The Tax Fairness for Americans Abroad Act of 2018 [Proposed]

Volume No. US-19-01

On December 20, 2018, just before the Congressional holiday recess,  Congressman George Holding (Republican-North Carolina) introduced H.R. 7358, the “Tax Fairness for Americans Abroad Act of 2018”.  This is one of two bills introduced by Congressman Holding, the other being H.R. 7373, the “Spam Calls Task Force Act of 2018”.

During the 114 Congress, Congressman Holding was a member of the House Ways and Means Committee which is the chief tax-writing committee in the House of Representatives.  On November 6, 2018, Congressman Holding was elected with 51.38% of the popular vote, for U.S. House District 2.

For years, Congressman Holding has been a proponent of tax reform for Americans living and working overseas. He and his staff have been working on draft legislation since December 2017 when it became apparent that some form of residency-based taxation, for individuals, would not be included in  the 2017 Tax Cuts and Jobs Act (“TCJA”).  While the 2017 TCJA made changes to how corporations were taxed, no such residency based adjustments were made for U.S. citizens and residents, who continue to be taxable on their worldwide income.

What is being proposed?

Under the bill, nonresident US citizens who make an election to be taxed as a qualified nonresident citizen will exclude from income, and therefore be exempt from U.S. taxation on, their foreign source income including both foreign earned income and foreign unearned income.  All nonresident US citizens, however, will remain subject to tax on any US source income.  The bill would add Code Section 911A – “Alternative for Nonresident Citizens of the United States Living Abroad”.

In order to qualify for “qualified nonresident citizen status”, a U.S. citizen must be a nonresident U.S. citizen and make an election to be taxed as such. Individuals will make an election and establish that they meet certain foreign residency requirements.

Under this proposal, a nonresident citizen is defined as an 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:

  1. 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
  2. is present in a foreign country or countries during at least 330 full days during such taxable year.

Will this Bill become law?

Anyone who follows U.S. politics will know how difficult it is, for what may be termed a private member’s bill, to become law.  Proposed laws must be voted in and passed by both the House of Representatives and the United States Senate and then signed into law by the President.  Those who remember the 2010 changes to the U.S. estate tax law will recall the vast number of bills that were proposed that ultimately went nowhere.

The U.S. Federal Government is currently shut down with no end in sight.  The Democrats have retaken control of the House of Representatives and many Democrats are talking of impeaching President Trump.  Other issues such as building a wall with Mexico, immigration reform and health care continue to dominate U.S. politics. 

In her 2011 Annual Report to Congress, National Taxpayer Advocate Nina E. Olson cited (page 152 of Section 1) that there were between 5 to 7 million U.S. citizens living abroad.  With the U.S. population at approximately 324 million (as of 2017) the number of U.S. citizens abroad represents, between, 1.54% to 2.16% of the U.S. population.  While the issue of U.S. taxation is a significant issue to those U.S. citizens living abroad, in the general scheme of things the taxation of U.S. citizens abroad does not appear to of significantly high importance to either the U.S. Congress or the IRS.

As such, while the passing of the bill may provide tax relief and simplification to U.S. citizens abroad, it is doubtful that it will become law anytime soon.  Essentially taxpayers shouldn’t get their hopes up.

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