The bill, which would implement a change long sought by groups such as American Citizens Abroad, would allow such foreign residents to elect to be taxed only on their U.S. sourced income, like non-resident foreigners. Currently, all U.S. citizens are subject to U.S. tax on their worldwide income. For the bill, see https://www.congress.gov/bill/115th-congress/house-bill/7358/text.
Although the Tax Cuts and Jobs Act (TCJA) moved the U.S. tax system toward residency-based taxation for corporations, it did not change the citizenship-based tax system for individuals. The new bill seeks to do so.
Under the bill, Americans who met the current rules for electing the section 911 foreign earned income and housing exclusions would be allowed to elect to exclude all foreign earned income and unearned income from their U.S. taxes. A citizen with a foreign tax home who certifies full compliance with U.S tax laws for the previous three years, and who is a bona fide resident of a foreign country for an uninterrupted period capturing a full tax year, or who is present in a foreign country for at least 330 days during a tax year would be eligible.
The proposal represents an evolution of numerous prior versions of individual residency-based taxation (RBT) that have been urged by American Citizens Abroad for several years. Previous versions would not have been acceptable to the mobility industry for a number of reasons. Early versions would have repealed section 911, required five years of overseas residency in order to elect the RBT system, and required those electing the RBT system to get a departure certificate from the IRS, calculate the value of U.S. assets and sometimes pay a departure tax similar to that faced under section 877 by taxpayers who renounce their U.S. citizenship. Subsequent versions would have retained section 911, but still contained the five-year and departure tax requirements. Although retention of section 911 was a step forward, the overall proposal did not improve the taxation of U.S. workers assigned abroad by their companies.
The new proposal is essentially an extension of section 911 to all foreign income, and without the current section 911 cap on the income that may be excluded ($105,900 for 2019). As such, it would save expat workers significant U.S. taxes, to the benefit of their U.S. employers. Although the proposal does not explicitly exclude foreign housing costs, it appears that those costs would also remain excludable under the current section 911. That is because section 911 provides separate elections to exclude foreign earned income and foreign housing. U.S. expats would elect the RBT regime for income, and section 911 for housing costs.
Consequently, it appears that this proposal would be of substantial benefit to U.S. companies.
The prospects for the legislation are unclear, and it faces an uphill battle. The current bill will die with the current Congress, but is expected to be reintroduced next year. However, no hearings have been held, no substantial technical or revenue analysis has been done, and there are no current cosponsors for the bill. Although American Citizens Abroad has obtained its own revenue estimates, those were done before the proposal was expanded to encompass an improved section 911 and eliminate some of the other limitations.
Nevertheless, this is a subject that should be expected to attract considerable attention and activity during the next Congress.
The proposal in the bill would substantially reduce U.S. taxes on U.S. workers assigned abroad by their employers, with resulting cost savings for the employers. Worldwide ERC® will follow the proposal closely and keep its members informed.