U.S. citizens who live abroad are subject to a slew of IRS regulations. They may owe American taxes, even if they already pay the equivalent in their country of residence. Unlike the citizens of virtually every other nation, overseas Americans must report their worldwide income.
The tax challenges posed by citizenship-based taxation, based on citizenship and not residency, “far exceed those of domestically based taxpayers,” according to the National Taxpayers Union Foundation. “This system contrasts with Residence-Based Taxation (RBT), which is used by the rest of the world and operates on the principle that only residents in a country should be subject to its income taxes.”
Relief could be on the way if President Donald Trump makes good on his October 2024 campaign promise to “end double taxation” on America’s estimated 5 million overseas citizens. Some estimates put the number as high as 9 million.
“You’ve been wanting this for years, and nobody had listened to you, and you deserve it,” Trump told voters. “And I’m going to do it. It’s the right thing to do. And no American leader has ever been willing to stand up and commit to you the way that I have.”
Laura Snyder, president of the Paris-based organization Stop Extraterritorial American Taxation is optimistic, to a point.
“No presidential candidate has done this before, and now it’s part of the national conversation,” Snyder said. “There’s momentum and unprecedented interest. Will it translate into a success? Who knows?”
Obstacles remain, however. “Congress doesn’t care about us,” due to a lack of representation, and “we are easy scapegoats,” often portrayed as rich tax evaders, despite tax compliance and often middle-class incomes, Snyder said.
Keith Redmond, a co-founder of SEAT and founder of the Facebook group American Expatriates for Residency Based Taxation, is riled by claims that Americans who live abroad do not pay taxes.
“People say, ‘What are you complaining about? You don’t have to pay American state tax, or you’re exempt from U.S. income tax thanks to the foreign-earned income exclusion,’” Redmond said. “What they fail to grasp is that we are already paying taxes in our home country.”
The country an American resides in, and whether that country and the United States have signed various tax treaties, will determine whether a U.S. citizen must pay self-employment Social Security tax (12.4%) and Medicare (2.9%) on top of the equivalent to their adopted country or is doubly taxed when they sell a home or inherit money or property in either country.
As onerous as it is, double taxation is just one element of extraterritorial taxation, said Redmond, who helps Americans who live abroad to navigate the U.S. tax system.
“You are dealing with two different tax systems, so you cannot have a normal financial life in the country where you live,” Redmond said. “For example, you can live in France and contribute to a financial product or account that is tax-free or tax-deferred in France but still need to pay capital gains in the U.S. Unemployment benefits are not taxed in France, but they are taxed in the U.S. as worldwide income.”
The Foreign Account Tax Compliance Act is yet another burden. Because it requires foreign financial institutions and certain other nonfinancial foreign entities to report on the foreign assets held by their U.S. account holders or be subject to draconian fines, many foreign banks and investment houses refuse to accept Americans as clients. Even worse, an increasing number of American brokerage firms will no longer serve overseas U.S. citizens, due in part to the copious paperwork.
Inspired by Trump’s call to end double taxation, in December 2024, in the waning weeks of the last Congress, Rep. Darin LaHood (R-IL) introduced the Residence-Based Taxation for Americans Abroad Act.
“This is a non-partisan issue that impacts U.S. citizens with roots in districts across the country,” LaHood said in a Dec. 18, 2024, statement, a bit over a month before Trump took office for a second, nonconsecutive term.
“I look forward to working with President-elect Trump and my House colleagues on both sides of the aisle to modernize our tax code to ensure Americans are not punished for living and working abroad,” LaHood added.
Once it is reintroduced in this Congress, the bill would establish a process to allow tax-compliant U.S. citizens who have lived abroad for at least three years to be treated as nonresidents without having to renounce their U.S. citizenship. As such, foreign financial institutions would not be required to deal with the FATCA and would have no justification to reject Americans living abroad. The nonresident American citizen would be exempt from certain reporting requirements and penalties related to foreign assets and transactions.
However, an overseas taxpayer would still be subject to U.S. tax on American-sourced income and gains, distributions, and U.S. retirement and deferred compensation plans, along with rental income from a U.S.-based property and other American-sourced income or gains. This could result in double taxation and hefty accounting fees in both countries.
The bill’s supporters include so-called “accidental Americans” — people born in the U.S. because their noncitizen parents were temporarily working or studying in the U.S., but who left the U.S. as children. Many accidental Americans have never returned to the U.S., even for a visit, and have no U.S.-based assets or bank accounts.
Snyder worries that the bill did not go far enough and that it would have empowered the IRS to decide when it would go into effect, if enacted.
“In our experience, when an agency is given that much discretionary power, nothing happens,” Snyder said.
Not everyone welcomes the LaHood approach to tax policy for Americans living abroad. David Lonn, who lives in Israel, believes that being required to file a U.S. tax return benefits Americans who live abroad.
“Speaking to an accountant once a year isn’t a big deal, and a lot of American immigrants rely on the additional child tax credit and appreciate stimulus payments,” Lonn said. “All of these are tied to filing an American tax return.”
AOC’S OPPOSITION TO SCHUMER ON SPENDING FIGHT FUELS SENATE PRIMARY SPECULATION
In contrast, Jeannie Flowers Mestres, an American who resides in France, favors any legislation that ends the FATCA.
“From the time my son was 18 years old until he turned 25, he couldn’t open a bank account in France,” Mestres said. “Now, I’m having problems. A lot of French banks don’t want to open accounts for American-born French citizens. This has to end.”
Michele Chabin is an Israeli journalist whose work has appeared in Cosmopolitan, the Forward, Religion News Service, Science, USA Today, U.S. News & World Report, and the Washington Post.
