Guest Post By Dr. Suzanne de Treville – Switzerland
Discussions about eliminating double taxation for U.S. citizens abroad often focus on reducing the significant compliance burdens these individuals face. When the U.S. taxes income or assets already taxed in a citizen’s country of residence, the resulting complexity is substantial while the extra tax revenue to the IRS that results from this double taxation by ordinary taxpayers is quite low. This complexity is particularly burdensome for the 80% of expat taxpayers with an Adjusted Gross Income of $100,000 or less.
The IRS requires expatriates to file intricate returns and is responsible for providing necessary assistance. However, while resources are available to domestic taxpayers, similar support is lacking for those abroad, despite their greater need. Continue reading →
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) February 20, 2022
This is Part 2 of the series. In Part 1, I identified that it is essential that individuals (and governments) unite to bring an end to the US tradition of “citizenship taxation”. “Citizenship taxation” – what a phrase. The words are not descriptive of anything. It clearly has something to do with some form of taxation. The inclusion of the word “citizenship” makes it sound almost patriotic. But maybe, not. Maybe it’s just part of what means to be a citizen. Since only the United States has citizenship taxation, perhaps taxation is what it means to be a US citizen. If so, then perhaps US citizenship should be called “taxation based citizenship”. The concept of citizenship means different things in different countries. Is this a statement that the essence and the meaning of US citizenship is taxation and only taxation?
Citizenship Taxation – Theory vs. Reality
A supporter of citizenship taxation is someone who THINKS about “citizenship taxation”. An opponent of citizenship taxation is anybody who has tried to LIVE under citizenship taxation.
Update 1 Nov. 22: The exclusion of 402(b) plans is I believe an accident. But it demonstrates why these problems can't be solved by patching existing legislation. "The Beyer "Tax Simplification For Americans Abroad Act": A First Look "https://t.co/tSGYunrqmQ via @expatriationlaw
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) November 22, 2021
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) November 21, 2021
On November 19, 2021 a post on the Democrats Abroad site introduced Congressman Beyer’s “Tax Simplification For Americans Abroad Act”. The Bill has been introduced as HR6057. I just saw this a few hours ago. Therefore, this post is necessarily a summary of my first impressions. It is likely that this will evolve and be updated over the next few days.
For those who do not want to read this relatively long post, the following excerpt provides an executive summary:
The Beyer Bill does NOT end US “citizenship-based taxation” and does NOT enact “residence-based taxation” as understood in the rest of the world. That said, the Beyer bill is intended to provide administrative (less to do) and substantive (less to pay) relief to middle class Americans abroad as long as they are not “entrepreneurs abroad” who carry on business through a CFC. “Entrepreneurs abroad” continue to be presumptively GILTI. If I am reading this correctly, GILTI income appears to NOT be included in the expansion of the scope of 911. Furthermore, the bill appears to provide conflicting directives on some “foreign pensions” (specifically excluding 402(b) pensions from the proposed new 911 exclusion while generally allowing foreign pensions generally to be excluded). It is my understanding that many Australian residents treat employer Superannuations as 402(b) pensions under the Internal Revenue Code.)
Like all “carveouts” the proposal purports to provide relief to a narrowly defined group of Americans abroad. In addition (this cannot be overemphasized) the bill retains US citizenship-based taxation. It should be clearly understood that ANY attempt to provide relief through expanding the FEIE (including the 2018 Holding bill) necessarily assumes the continuation of citizenship-based taxation.
This post is composed of the following four parts:
Part A – The General Purpose
Part B – General Impressions
Part C – The relevant modifications to IRC 911 Foreign Earned Income Exclusion
Part D – Tentative conclusion
* Appendix – The text of 911 with the proposed changes
On May 14 – 16 the Democratic Party had its Global Annual Meeting. It’s interesting to see the resolutions proposed. (Those not dealt with will considered at a later meeting.)
Americans abroad who understand that the single most important issue facing them is US citizenship-based taxation, should be aware of resolution 18. Shockingly this resolution was proposed by FOUR MEMBERS OF DEMOCRATS ABROAD and includes (but is not limited to):
1. A strong endorsement of US citizenship-based taxation and the proposed US Wealth Tax
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) July 10, 2021
Notice in this excerpt they completely acknowledge that at best, their proposal is designed to create “de facto” residence-based taxation for some Americans abroad. To put it very simply:
Clearly (at least) some members of Democrats Abroad:
Ending U.S. citizenship taxation is an increasingly popular topic. Here is a presentation that I organized in July or 2024 attempting to answer the questions of:
1. What does it mean to end citizenship taxation; and
2. What would a system of residence taxation really look like?
Thanks to @Tpsmyth01 for help in "Take 1: Digging The Foundation To Build The House Of US Residency-based Taxation" – Hosting a zoom call to discuss proposal and related matters on Sat. July 10/21 at 8:00 am EST – Please DM to join https://t.co/MH9CxZYkeJ via @expatriationlaw
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) July 9, 2021
It’s about “pure residency-based taxation” and not citizenship-based taxation with a “carve out”
I have previously advocated that the United States should move to to a system of pure residence-based taxation. A system of pure residency-based taxation, means that:
Citizenship is NOT a sufficient condition for tax residency. If citizenship is not a sufficient condition for tax residency, income sourced outside the United States, which is received by people who are not residents of the United States, should not be taxable by the United States.
Note that pure residency-based taxation is NOT citizenship-based taxation with a “carve out” for US citizens living abroad. To put it another way: US citizens, simply because they are US citizens, would NOT be defined as US tax residents and subject to US worldwide taxation. This is different from US citizens being defined as US tax residents, but allowing (like the FEIE) for their foreign income to be excluded from US taxation. Note also that this is a legislative proposal. It is therefore different from our earlier proposal for “A Regulatory Fix To Citizenship Taxation“.
It is my opinion and the opinion of the members of SEAT, that only a system of pure residency-based taxation will solve the many problems of Americans abroad!
How is residency to be determined?
.@Taxresidency in Canada is largely based on being "ordinarily resident". This is based on actual circumstances and appears to be a combination of domicile, a degree of physical presence and the centre of gravity of your life. https://t.co/fs6m4Nlrz2 via @expatriationlaw
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) July 9, 2021
Residency is commonly determined in various ways. For example, Canada determines residency based on an objective deeming provision (number of days spent in Canada and through a “facts and circumstances” test described as ordinary residence). Generally, citizenship (if it is a factor at all) is not a significant issue in determining ordinary residence. The Canadian experience is proof that it is possible to have very sticky tax residency without citizenship being an issue.
Purpose of this post:
The purpose of this post is to propose some simple amendments to the Internal Revenue Code which would provide a foundation for the United States to transition from citizenship-based taxation to pure residence-based taxation. The goal is modest. The post is not intended to (I will write a separate post) deal with those who are CURRENTLY US citizens living outside the United States. It is NOT to address all the issues. That said, most of the Internal Revenue Code focuses on the taxation of those who are US tax residents. Little in the Code focuses on the actual definition of US tax residency.
The purpose of this post is begin with the fundamentals and ask:
How could the existing Internal Revenue Code be modified to provide a framework for residency-based taxation? Of course, readers will be left with many questions. But, the proposed foundation would allow for:
1. US citizens to move from the United States and sever tax residency with the United States.
2. US citizens to move from the United States and continue to be treated as tax residents of the United States.
Under either scenario, US citizens would remain US citizens. They would NOT be required to relinquish US citizenship in order to sever tax residency.
Obviously there will be many complications. But, every journey begins with a modest beginning. This is intended to be only a modest beginning. It is to begin digging the foundation to build the house of “residency-based taxation”.
The post is composed of the following parts:
Part A – Residents Are Subject To Worldwide Taxation
Part B – Nonresidents Are Not Subject To Worldwide Taxation
Part C – Definition Of Resident and Nonresident- 7701(b)
Part D – Definitions That Require Change “US Person”, “Relinquishment Of Residency”, etc.
Part E – Relinquishment Of Residence
Part F – Living abroad without relinquishing US residence
Generally, I believe that amendments to a small number of sections of the Internal Revenue Code provide the foundation from which to grow. Note that this proposal solves the problems of the “Retirees Abroad” (they don’t give notice under the new 877(a)(g)) and the problems of accidentals (they were never tax residents in the first place). There would be regulations (like the Canada Revenue Agency folio) for what constitutes residence. In Canada tax residency is defined largely by “ordinary residence” – a concept that is very sticky).
I am identifying the building blocks that could define tax residency under a US system of residency-based taxation, with few modifications to the Internal Revenue Code. (These building blocks are generally compatible with the existing Internal Revenue Code.) Once the foundation has been built we would then build our way out. This initial foundation solves the PFIC problem, the CFC problems and most problems related to foreign source income. The FinCEN 114 (FBAR) rules currently reference Internal Revenue Code 7701(b). Therefore, the proposals in this post would solve the FBAR problem.
I will discuss other issues impacting Americans abroad in subsequent posts.
I have included only the sections of the Internal Revenue Code that I consider the foundation of US tax residency. When a word is IN CAPS that means that there has been a change to facilitate a change to pure residence-based taxation.
The language in the discussion for change reflects a desire (on the part of individuals and organizations) to move from the US system of “citizenship-based taxation” to a system of “residence-based taxation”. Various individuals and groups describe the goal using the language of “residence-based taxation” AKA RBT. It would be a mistake to assume that RBT means the same thing to different people. The purpose of this post is to describe definitions of RBT and and how those definitions may be defined for different individuals or groups.
This is Part 3 in my “Little Red Dual Citizenship Book” Series. For parts 1 to 5, see the Appendix.
Oct. 22/20 lawn sign in Toronto, CA: COULD the Nov. 3/20 US election be decided by CDN residents with US/CDN @dualcitizenship? What would Homeland Americans think of their next president being decided by Canadians? – https://t.co/zs8Uer7iO1 appears to be a @Demsabroad Initiative pic.twitter.com/yNbY1xt7HR
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) October 24, 2020
I have been walking around these days asking myself with only half a smile whether there is some morphed version of the Canadian national anthem which declares: “True expatriate love in all thy sons and daughters command.”
I am doing this because I have been regularly experiencing what you might call expatriate shaming.
There’s been a push — no, make that a shove — to recruit Americans living in Canada who are eligible to vote in the Nov. 3 presidential election to become part of the electoral process. Knowing I was born in the U.S., my friends, neighbours and relatives will ask with a semi-desperate twinge in their voices: “Have you registered to vote in the U.S. election?” And when I say I am registered but I do not plan to vote, they get very angry.
Given what has been going on under President Donald Trump, they exclaim, how can I even think about not making a difference by casting a presidential ballot? (By the way, no one assumes that an expat could possibly vote for Trump, which is interesting.)
Appreciate these interviews from Democrats Abroad. But, they need to STOP making the question about residence-based taxation conditional on revenue neutrality!
See starting at the 9 minute mark … Separate questions about FATCA and citizenship-based taxation …
This is the @Demsabroad interview with Senator Sanders that includes two distinct questions: 1. About FATCA and 2. About residence-based taxation.
Many people have reported (based on this interview) that Senator Sanders supports residence-based taxation on a “revenue neutral” basis. This is NOT what he said. His answer did NOT include the “revenue neutral” condition. The question asked by the DA representative phrased the question in terms of revenue neutrality. (Arguably, the Senator’s answer was based on an assumption of revenue neutrality – but, I don’t think so.
My impression is that Senator Sanders did NOT condition his support on revenue neutrality. Democrats should stop building the “revenue neutrality” condition into the question. It is obscuring the meaning of the answers.
Finally, Mayor Pete when asked the question ABSOLUTELY made it clear that his support for residence-based taxation WAS based on revenue neutrality. Again, it is possible that he was NOT answering the question more generally.
I applaud Democrats Abroad for this interview series and for asking these questions of all candidates. That said, I do NOT think the question should be based on a move to residence-based taxation being revenue neutral.
This is post is “based on” (not identical to) one of two submissions that I submitted in response to Senator Hatch’s request for submissions regarding tax reform.
__________________________________________________________ Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?
The Internal Revenue Code mandates that ALL “individuals” , EXCEPT “non-resident aliens”, are subject to full taxation, on their WORLDWIDE income, under the Internal Revenue Code. The word “individuals” includes U.S. citizens regardless of where they live and regardless of whether they are citizens and residents of other countries where they also pay tax. This means that, by its plain terms, the United States imposes full taxation on the citizens and residents of other nations, because they are also (according to U.S. definitions) U.S. citizens. The United States is the only country in the world that has a definition of “tax residency that mandates full taxation based ONLY on citizenship.
How “U.S. citizenship” and U.S. “taxation” interact
Principle 1: The United States is one of the few countries in the world that confers citizenship based SOLELY on birth on its soil.
Principle 2: The United States is the ONLY country in the world that imposes full taxation ON THE WORLD INCOME of its citizens, REGARDLESS OF WHERE THE U.S. CITIZEN LIVES IN THE WORLD.
Bottom line: The United States is the ONLY country in the world that imposes full taxation, on WORLDWIDE income, based ONLY on the “place of birth”!
A practical example: A person whose only connection to the United States is that he was born in the United States, who lives in Canada (and may have never lived in the United States and whose only income is earned in Canada), is required to pay U.S. tax on that income. This resident of Canada is treated AS THOUGH HE WAS A U.S. RESIDENT. NOTE ALSO THAT THIS INDIVIDUAL IS REQUIRED TO PAY TAX TO CANADA! He is subject to “double taxation”. (This “double taxation” is only partially mitigated through “foreign tax credits”, tax treaties and the “foreign earned income exclusion”.)
Therefore: What academics and government officials refer to as “citizenship-based taxation” (they really don’t understand its practical effects) is PRIMARILY “place of birth taxation” and therefore a convenient way to impose U.S. taxation on the citizens and residents of other countries. As a blog devoted to “citizenship taxation” (noting the difference between the theory and reality) points out:
“A supporter of citizenship taxation is someone who THINKS about “citizenship taxation”. An opponent of citizenship taxation is anybody who has tried to LIVE under citizenship taxation.”
How did this happen? It certainly didn’t start this way!
Furthermore, as people become more and more mobile, it is not unusual for somebody to have been “Born In The USA” but live outside the USA. Global mobility is now the rule, rather than the exception.
The evolution of U.S. taxation and the Internal Revenue Code
The Internal Revenue Code has become more and more complex and impacts more and more activities of daily life. Because “U.S. citizens” (even though they are citizen/residents of other countries) are subject to U.S. taxation, they have been tremendously impacted by the “creeping complexity” of the Internal Revenue Code (which applies equally to ALL Americans wherever they may live).
This “creeping complexity” has evolved slowly through the years. The problems have been exacerbated because Congress does NOT consider that when amending the Internal Revenue Code they are impacting the lives of tax paying residents of other nations (who happen to be U.S. citizens). Congress is “indifferent” to the plight of Americans abroad:
The evolution of the Internal Revenue Code combined with ease of retaining U.S. citizenship has built a “fiscal prison” (legislative brick by legislative brick), in which to keep the tax paying residents of “OTHER NATIONS”, who just happen to have been born in the United States.
Tax Reform 2017
The United States is “making noises” about “tax reform”. Senator Orrin Hatch requested submissions from “steak stake holders” on what should be included in tax reform. He has clearly received (as did the Ways and Means Committee in 2013 and the Senate Finance Committee in 2015) many suggestions advocating the repeal of “citizenship-based taxation”.
