updated 10:30 AM CEST, Sep 19, 2019

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ACA issues detailed explanation of 'Tax Fairness' legislation

The American Citizens Abroad says tax legislation introduced on Capitol Hill last month that aims to address the tax problems U.S. expats currently face is a start, which would begin the transition from the country's current citizenship-based tax regime to one that allowed for U.S. citizens to be taxed on the basis of where they live.

This assessment of the so-called “Tax Fairness for Americans Abroad” (H.R. 7358) or TFFAA was included in comments issued in an ACA statement this week, which accompanied the publication of a nine-page explanation of the long-awaited bill – sponsored, as had been anticipated for months, by North Carolina Republican Congressman George Holding.

The work needed to complete the task of ensuring that Americans who live overseas are treated as fairly by the U.S. tax system as their Homeland counterparts now needs to be done, ACA legal counsel Charles Bruce said, in the ACA statement.

"The bill [sponsored by Holding] lays down an important ‘marker’. Now everyone can greatly sharpen their thoughts."

As reported, the TFFAA bill was unveiled on Dec 20, just hours before the end of the 2018 legislative session, and as most of the United States was about to close down for the Christmas holiday. As it turned out, it was also just before an even longer shutdown that began two days later as part of President Trump's efforts to get his political opponents to agree to fund the building of a wall along America's border with Mexico. That shutdown continues.

Nevertheless, the Republicans Overseas on Thursday posted a statement on its Facebook page saying that it was “our understanding that Congressman Holding plans to reintroduce the Tax Fairness For Americans Abroad Act sometime in 2019."

Based in Rockville, Maryland, the ACA is the main non-partisan Capitol Hill-focused advocacy group representing American expats around the world.

Central features of TFFAA

Among the central features of Holding's bill is an option for American citizens who are living abroad to elect to be taxed on the basis of their residency, rather than their citizenship. Those who wished to continue to be taxed as U.S. citizens would be allowed to do so.

With "limited exceptions", the foreign-source income of those who opted to be “Qualified Nonresident Citizens," or QNCs, of the US living abroad would be taxed like that of nonresident alien individuals, that is to say, not taxed by the U.S., the ACA notes.

However, these QNCs "would remain U.S. taxpayers, and fully taxable, and subject to normal filing requirements, on [their] U.S.-source income," the ACA analysis adds, as it goes on to detail the current bill language and how it would provide for the tax treatment of both foreign-earned and foreign unearned income; salaries, PFICs, Social Security, capital gains, pension contributions, investment income, and so on.

'Not an official technical explanation'

ACA legal counsel Bruce stressed that the organization's analysis of the TFFAA is not meant to be taken as an "official technical explanation" of it. ACA executive director Marylouise Serrato added that it was rather "an attempt to lay out all the various income streams and assess how the proposed legislation [would] be applied to these income streams -- what [would and would not] be taxed by the U.S."

"ACA is obviously very much interested in helping develop and enact a final bill," she went on.

"From work on background subjects and then the drafting details, ACA is now turning to pushing for adoption of residency-based taxation."

ACA has been advocating a residency-based taxation regime for years, and has done considerable work researching how it might be introduced without negatively affecting the U.S. government's tax base. In November of 2017, for example, it published the results of a survey commissioned by its partner organization, the American Citizens Abroad Global Foundation, which found that introducing a citizenship-based regime could be achieved in a "revenue-neutral" manner.

Some concerns

One concern about the Holding bill as it currently stands that has been raised, meanwhile, is that an American expatriate who has begun to receive retirement income in one foreign country and decided to move to another – for reasons of weather, family reasons and/or a lower cost of living, for example – would at that point again begin to be taxed by the U.S. as though a U.S. resident, as opposed to a QNC.

Another point, raised by the ACA in its analysis of the legislation, is that just “a little non-excludable U.S.-source income” would result in a U.S. citizen who is living overseas but opting to be considered a Qualified Nonresident Citizen to nevertheless still “have to meet all the filing requirements of a U.S. taxpayer, as there is no de minimis rule”.

Federal employees living overseas also would not have the option of being treated as a QNC.

To read and download the ACA analysis, in the form of a pdf, click here.