its citizens based on citizenship rather than residency. AP

Millions of Americans living abroad who argue they are unfairly treated by complex and costly tax obligations are growing increasingly hopeful they will soon see relief through president-elect Donald Trump's campaign pledge to end double taxation.

A newly proposed bill allowing American citizens living abroad to identify as non-US tax residents added to these hopes, and action could be taken next year.

US expatriates face a unique tax scenario in that they have to fulfil tax obligations for the US as well as the country in which they are living. That is because the US is the only advanced country in the world that taxes its overseas citizens based on citizenship instead of residence.

These obligations also apply expats with few ties to the US including green card holders and so-called accidental Americans (someone who may have US citizenship even though they never lived in the country).

The Internal Revenue Service (IRS) offers a maximum exclusion on the first $126,500 in earned income for individual international taxpayers, while two individuals who are married living and working abroad could exclude as much as $253,000 together. That means tax burdens on earned income typically fall on high-income individuals. The exemption also does not apply to foreign unearned income such as money made from investments, foreign disability payments or unemployment, or other types of unearned income.

So that leaves about 60 per cent of US expatriates typically do not owe any taxes when filing a 1040 or 1040NR form due to deductions, credits and exclusions, according to the Taxpayer Advocate Service's 2023 Annual Report to Congress.

Now, US expats see their greatest opportunity to end double taxation. Mr Trump pledged to eliminate it during the 2024 campaign trail and a new bill in Congress provided new language to put it into action next year.

Republicans Overseas chief executive Solomon Yue, who pushed the Trump campaign for the promise, told The National he “absolutely” believes the president-elect will fulfil it. Mr Trump's transition team did not respond to The National's request for comment.

A dizzying process

While overseas Americans must fill out the same tax forms as domestic taxpayers, they are also subject to other forms and schedules, and report foreign financial accounts to prove they are compliant.

The process becomes more complicated the longer a US citizen is living abroad who might wish to purchase a house, make investments or create a mutual fund, said Laura Snyder, a Paris-based lawyer and president of the non-partisan group Stop Extraterritorial American Taxation (Seat).

“They're not going to experience this all at once. They're going to experience it progressively over a matter of years.”

US citizens can choose to seek professional help to file their taxes with the IRS but doing so costs hundreds of dollars.

The Foreign Account Tax Compliance Act (Fatca), meant to combat tax evasion at a global scale, added to these challenges in 2010. “Really, Fatca just is one pretty shallow layer of all of this,” Ms Snyder said.

To date, 113 countries including the UAE have Fatca agreements with the US (95 do not).

Under the law, foreign financial institutions (FFIs) and certain US taxpayers are required to report financial accounts held by US citizens abroad to the IRS. Failure to do so comes with steep penalties.

Non-compliant FFIs face a 30 per cent withholding tax on certain US-sourced income, potential loss of access to the US financial system and reputational damage.

“Fatca came along after all of these tax issues were created and said to banks: 'OK, we are going to make you subject to pretty heavy penalties if you don't do it. Figure out who your American clients are and report their bank account information to … the United States,'” Ms Snyder said.

“And so this scared a lot of banks and a lot of them said, 'you know, we just don't want American clients'.”

Jonathan Lachowitz, founder of White Lighthouse Investment Management, said a Swiss bank had recently suddenly stopped working with one his clients based on their US citizenship.

Expats' access to banking and financial services inside their current country is a “huge issue” that is ongoing, he said.

Those found to be noncompliant could face a $10,000 penalty, with a maximum penalty of up to $50,000.

Mr Lachowitz said the penalties created by Fatca more than a decade ago created a new set of problems for tax-compliant expats.

“The vast majority of Americans overseas are just normal people wanting to do normal jobs, to live normal lives, would love to stay in compliance, if it wasn't so burdensome, and many of them try to spend a fortune doing it every year.”

That leaves US citizens overseas deciding whether to comply with the regulations or renounce their citizenship.

The number of US expats considering revoking their citizenship this year rose from 20 per cent to 30 per cent, the Expat Tax Services 2024 annual expat survey found. Three in four respondents cited taxes as their primary reason.

Momentum builds on Capitol Hill

The Residence-Based Taxation for Americans Abroad Act would allow US expatriates to elect to be treated as a non-citizen and switch to a residence-based model without giving up their citizenship.

The rule also has a so-called transition tax of certain expats who elect to switch to a residence-based tax model, although there a number of exceptions.

It would also amend Fatca rules. Individuals who elect residence-based taxes may also not be subject to Fatca reporting rules by their foreign banks if provide a certificate of non-residency from the IRS to their bank.

That bill – or some variation of it – will likely be reintroduced when the new Congress sits next year. Until then expats are in a wait-and-see mode but remain hopeful, said Rebecca Lammers, chairwoman of the Democrats Abroad Taxation Task Force.

American Citizens' Abroad executive director Marylouise Serrato told The National ACA was "very positive" there would be legislative action of some kind next year.

Next year's tax battles are expected to be fought along party lines, with many provisions of Mr Trump's 2017 Tax Cuts and Jobs Act due to expire. But those who support ending double taxation say it transcends party lines.

"We truly believe something will be done legislatively," Ms Serrato said.