Tax Fairness for Americans Abroad Act: An Update

Not long ago, Congressman George Holding introduced a bill called the “Tax Fairness for Americans Abroad Act of 2018” (a simplified version of the TTFI, or the Territorial Taxation for Individuals bill), just before the Congressional holiday recess. The bill, also known as H.R. 7358, would exempt from taxation foreign income earned by US expats. We’ll give you an update on the TFFAAA bill so that you’re up to speed on what the future holds for expat taxation!

What Is the TFFAAA?

The Republicans Overseas group initiated this bill and found Congressman Holding to introduce it. It was sent to the Ways and Means Committee for further consideration; however, this bill was presented to the 115th Congress, which is no longer in operation. Now, for the 116th Congress or Ways and Means Committee to consider this bill, it would need to be reintroduced with a Democrat as a cosigner.

Republicans Overseas is looking for folks to reach out to representatives – especially Democratic members of Congress – to help get a bipartisan bill under consideration. The group has high hopes that it will get through as legislation, which is great news for Americans abroad.

How Would the TFFAAA Affect Americans Abroad?

The bill does not change the US citizen/resident-based taxation to a territorial taxation system; the core tax code remains in effect. US persons, citizens, and residents (aka Greencard Holders) remain US persons and subject to taxation under all of the current laws. Some background: in order to end citizenship-based taxation, nearly the entirety of the tax code would need to be rewritten. For these reasons, Republicans Overseas knows that the TFFAAA is only a first step in the goal to address the issues and problems for expats residing overseas.

The TFFAAA proposes to add Sec. 911A which, again, would not change the core code but instead add to the rules. Sec. 911A amends the current tax code so that nonresident citizens can elect to be considered “qualified nonresident citizens” and only have their US source income taxed, excluding all foreign source income from US taxation.

How Would You Qualify as a Nonresident Citizen Under TFFAAA?

In short, it pretty much follows the bona fide residence and physical presence tests for the Foreign Earned Income Exclusion. So, you’d need to meet the following criteria:

  • Be a citizen of the US
  • Have a “tax home” in a foreign country
  • Be fully compliant for the prior three taxable years
  • Meet the other requirements of either the bona fide residence or physical presence test for the taxable year
  • No federal employees are considered nonresident citizens

After determining you meet the five points of a nonresident citizen, you could elect annually to be taxed as a qualified nonresident citizen. However, any sale of personal property is only excludable for the periods you elect to be a qualified nonresident citizen; essentially, all capital gain transactions would need to be calculated by allocating for any years the TFFAAA did not protect the foreign personal property, foreign homes, stocks, etc.

There’s Good News and Bad News

What’s the good news? Our experts agree that this bill is likely simplistic enough to get through Congress and a first step in the long-term goal of territorial taxation. It will be a hugely positive change for US persons overseas that have absolutely no US sourced income.

What’s the bad news? This bill benefits only a small number of US persons living overseas. Beyond having to calculate any portion of foreign personal property sales to the periods you are not a qualified nonresident citizen, the bill does not address the multitude of other problems in expat taxation, such as:

  • The TFFAAA would not change FATCA or FBAR reporting. If you had an aggregate bank account balance of $10,000 in foreign financial accounts, you would continue to file the FBAR annually.
  • All informational reporting remains unchanged. US persons with ownership in foreign businesses will need to continue any annual reporting requirements for 10% or more ownership in a foreign corporation, like Form 5471. In addition, the GILTI calculations are not addressed.
  • The bill does not address foreign currency conversion transactions, PFICs or foreign trusts reporting and taxation.
  • The bill means you cannot elect to qualify for the Foreign Earned Income Exclusion and also to be a nonqualified resident citizen, so, any US sourced income would be taxed as a nonresident, subject to any treaty-based positions that nonresidents currently claim.
  • Because of the compliance requirements, the TFFAAA does not address any “accidental Americans” and the issues they face banking overseas.

So, there you have it. A small step for expats, but hopefully a giant leap is on its way. Keep your fingers crossed, and call your representatives!

To read more on the topic, download our guide devoted to the Tax Fairness for Americans Abroad Act to get all the facts.

 

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