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Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation

Prologue

This is the third of a series of posts focussing on the need to end US citizenship-based taxation (practised only by the USA) and move to a form of pure residence-based taxation (practised by the rest of the world). The first post was titled “Toward A Definition Of Residence-based Taxation For Americans Abroad“. The second post was titled “Toward A Movement For Residence-based Taxation For Americans Abroad“. This third post is “Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation“.

Why are some Americans Abroad not concerned about citizenship-based taxation? Why will many Americans Abroad continue to vote for the same political party that continues to damage them? What does this imply for unifying Americans Abroad in support of a movement toward residency-based taxation? This post will explore these issues.

In The Life Of Many Americans Abroad: Citizenship-based taxation is not a problem until it is!!

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Toward A Movement For Residence-based Taxation For Americans Abroad

Part I – Pure Residency-based Taxation vs. Citizenship-based Taxation With A Carve Out

This is a continuation of my post on May 29, 2021 titled “Toward A Definition Of Residence-based Taxation For Americans Abroad“.

In that post I noted that different persons/groups have different ideas of what is meant by residence-based taxation. That someone tells you that they support residence-based taxation does not tell you what they mean. There are different definitions of residence-based taxation. I strongly believe that people must embrace a definition of residence-based taxation that means that US citizens are NOT – because of their US citizenship – subject to the Internal Revenue Code. In other words, the goal should reflect the view that:

The United States should not be imposing taxation and should not be permitted to impose tax on the non-US source income received by people who are tax residents of other countries and do NOT reside in the United States!

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As 2018 draws to a close: Congressman Holding introduces "Fair Taxation For Americans Abroad Act"

Updated December 21, 2018 – Here is the video of the discussion:


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Here is a description of what the Bill is intended to accomplish:

Tax Fairness for Americans Abroad

The proposal outlined below would effectively end the current citizenship-based taxation system and instead transition to a system that provides territoriality for individuals – often referred to as residence-based taxation. By taking this first step toward ending the onerous burdens of citizenship-based taxation, Americans will become more competitive in the international job market and free to pursue opportunities around the world.

Under this new system, qualified nonresident citizens will no longer be taxed on their foreign source income while they are resident abroad; however, they will remain subject to tax on their U.S. source income.

Eligibility

In order to qualify for qualified nonresident citizen status, an individual must be a nonresident citizen and make an election to be taxed as such. Individuals will make an annual election to certify they remain in compliance with the eligibility requirements.

Under this proposal, a nonresident citizen is defined as in individual that:

• Is a citizen of the United States,
• Has a tax home in a foreign country,
• Is in full compliance with U.S. income tax laws for the previous 3 years, and
• Either:

a) establishes that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
b) is present in a foreign country or countries during at least 330 full days during such taxable year

Tax Treatment

Once an individual meets the qualifications to become a nonresident citizen, he may elect to be taxed as a qualified nonresident citizen.

Those electing to be taxed as qualified nonresident citizens will be exempt from taxation on, and shall exclude from gross income, their foreign source income. This includes both foreign earned income (as defined in section 911(b)) and foreign unearned income (defined as income other than foreign earned income that is sourced outside the U.S).
Under this proposal a qualified nonresident citizen will remain subject to tax on any U.S. source income.

While individuals will not be taxed on gain from the sale of foreign personal property attributable to their time as a qualified nonresident citizen, they will still be taxed on any gain attributable to their time as a resident of the U.S. In other words, if an individual holds a foreign asset prior to their election of qualified nonresident citizen status and then sells said asset while they are a qualified nonresident citizen, the individual will only owe U.S. tax on the portion of gain attributable to the period prior to their change in status.

Here is the full text of the Bill:

Tax Fairness for Americans Abroad Act_H.R. 7358

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John Richardson – Follow me on Twitter: @ExpatriationLaw