SEAT’s Response to Rep LaHood’s Request for Feedback

Prologue by @JCDoubleTaxed:

 

I am not really understanding why it is all is about providing relief for Americans Abroad, and why can’t the situation just be considered for what it is: WRONG. This is similar to: if you live in one U.S. state and pay taxes there are receive state services there: THEN you move to another U.S. state and pay state taxes there and receive state services from the new state. After an RBT style transition (it seems like six months) you no longer have to pay taxes to the original state: as you are/can no longer receive state services from that state. For the state one used to live in to insist on continuing to tax you is considered along the lines of theft. I think mainland Americans get this concept. Why then the difficulty of jumping to Americans not actually living in the U.S.?

On 18 December 2024 U.S. Representative Darin LaHood (R-IL) introduced a bill entitled “Residence-Based Taxation for Americans Abroad Act.” The bill is H.R. 10468. At this time, text is not yet available on Congress.gov. You can find LaHood’s original draft at this link.

General descriptions of the bill are available from other sources online, such as here, here, here, and here. Our commentary in this post will not duplicate those descriptions.

The introduction of the bill is an important milestone in efforts to end dual tax residency for overseas Americans. SEAT is deeply grateful to Representative LaHood for his work on the issue. SEAT recognizes the work of the association Tax Fairness for Americans Abroad (TFFAA) (SEAT President Laura Snyder is a member of the Board of TFFAA). SEAT also recognizes the work of many other groups and individuals over many years. (We have described just some of that work in this article and this article).

Representative LaHood describes the introduction of the bill as an opportunity for overseas Americans and other “stakeholders” to provide feedback ahead of reintroduction in the 119th Congress. LaHood stated that he is hopeful the bill can be considered in a 2025 reconciliation package. Thus, this initial bill is the first step in what we expect to be a long journey during which the legislation will evolve.

The following reflects SEAT’s initial response to this first step. SEAT is responding to Representative LaHood’s call for feedback:

Critical Clarification

The bill is described as implementing a “residence-based taxation system” (RBT) for U.S. citizens living overseas.

This description is not accurate. A more accurate description is:

The bill creates the possibility for a carve-out from the current citizenship (nationality)-based tax system (CBT) for persons who meet certain criteria. (The reason why the bill creates only the possiblity for a carve out is discussed below). In creating the possiblity for such a carve out, the bill, rather then ending CBT, further entrenches it as part of the U.S. tax code.

Critical Issues

1. The default status remains dual tax residency: that of the United States as well as that of the country where the person lives. The presumption remains that U.S. citizens are U.S. tax residents. This presumption means that: Rather than the overseas American opting to remain in the U.S. tax system, instead the overseas American must take steps to have the possibility to opt out of U.S. tax residency. (Again, the reason why the bill creates only the possiblity to opt out is discussed immediately below).  Rather than maintaining  a presumption that those living outside the United States are U.S. tax residents, a true residency-based system would be based on a presumption that U.S. citizens living outside the United States are NOT U.S. tax residents. It should require an “opt in” to U.S. tax residency rather than an “opt out.” As an example, a way that an overseas American could opt in to U.S. tax residency is simply by filing/continuing to file a Form 1040.
2. The bill grants (far) too much discretion to Treasury/IRS: As mentioned above, for most overseas Americans the bill creates only a possiblity of being able to opt out of U.S. tax residency. This is because save for persons born outside the United States, overseas Americans will be able to opt out of U.S. tax residency only subject to the discretion of Treasury/IRS. For persons born in the United States, the bill does not: (i) grant to them any right to opt out of U.S. tax residency, (ii) delineate the criteria under which they would have such a right, or (iii) establish any timelines/deadlines for Treasury/IRS either to itself establish the criteria, or to recognize that the option has been exercised. On the contrary, the bill makes clear that all these questions are to be decided by Treasury, and to be decided on Treasury’s timeline: “An election under this section shall be made at such time and in such manner as the Secretary may provide.” Granting Treasury/IRS this much discretion should be highly concerning. As we have explained in detail here, the IRS has demonstrated as well as expressly stated time and again that it is either unwilling or unable to implement most of the mere adminstrative changes that are needed with respect to the taxation of overseas Americans. As drafted, this bill does nothing to prevent Treasury/IRS from continuing to drag its feet. Recall also how the State Department continues still today to delay the implementation of its promised reduction of the renunciation fee from $2,350 to $450: it first promised the reduction in January, 2023. Nearly two years have passed without the State Department providing any meaningful information on when the reduction will finally be implemented. Just as the State Department has made illusory the reduction of the renunciation fee, so can (and likely will) Treasury/IRS make illusory the ability to opt out of U.S. tax residency.
3. Need to clarify exemption from exit tax: The bill does not address the situation of persons who either pay the departure tax or are exempted from its payment, and who, at a later time, renounce U.S. citizenship for whatever reason. The bill should make clear that such persons will be exempt from the Section 877/877A exit tax.

Additional Observations

1. Prospectively (that is, for persons who leave the United States after the bill’s adoption), the bill defines U.S. tax residence only in terms of the substantial presence test rather than including a requirement of ordinary residence. This creates potential for abuse. Strangely in contrast, some persons (those who were born in the United States) who live outside the United States at the time of the bill’s adoption can qualify for the transitional rules only if they are ordinarily resident outside the United States.
2. The bill makes no provision for long-term green card holders who leave the United States. Presumably, then, they remain subject to the Section 877/877A exit tax, which has a lower net worth threshold and includes more assets than the departure tax for citizens. We fail to see why departing long-term residents should be taxed more onerously than departing citizens.  

The legislative process is long. SEAT thanks Representative LaHood for the opportunity to provide feedback and looks forward to providing additional feedback during the legislative journey.

Again, SEAT is deeply grateful to Representative LaHood for his attention to this issue. SEAT strongly encourages Representative LaHood to incorporate this feedback into the next version of the bill. In doing so, the bill can move from further entrenching CBT to genuinely ending it. It is possible if not likely that in our generation we’ll only get one bite at this legislative apple. We should make sure that bite encompasses what ALL overseas Americans – not just a lucky few – truly need.

If the United States is the Land of the Free then it should be able to let people go.