Update – June 27, 2025 – The 899 Penalty Tax has been removed from the “Big Beautiful Bill”:
Introduction – It’s The American (A)Way
The United States tax system is designed to impose punitive tax, reporting and penalties on the non-U.S. income and assets of Americans abroad. Nonresident aliens (those who are neither U.S. citizens nor residents) are taxable ONLY on their U.S. source income.
This reality has driven many U.S. citizens (living abroad) to renounce U.S. citizenship. It has also caused many Green Card holders to abandon their green cards. This is the consequence of U.S. citizenship-based taxation – a system that defines tax residency in terms of one’s citizenship (one may not reside in one’s country of citizenship) – regardless of one’s actual residence. (Green Card holders are deemed to be U.S. tax residents regardless of their residence.)
The United States taxes ALL U.S. source income regardless of the recipient of the income. Therefore, the practical impact of citizenship taxation is to impose U.S. taxation on the non-U.S. source income of individuals who do NOT reside in the United States. To put this in visual terms:
A person born in the United States, with no U.S. source income, is subject to U.S. tax, reporting and penalties on income received from the country where that individual lives.
A Summary Of How Different People Are Subject To U.S. Taxation
1. The United States taxes ALL individuals – regardless of citizenship or residence – on U.S. Source income.
2. The United States taxes its RESIDENTS – regardless of citizenship – on worldwide income.
3. The United States taxes U.S. citizens – regardless of residence – on worldwide income. The United States is the only major country that taxes its citizens on their worldwide income when they do not live in the country.
4. The United States taxes nonresident aliens (those who are neither citizens nor residents) on U.S. source income.
The 2025 “Big Beautiful Bill” proposes a new S. 899 of the Internal Revenue Code. This new section would impose a more punitive U.S. tax regime on the U.S. source income, received by some, but not all, nonresident aliens. The more punitive regime would be imposed on nonresident aliens who are tax residents of countries that are described as “offending foreign countries”. “Offending foreign countries” are countries that the U.S. deems to impose unfair taxes on U.S. corporations or persons. To be clear, the tax paid imposed on the individual, would be based on the tax policies of the country where the individual is resident for tax purposes!
