Are you an American expatriate? Some tax reprieve may be coming your way. The U.S. is one of the few countries that taxes its citizens on worldwide income, regardless of where they live. However, a new bill – the Residence-Based Taxation for Americans Abroad Act – might change that.
If passed, this legislation would offer U.S. citizens the chance of non-residency status for tax purposes. Keen to know more? Our CPAs break down what this could mean for U.S. expats.
Key Provisions of the Proposed U.S. Residency Tax Bill
A clear understanding how this bill could reshape tax obligations for expatriates is key to making an informed decision. Here’s what you need to know.
1. Elective Non-Residency for U.S. Tax Purposes
Currently, U.S. citizens must file taxes regardless of where they reside. Should this bill be signed into law, Americans who meet specific criteria would be allowed to be treated as non-residents for tax purposes. This means you would only need to file U.S. taxes if you earn U.S.-sourced income such as rental income, wages or retirement distributions etc. However, electing this status comes with conditions:
- Minimum Non-Residency Requirement: To qualify as an expat, you must live outside the U.S. for at least three consecutive years.
- Annual Certification: You would need to confirm your status as a non-resident annually.
2. Tax Compliance Requirement
This is not a ‘get out of jail free card’ for unpaid taxes, though. To qualify for the new status, you would need to certify five years of full tax compliance before making the election.
3. Changes to the Exit Tax Threshold
The bill also offers greater tax benefits. Under current rules, renouncing your citizenship and having assets worth over $2 million, means you’d be subject to exit tax. But, the new bill proposes raising this threshold to $13.6 million. This means individuals with moderate wealth may be able to keep more money in their pockets.
4. Banking and Financial Benefits
One major issue for U.S. expats has been access to foreign banking services. Due to strict reporting requirements, many international banks refuse to work with U.S. citizens. The proposed bill addresses this by allowing eligible individuals to obtain a non-residency certificate, which makes it easier to open a foreign bank account without triggering Foreign Bank Account and Tax Compliance requirements.
Potential Impact for U.S. Expats
The bill essentially proposes aligning the U.S. tax system with most of the world, offering a significant reduction in both taxes, tax compliance and double taxation faced by many Americans living abroad. However, we are not there yet. The bill has yet to pass and could face opposition from lawmakers concerned about potential revenue loss.
Having the bill passed, doesn’t automatically make it a good option for you though. Every unique situation needs to be carefully considered in terms of your long-term residency and compliance requirements. Our CPAs can help.
At Fusion, we partner with international tax experts to help you evaluate your eligibility and understand the implications as part of your tax planning process. Contact us for help today.
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.