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For Americans living abroad life can be more complicated and expensive due to the United States’ system of citizenship-based taxation, which requires citizens to file a US tax return each year, taxing them on the basis of citizenship rather than residency.
During the recent election campaign, President-Elect Donald Trump made the bold promise of ‘ending double taxation’.
He told Americans living abroad, in a Youtube announcement, “I’m going to take very good care of you. I’m going to take care of our nation. We’re in a failing nation, and we’re going to bring it back and bring it back strong.
“Once and for all, I’m going to end double taxation on our overseas citizens. You’ve been wanting this for years and nobody has listened to you, and you deserve it.”
So what’s at stake here for Americans living in Europe? Can Donald Trump simply “end double taxation” and what would that change in reality?
What is the ‘double taxation’ that Trump is referencing?
As you will no doubt notice, the speech was short on detail and Trump’s team did not respond to a request for clarification from The Local. As far as we know they have not given any further clarification elsewhere on their specific policy plans for ending “double taxation”.
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Usually, “double taxation” is defined as “taxes levied twice on the same source of income”, but most Americans abroad don’t actually pay tax on the same income in both the US and where they live because of bilateral tax treaties, foreign tax credits and foreign earned income exclusion rules.
In reality the term double taxation is often simply used as a stand-in for “citizenship-based taxation” (CBT).
“There are almost no cases of double taxation,” tax attorney and professor of law at the University of Michigan, Reuven S. Avi-Yonah, told The Local.
“Americans living overseas already benefit from three significant provisions that in most cases prevent any double taxation, and because of these most of them do not have any US tax liability.”
Even if they don’t pay taxes twice it is normal, however, for Americans abroad to be required to file tax declarations in two countries; their country of residence and the US.
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Citizenship-based taxation has ‘deep tentacles’
But for many Americans abroad, the overarching system of citizenship-based taxation, which has been in place since the American Civil War and exists in very few other countries (just Eritrea, Myanmar and Hungary), makes things much more complicated.
Marylouise Serrato, the executive director of American Citizens Abroad (ACA), a non-partisan, non-profit organisation that represents the legislative interests of Americans living overseas, told The Local that citizenship-based taxation has “deep tentacles”.
“It creates a very complex filing obligation for people to undertake, which is linked to the fact that so much of the legislation that affects Americans overseas is geared toward bad actors,” she said.
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This obligation and fear of making mistakes when filing has meant many Americans abroad pay more on personal tax advisors than they end up owing in US taxes.
READ MORE: Divorce, stress and fines: How citizenship-based taxation affects Americans in France
Serrato also said the Foreign Account Tax Compliance Act (FATCA), which was intended to prevent money laundering and other financial crimes, has made it more difficult for Americans abroad to open a bank account or invest in savings plans or pensions.
Other regulations also impede overseas’ Americans ability to invest in local financial products or save for retirement.
Americans abroad often resort to renouncing their US citizenship – in 2020, a record-breaking 10,000 US nationals said goodbye to their American passports.
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So what could Trump actually do?
All politicians say things on the campaign trail that never quite materialise once they are in office, but do experts think Trump could change anything with regards to the tax situation for Americans abroad?
“Our understanding is that [Trump’s pledge] is a move away from taxing people based on citizenship, and a move towards a taxation model based on where income is earned,” Serrato, from American Citizens Abroad said.
“That has been what the community has been complaining about for many years. That has been what our organisation and other organisations on Capitol Hill have been advocating for. I cannot speak for President-Elect Trump, but we are taking the opportunity with the statement that was made…that we are advancing on residence-based taxation.”
Garrett Watson, a senior policy analyst at the Tax Foundation, an international research think tank based in Washington DC, had a similar interpretation albeit cautioning against the lack of information.
“We unfortunately don’t have any further details on what the President-Elect intends or what the design might look like for ending double taxation. The most direct and purest way to do that would be to move totally to a residence-based taxation system for American citizens,” he said.
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But is it likely that this will really happen?
While there have been various attempts to push Congress to consider a residence-based system, including as recently as 2018, complaints from Americans overseas about CBT have tended not to be a priority for US lawmakers.
But with the issue thrust back into the spotlight, ACA’s Serrato believes a change could be on the cards.
“This is going to be our organisation’s push and focus for 2025 (…) we think it can be done. It’s a good moment for it,” she said.
“We now have a commitment by the President-Elect that he wants to do something. He has acknowledged that obviously there’s an issue there and something needs to be done and I think there’s good bipartisan support,” she said.
However tax expert Professor Avi-Yonah was less optimistic. He said: “I still think it’s not very likely legislatively, unless Trump really gets behind it. He made lots of promises on the campaign trail (…) There are a lot of moving pieces in the air.”
Nevertheless – with the 2017 Tax Cuts and Jobs Act due to expire, tax legislation is set to be a top priority for the incoming Trump administration – something that may even be tackled within the first 100 days.
The Tax Foundation’s Garrett Watson said: “There’s a decent shot of this being dealt with next year (…) The fact that President-Elect Trump has brought this up is a game changer.”
So what could actually change for Americans overseas?
If citizenship-based taxation was scrapped entirely the situation for Americans in Europe would become broadly similar to that of other foreign residents; fulfilling the tax requirements of the country where they live but, provided they have no income in the US, no longer being required to do the American tax return.
And according to tax expert Avi-Yonah it wouldn’t be that difficult to do.
“As a matter of the change in the law, it is a relatively easy fix,” he said.
“If you change the definition of what a ‘US person’ is to exclude citizens abroad and green-card holders, and just apply it to people physically resident in the US, it’s not a difficult fix (…) Congress could change that any time,” he said, explaining that it could simply be added into upcoming tax legislation.
Alternatively there are other measures Trump could take that could be interpreted as fulfilling his promise to “end double taxation”. Indeed there already are existing proposals currently making their way through Congress, like the Overseas Americans Financial Access Act – which would help to relieve some of the financial burdens caused by FATCA.
Watson said further smaller measures could involve “changing the foreign earned income exemption amounts, or broadening the way we use and define foreign tax credits”.
He suggests other possible changes could be more ‘incremental’, such as only allowing US nationals to qualify for residence-based taxation if they had lived abroad for five years or more.
Avi-Yonah also believed it would be easier for Trump and his team to look at less significant reforms rather than overhauling CBT altogether.
“It certainly would be politically easier to take smaller steps like raising the foreign income exclusion threshold, or looking at tax credits. Another step that would make a big difference would be to amend FATCA so that it excludes bank accounts if the American abroad is resident in that country,” he said.
The tax attorney and professor added that lawmakers could also look at changing the “onerous” IRS regulations around PFICs (Passive Foreign Investment Company) which make it challenging for Americans overseas to invest, even small amounts.
These measures would strip away some of the extra financial complications that Americans face, but they may not satisfy those Americans hoping for an end to citizenship-based taxation.
Until the contents of the expected 2025 tax bill are revealed, Americans in Europe will remain in the dark about Trump’s attention-grabbing pledge, no doubt many with their fingers crossed.
Are you desperate for citizenship-based taxation to be scrapped? Share you own views in the comments section below.