THE TRANSATLANTIC MAGAZINE
On November 19th, Congressman Beyer introduced the Tax Simplification for Americans Abroad Act (H.R.6057). The bill provides for a simplified tax filing form for certain Americans living and working overseas and also expands the definition of foreign earned income eligible for exclusion under the Foreign Earned Income Exclusion (FEIE, section 911 of the Internal Revenue Code). New categories of income would be eligible for exclusion such as; pension income, disability payments, etc. As a service to the community, ACA has written a brief explanation of the elements of the bill, however, an official technical explanation may be provided by the Congressional tax writing committees and, when made available, ACA will share with the community along with commentary. Also, there is no estimation of revenue effects as of this date.
Congressman Beyer’s bill is a good step forward and indicates that Congress is getting the message that something needs to be done about the taxation of Americans overseas. ACA has been instrumental in getting this message into Congress through advocacy in Washington, DC and write-in campaigns calling for the Congress to hold hearings. Hearings are exactly what is needed and are the essential next step in the process of tax reform for Americans overseas. Although the Tax Simplification for Americans Abroad Act addresses some of the cost and compliance issues that have been reported by overseas Americans, it does not address the greater problems associated with the current Citizenship-Based Taxation (CBT) regime which can only be addressed by serious tax reform and adoption of Residence-Based Taxation (RBT).
A key component for hearings is the presentation of good data and information on the community of Americans living and working overseas. An accurate count of the number of Americans living overseas, data on the revenue generated by CBT and data on the asset and income make-up of Americans overseas, are essential. American Citizens Abroad Global Foundation‘s (ACAGF) 2017 research by the contractor District Economics Group (DEG) to provide revenue estimates for ACA’s side-by-side comparative of CBT and RBT has already provided offices in Congress with some of this vital information. ACAGF’s follow-up research project with DEG to update their 2017 report will be issued shortly and ACA will be returning to offices on Capitol Hill that are involved in the writing of tax legislation and in the scoring (evaluating the cost) of legislation, such as, Congressman Beyer’s bill, to present their research and data. Surprisingly, the government does not have complete data on the community of overseas Americans, and ACAGF’s research project has provided them with a more complete and accurate picture.
ACA applauds Congressman Beyer’s efforts to address the tax and compliance issues of Americans overseas and supports his efforts to bring attention to the concerns of Americans abroad. At the same time, ACA stands firmly behind adoption of Residence-Based Taxation (RBT). RBT is the only way to address all the tax and compliance issues of Americans Abroad. ACAGF’s research work has demonstrated that RBT can be adopted, can be revenue neutral (not cost the government) and super tight against abuse.
Legislation introduced by Congressman Beyer (D-Va, 8th District) calls for the creation of a short form tax return to simplify the return process for certain taxpayers living abroad (section 2 of the bill) and expands the foreign earned income exclusion under section 911 (section 3 of the bill). At the time of this writing, no technical explanation of the bill or revenue estimate has been released.
Section 2 instructs the Secretary of Treasury or the IRS to create a form for use by individuals to file the federal income tax return. (An individual might be a US citizen or alien individual treated as a resident alien for US tax purposes.) This bill provision is not an amendment to the Code but rather an instruction to Treasury. The form “shall be as similar as practicable to Form 1040-EZ as it existed in 2017”. (Form 1040-EZ was eliminated as part of the Tax Cuts and Jobs Act. For tax year 2018 and later, individuals no longer use Form 1040-EZ, but instead use Form 1040 or Form 1040-SR. Form 1040-EZ (Income Tax Return for Single and Joint Filers with No Dependents) 2017, in effect, is the intended model for the new “short form” for certain Americans abroad. See https://www.irs.gov/pub/irs-prior/f1040ez--2017.pdf.
The new form will allow an individual:
To demonstrate that he or she is a nonresident for purposes of the substantial presence test in section 7701 (b)(3). (This provision seems most useful for any alien individual wishing to establish that he or she is “non-resident” and, therefore, not subject to US income tax.)
To declare foreign earned income for purposes of the section 911 exclusion. (Apparently this relates only to foreign earned income, not housing expenses, which are also dealt with in section 911.)
To characterize income based on source, including, but apparently not exclusively, wages, contract income, foreign government benefits, pension and other retirement income, scholarships and fellowship grants, interest, dividends, and capital gains. Characterizing, for example, certain pension income as “foreign” would be favorable because it would place income under the expanded rules in amended section 911. Section 911, as amended by this legislation, would treat some income, which previously did not qualify for the foreign earned income exclusion, as excludable. See below.
To claim the standard deduction and, if applicable, the child tax credit and earned income tax credit.
To declare foreign taxes paid (and thus benefit from the foreign tax credit and deduction rules).
Declare United States source income from retirement, pension and Social Security benefits to be treated as resourced from treaty income where taxes been paid upon distribution. (Certain bilateral tax treaties allow a US citizen an additional credit for part of the tax imposed by the other country on US source income. This is separate from, and in addition to, the foreign tax credit for foreign taxes paid or accrued on foreign source income. If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and the taxpayer elects to apply the treaty, he or she, in the foreign tax credit calculation, can include that income under the category “Certain Income Re-sourced By Treaty”. The income can be treated as foreign source to the extent provided in the treaty. The taxpayer must compute a separate foreign tax credit limitation for any such income for which he or she claims benefits under the treaty, using a separate Form 1116, Foreign Tax Credit, for each amount of resourced income from a treaty country. See Internal Revenue Code sections 865(h), 904(d)(6), and 904(h)(10) and the regulations under those sections (including Regulation section 1.904-5(m)(7)) for any grouping rules and exceptions. This provision in the Beyer bill makes this favorable approach more widely available. While the new “short form” may be short, the instructions explaining the workings of this rule may not be so short. A Joint Committee on Taxation Technical Explanation of the Buyer bill would be helpful. Likewise, Treasury regulations following enactment will be important and necessary.)
Section 2 of the bill amends section 911 (US citizens or residents of the US living abroad – exclusion of certain income and special treatment of housing expenses) as follows:
By putting back in the definition of foreign earned income amounts received as a pension or annuity. Under current law, these are specifically excluded.
By expanding the definition of “foreign earned income” to include not only services performed by the taxpayer but also benefits received by such taxpayer. An indication of the meaning of “benefits” follows immediately.
By expanding the meaning of “earned income” to include not only wages, salaries, professional fees, and other amounts received as compensation for personal services, but also pensions, distributions from retirement funds, or payments received with respect to disability, unemployment, family medical leave, or childcare.
Changes in the definitions of “foreign earned income” and “earned income” in section 911, as amended, may affect other provisions of the Code, and Treasury and the IRS will no doubt pay close attention to this.
The effective date of provisions in both section 2 and 3 is taxable years beginning after date of enactment.
As of today, there are no estimates of the revenue effects of this legislation. There will be a significant revenue effect because additional types of income become excludable, i.e., not taxable. It should be noted, among other things, that US Social Security payments are not simply excluded from tax.*This explanation was prepared by Charles M Bruce, who says that he is solely responsible for any misstatements or mistakes. Charles is Legal Consel to ACA and a highly respected American attorney specializing in international tax planning and compliance matters.