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American Citizens Abroad (ACA) Responds to Overseas Taxation developments
Michael Larsen, Director and UK Chapter Chairman of American Citizens Abroad and Jonathan Lachowitz, ACA Chairman look at The Tax Fairness for Americans Abroad Act – where is it going and what will happen next?

Published on February 27, 2019

On December 20, 2018, Congressman Holding (R-NC), a member of the influential House Ways & Means Committee, introduced a tax bill that is a critical first step toward transitioning from the current citizenship-based taxation system to a system that provides residence-based taxation for individuals, the Tax Fairness for Americans Abroad Act (TFAA).

Under TFAA, nonresident US citizens, can elect to be taxed as a qualified nonresident citizen (QNC), and be exempt from taxation on their foreign-source income. All QNCs, however, will remain subject to tax on any US-source income.

The basic principle of the bill mirrors the thinking behind American Citizens Abroad [ACA]’s residency-based taxation (RBT) approach, that is, separating foreign-source and US-source income and excluding from US taxation specified foreign-source income earned when a US citizen is a qualified resident abroad. The toggle switch determining whether an individual is taxable on US income – and not on foreign income – is residency.

Qualifying for nonresident citizen status

In order to qualify for “QNC” status, a US citizen must be:

A citizen of the United States,
Have a tax home in a foreign country, either establishing that he has been a bona fide resident of a foreign country or countries for an uninterrupted period (i.e. entire taxable year) or, is present in a foreign country or countries during at least 330 full days during such taxable year.
In full compliance with US income tax laws for the previous 3 years

What is taxed and what is not taxed under TFAA?

TFAA is an important bill as it puts down a “marker” and provides an outline and basic understanding of the new regime. However, more detailed refinements are still needed. Issues such as treatment of income from PFICs, capital gains, social security/retirement income, estate tax and filings of FATCA and FBAR forms will need further investigation. ACA has provided the offices working on TFAA and the community with an in-depth explanation of how income, given the current drafting of the bill, will be treated, as well as, highlight areas of the bill that need more consideration.

What happens now and how does the TFAA get enacted into law?

Now that the bill has been introduced, the real work of “selling it” begins. This means carefully planned and strongly executed lobbying – not a dirty word in this context!

The first step is for Congressman Holding to reintroduce the bill in the 116th Congress. ACA anticipates that this will happen soon, if not already by the time of the publication of this article.

ACA believes that hearings on the bill will be held before the House Ways & Means Committee, the full committee or its subcommittee on tax policy, so as to “air” all the issues and give Members the opportunity to ask all the relevant questions and examine all the data - the revenue implications of the bill, the mechanics of the bill, the profile, including demography, of the Americans overseas community. ACA’s work on the subject (RBT proposal and our revenue estimates) along with our recent explanation of the bill, we anticipate, will be part of the knowledge and data presented.

Legislators will begin work to spell out in greater detail areas and topics. As noted above, clarifications with respect to the treatment of certain income will be added. Also, how individuals will qualify and consideration of compliancy programs to ensure that those Americans who were unaware of their US tax obligation (non-willful) have a path forward to qualify for TFAA.

ACA’s role in TFAA advocacy

ACA has been deeply involved in the push to develop a legislative proposal for residency-based taxation. ACA will continue to push for hearings and help those offices working on the Tax Fairness for Americans Abroad Act in developing refinements to the legislation. ACA has the knowledge and data to do this.

ACA will be pounding the pavement and walking the hallways of the Congress to drum up support with Members, Member’s staff and the Committees working on RBT tax reform. ACA will continue to educate both Democrat and Republican offices to on-board sponsors. ACA is ideally suited for this because, firstly, we are non-partisan and represent an independent voice on the subject, secondly, ACA is respected in Congress for bringing solutions to problems that are in the best interests of the community without political bias and, lastly, we have a dedicated presence in Washington, DC – we are an Uber ride away from key offices in Congress.

What can you do?

First, let your representatives in Congress know about TFAA! Write your representatives and inform them about the bill and your support of a residency-based approach to taxing Americans overseas.

Second, Support ACA’s Fundraising effort – Two ways to do this!

1. American Citizens Abroad Global Foundation (ACAGF, which focuses on education and research) is continuing to raise monies for additional analysis leading to improved database and detailed revenue estimates. Detailed revenue estimates on different pieces of the “Tax Fairness for Americans Abroad Act” are extremely important because they help refine and reshape the legislation. Donations to ACAGF are tax deductible.

2. ACA, which advocates (lobbies) for legislation, such as TFAA, is raising funds to do just this – lobby for enactment of a residency-based taxation regime. ACA will meet with Committees, Members in the House and Senate and hold meetings with other “players” to educate and get everyone pushing in the same direction. ACA will work to activate others that, in turn, will lobby in favor of legislation. Donations to ACA for lobbying are not tax deductible. At this time no ceiling on this effort is anticipated. ACA is registering right now as a lobbyist and, having done that, will be in a position to do everything possible to push for enactment.

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