The U.S. Congress has been mulling changes in the way American individuals abroad are taxed by shifting from a citizen-based income-tax system to a residence-based system that would only tax people on the income they earn in the U.S. Americans abroad would no longer be taxed on worldwide income simply because they are U.S. citizens; they would only have to pay tax to the country where they live.
This change would align U.S. rules with that of just about every other country in the world, except Eritrea.
If Congress does what it’s talking about — if not in the current tax reform bill, in the next one — it would be a godsend for Americans in Canada. While official estimates vary widely, there are thought to be approximately one million Americans residing in Canada. They are, as they will tell you emphatically, hard put-upon U.S. taxpayers, filling out voluminous and complicated IRS tax forms, reporting lots of detailed information, paying tax, dealing with information requests from their Canadian bank, and so forth.
If Congress does what it is considering, it would be a godsend for Americans in Canada
Many of them have lived in Canada all their lives. A surprising number are “accidental Americans” who never actually chose to become an American but, due to quirks in nationality laws and uncontrolled circumstances, became American taxpayers.
The repercussions would be many and could vary all over the lot. Americans living and working in California could relocate to Vancouver and work there, no longer subject to U.S. tax on their income earned in Canada, assuming they obtained the necessary Canadian visa and other documentation.
Attorneys and others counselling Americans on renunciation of U.S. citizenship are already having to tell clients they might want to pause to see what Congress does. The IRS recently reported a significant bump in expatriations, with 1,758 individuals expatriating in the second quarter of 2017, which is more than three times as many in the second quarter of 2016.
Efforts to make this tax law change have been underway for years
Efforts to make this tax-law change have been quietly underway for several years. Since the 2016 election these efforts have “gone public,” with grassroots lobbying and “crowd-funding” of the costs of revenue estimates. American Citizens Abroad Global Foundation has been working for months on the details and is completing revenue estimates. Republicans Overseas has been knocking on doors and delivering stacks of petitions all over Washington. Democrats Abroad have been active as well.
Residency-based tax provisions can be straightforward. Citizens residing overseas would be removed from the category of taxpayers who are subject to U.S. income tax and placed in the same category as foreign individuals. Like foreign individuals, they would pay U.S. tax on most types of U.S. source income, but not on the income they earn outside the U.S.
Residency-based taxation has attracted bipartisan support. While differing on details, Democrats Abroad, Republicans Overseas, Americans for Tax Reform/Glover Norquist, the Heritage Foundation, American Citizens Abroad, the U.S. Chamber of Commerce, several American Chambers of Commerce overseas, and other business groups, all support the approach.
Charles M. Bruce is Chairman of American Citizens Abroad Global Foundation.