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Expat Briefing Editorial Team
24 November, 2016
The election of maverick businessman Donald Trump to the presidency of the United States earlier this month was, to put it mildly, a controversial decision by the US electorate. However, for expats groaning under the weight of an increasingly onerous US tax regime, the president-elect may turn out to be something of a savior.
The Current Situation – Tax By Nationality
US citizens and resident aliens who are outside the United States (and its possessions) have the same requirements to file tax returns as anyone living in the United States. Income from worldwide sources must be considered when determining if a federal tax return must be filed. In general, foreign earned income is income received for services performed in a foreign country.
If you pay foreign taxes, it may be possible to offset these against US taxes if there is a double tax treaty with the country in which you are resident.
US expatriates who meet the Physical Presence Test or meet the Bona Fide Resident Test (see below) may be able to take advantage of the Foreign Earned Income Exclusion and or the Foreign Housing Exclusion. This exclusion entitles US expats to exclude for US income tax purposes a certain amount of foreign earnings that is adjusted annually for inflation. In addition, US expats can exclude or deduct certain foreign housing amounts, which are based on the total of your housing expenses for the year minus the base housing amount.
You are considered physically present in a foreign country (or countries) if you reside in that country (or countries) for at least 330 full days in a 12-month period. A person is considered a "bona fide resident" of a foreign country if they reside in that country for "an uninterrupted period that includes an entire tax year." A tax year is January 1 through December 31. Brief trips or vacations outside the foreign country will not jeopardize status as a bona fide resident.
The concept of "tax home" is used in connection with foreign residence. Generally, a person's tax home is the general area of her main place of business, employment, or post of duty where she is permanently or indefinitely engaged to work. A person is not considered to have a tax home in a foreign country for any period during which their abode (the place where they regularly live) is in the United States.
FBAR And FATCA
Additional legislation also places comprehensive reporting requirements on US citizens with income from foreign bank accounts, as well as the financial institutions with which they hold investments. Each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if the person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and the aggregate value of all foreign financial accounts exceeds USD10,000 at any time during the calendar year.
Further reporting obligations have been created by the Foreign Account Tax Compliance Act (FACTA), effective July 1, 2014.
Under FATCA, certain US taxpayers holding financial assets outside the United States must also report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. Reporting thresholds are higher than for the FBAR, the lowest being USD50,000, and vary based on whether a taxpayer files a joint income tax return or lives abroad.
FATCA also expands the information reporting requirements imposed on FFIs with respect to accounts held abroad by US residents.
Change In The Air?
No other country on earth can claim to cast its tax net so wide and so comprehensively as the United States, and, understandably, this is a situation that my US expats, expat representative groups and other bodies find unfair.
As things stand, pretty much the only way Americans can escape the clutches of the IRS is by taking the rather drastic step of renouncing citizenship. And according to the US Treasury's own figures, record numbers of US passport and green card holders are doing just this, with 1,380 US taxpayers having given up their passports or their green cards in the third quarter of 2016, the second-highest quarterly number on record.
Many organizations have called on Congress to at least simplify tax compliance for US expats. American Citizens Abroad (ACA) for instance has provided the House of Representatives Ways and Means Committee with a full reform proposal for the enactment of residence-based taxation (RBT) for American expatriates.
ACA has said lawmakers should enact RBT instead of the present citizenship-based taxation system because it would reduce compliance burdens for expatriates, eliminate double taxation and costly double reporting, and improve competitiveness. Under RBT, US residents, whether Americans or foreigners, would be subject to US income, estate, and gift taxation, while Americans resident abroad could elect to be treated in a manner analogous to non-resident aliens and only be taxed by the United States on US-source income.
In August 2016, the American Institute of Certified Public Accountants called on the IRS to eliminate certain duplicative reporting requirements. "We believe it is unfair to subject these taxpayers to a complicated, time-consuming, and potentially expensive reporting requirement for information available to the IRS from alternative sources," Troy Lewis, Chair of the AICPA Tax Executive Committee, wrote in a letter to the agency.
Many members of the US Congress are also sympathetic to expats' cause. For instance, several bills have been introduced by Republican lawmakers which would repeal FATCA, including most recently bill H.R. 5935, sponsored by Representative Mark Meadows of North Carolina. However, despite the relatively large expat constituency, which numbers about 8m people (many of whom vote), these concerns have, for the most part, been largely ignored by Congress and the Government.
But are things about to change?
The tax proposals on the campaign website of Donald Trump do not mention this issue specifically, but they do signal his intent to substantially reduce the tax burden on most individual taxpayers. Or, in the campaign's own words, a "massive tax reduction."
However, the president-elect is already working with senior Republican figures in Congress on a list of legislative priorities, and areas where there is common ground between the two sides, and one of them is likely to be tax reform.
It is worth noting that reducing the expat tax workload and steering the United States towards a more territorial system of taxation generally was a feature of the Republican tax platform endorsed at the party's National Convention in July 2016. The platform suggests that both FATCA and FBAR could be repealed, or at least watered down, to prevent "Government's warrantless seizure of personal financial information without reasonable suspicion or probable cause."
"Americans overseas should enjoy the same rights as Americans residing in the United States, whose private financial information is not subject to disclosure to the Government except as to interest earned," the platform states.
The GOP is of the opinion that "FATCA not only allows 'unreasonable search and seizures' but also threatens the ability of overseas Americans to lead normal lives. We call for its repeal and for a change to residency-based taxation for US citizens overseas."
Just a day after Trump's momentous election victory, Kevin Brady, a Texas Republican, Chairman of the House of Representatives Ways and Means Committee, which has jurisdiction over all tax matters, explained his commitment to work with President-elect Donald Trump on US tax reform as soon as possible in 2017.
"I think the top key items on getting this economy going has to be fixing and redesigning this tax code," he said during an interview by CNBC. "It has to be lifting the burden that's a huge drag [on the US economy]."
With a tax rewrite confirmed as a top priority by President-elect Trump, Brady reiterated that the Republican Party is "ready with the agenda we've laid out, especially fixing this broken tax code."
He noted that the individual and corporate tax-cutting reforms the Republican Party has laid out are "very close to Mr. Trump's proposal."
This suggests that the Republican Party, which has made clear its call for lighter, simpler taxes for US expats, and Trump are, more or less, singing from the same hymn sheet. Indeed, tax reform is expected to be a priority for the presidency and Congress in 2017.
Tax reform is, however, a hugely complex issue, and while we are likely to see some movement on it next year, there could be lengthy discussions on the details.
An easing of the tax compliance burden for US expats is by no means guaranteed to feature in a future tax reform bill. But the chances that expats could soon experience some tax relief have certainly improved.
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