Tax Fairness for Americans Abroad Act of 2018

February 27, 2020

In 2018, Congressman George Holding, US Representative from North Carolina, introduced a bill called the “Tax Fairness for Americans Abroad Act.” The bill, also known as H.R. 7358, would exempt foreign income earned by US expats from taxation. This is huge news for all Americans living abroad; let’s find out what the bill would mean.

 

What Is the Tax Fairness for Americans Abroad?

The bill would add a new section to the Internal Revenue Code, called section 911A. This section would state that:

“[I]n the case of a qualified nonresident citizen, there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year – (1) the foreign earned income of such individual, and (2) the foreign unearned income of such individual.”

Put simply, this means that, rather than using the Foreign Earned Income Exclusion to exclude part of your foreign income from US taxation, qualifying nonresident citizens would be able to exclude all foreign income.

The definition of nonresident citizen as stated in the bill is a US citizen who has a tax home in a foreign country (which is achieved by meeting either the Physical Presence Test or the Bona Fide Resident Test) and has been tax compliant for the past three years. Foreign earned income is defined as any income generated outside the US, and unearned foreign income as the sale of personal property during your tenure as a nonresident citizen.

What Would Change for Americans Abroad?

So, what does this mean, exactly? Expats would no longer have foreign income taxed by the US; only US income would be subject to US tax. It would essentially end the citizenship-based taxation model the US currently uses, and move to a residence-based taxation model that the rest of the world – minus Eritrea – uses. Presently, Americans living abroad must annually file a Federal Tax Return whether or not they owe taxes, and this reporting requirement, would be eliminated.

Why is the Act Important?

Getting the attention of lawmakers has long been a struggle for American expats. Though there are over nine million expats currently living abroad, their votes are dispersed across the US and their interests have not been prioritized, to say the least. Many expats feel abandoned by their representatives and resent having to pay taxes without proper representation. Introducing the Tax Fairness for Americans Abroad Act laid the foundation for future efforts to simplify taxation and respond to expats’ concerns.

What’s the Latest News on the Tax Fairness for Americans Abroad Act?

When the Tax Fairness for Americans Abroad Act was introduced in 2018, the main intent was to spark conversation among lawmakers. While the Act failed to gain significant traction, additional hearings on the subject have encouraged other supporters to continue refinements to the bill, which may result in future discussion about tax law. As Congressman George Holding of North Carolina prepares to retire at the end of 2020, the expat community hopes to see new leaders emerge to advocate for their cause.

Are You Ready for Residence-Based Taxation?

It’s worth restating: any new bill that allows residence-based taxation is certain to mandate that expats provide proof of tax compliance first. So, get started with Greenback today! We’ve helped over 8,750 expats around the world become compliant without any anxiety or hassle. We’d love to help you, too.