Proposed U.S. Legislation to Change How Americans Abroad Are Taxed: The Residence-Based Tax Election

On December 18, 2024, Representative Darin LaHood (R-Illinois) introduced the Residence-Based Taxation for Americans Abroad Act (RBTAA), a landmark bill that could transform how U.S. citizens living abroad are taxed. 

LaHood’s Tax Bill: A Step Toward Residence-Based Taxation for Americans Abroad

This proposed legislation seeks to replace the current system of citizenship-based taxation (CBT) with a residence-based approach. If enacted, it would have significant implications for global mobility programs, international assignments, and the millions of U.S. citizens residing overseas.

The Current Taxation Landscape

The United States is one of only two countries that taxes its citizens on their worldwide income, regardless of where they reside. This CBT system often creates complexities and double-taxation issues for Americans living abroad, even with relief mechanisms such as the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit (FTC), and income tax treaties.

For global mobility teams, CBT imposes additional compliance burdens and can discourage U.S. citizens from accepting international assignments. It also places Americans at a financial disadvantage compared to individuals from countries that follow a residence-based taxation model.

What Residence-Based Taxation Could Mean

Under a residence-based taxation (RBT) system, U.S. citizens living abroad would only be taxed on their U.S.-sourced income, such as employment income earned in the United States, distributions from U.S. retirement plans, and income from U.S.-based assets. The primary tax liability would shift to the country of residence, simplifying tax compliance for expatriates and reducing administrative burdens for global mobility teams.

Prospects for Enactment

Introduced at the end of the 118th Congress, the RBTAA’s best chance for enactment lies in its inclusion in broader tax legislation during the 119th Congress in 2025. With key provisions of the Tax Cuts and Jobs Act (TCJA) set to expire at the end of 2025, lawmakers are expected to prioritize major tax reforms.

Advocacy groups, including Democrats Abroad, support the proposed legislation and encourage U.S. citizens to lobby Congress for co-sponsorship. Meanwhile, the Joint Committee on Taxation is assessing the bill’s financial implications to ensure it remains revenue-neutral.

How RBT Would Work: Eligibility and Requirements

• Election Process: U.S. citizens living abroad would elect to be treated as non-residents for tax purposes by meeting specific criteria, such as establishing tax residency in a foreign country and staying compliant with U.S. tax filings for U.S.-sourced income.
• Irrevocability and Termination: Once made, the election would generally be irrevocable, except in cases of non-compliance. If canceled within three years due to excessive time spent in the United States, the election would be retroactively voided, and taxes recalculated under CBT rules.
• Departure Tax: High-net-worth individuals may face a “departure tax” on unrealized gains and deferred income, with transitional rules for individuals with limited recent ties to the U.S. tax system.
• Compliance Relief: Qualifying individuals would be exempt from onerous reporting requirements, such as Foreign Bank Account Reporting (FBAR) and Foreign Account Tax Compliance Act (FATCA) obligations.
• Substantial Presence Test (SPT): The SPT would be applied to determine residency. U.S. citizens who spend significant time in the United States would revert to CBT.

Key Benefits for Global Mobility Programs

1. Streamlined Compliance: Simplified tax filings and reduced reliance on foreign tax credits.
2. Enhanced Employee Experience: Lower tax burdens and greater financial certainty for U.S. assignees abroad.
3. Increased Assignment Acceptance: Reduced double-taxation hurdles, encouraging international mobility.
4. Cost Savings: Lower tax-related expenses for both employers and employees, enabling resources to be allocated elsewhere.

Challenges and Considerations

While the RBTAA offers numerous benefits, implementation presents challenges, including:

• Residency Definition: Establishing clear criteria to prevent abuse.
• Exclusion of Green Card Holders: The RBT election would apply only to U.S. citizens.
• State Tax Residency: The election would not affect state tax residency, potentially leaving some individuals subject to state taxes while being federal non-residents.
• Transition Period: Managing tax obligations for those moving out of the CBT system, including departure tax liabilities.
• Revenue Impact: Ensuring the tax system remains equitable and addressing potential revenue shortfalls.

How Global Mobility Teams Can Prepare

1. Monitor Developments: Stay updated on legislative progress and engage with policymakers.
2. Consult Tax Advisors: Work with specialists to assess the implications for expatriate tax obligations.
3. Revise Policies: Adapt mobility policies to reflect new tax realities and support employees during the transition.
4. Communicate with Assignees: Keep employees informed about potential impacts on their tax situations.

A Milestone for Americans Abroad?

The Residence-Based Taxation for Americans Abroad Act could mark a turning point in addressing long-standing tax challenges for U.S. citizens overseas. For global mobility professionals, the legislation offers an opportunity to streamline operations and enhance international assignments.

AIRINC will continue monitoring these developments and providing insights to help organizations navigate the evolving tax landscape.

Stay tuned to AIRSHARE for updates on this and other critical issues shaping global mobility.