Accounting
Congressman introduces bill to offer residence-based tax system to expatriates
Expatriate advocacy groups are applauding legislation introduced this week that would implement a residence-based taxation system for U.S. citizens living overseas.
Rep. Darin LaHood, R-Illinois, a member of the tax-writing House Ways and Means Committee, introduced the Residence-Based Taxation for Americans Abroad Act on Wednesday, a bill that would implement a residence-based taxation system for U.S. citizens currently living overseas.
The bill would enable Americans living overseas to elect to be treated as a nonresident American, allowing them to be subject to U.S. tax only on U.S.-sourced income and gains.
“This is a non-partisan issue that impacts U.S. citizens with roots in districts across the country. In today’s world, Americans choose to live and work abroad for a host of reasons, and that does not mean that they should be subject to more onerous tax and compliance burdens,” LaHood said in a statement Wednesday. “I look forward to working with President-elect Trump and my House colleagues on both sides of the aisle to modernize our Tax Code to ensure Americans are not punished for living and working abroad.”
The issue received more attention this past fall during the election campaign when Donald Trump told the Wall Street Journal, “”I support ending the double taxation of overseas Americans.”
According to recent estimates, over 5 million U.S. citizens are currently living abroad, including both Americans who were born and raised in the United States but have since moved abroad indefinitely, as well as “accidental Americans,” or individuals who hold dual citizenship in the United States and a foreign country but are unaware of their status as U.S. citizens. The U.S. is the only major country that uses citizenship-based taxation, levying taxes on individuals regardless of where they live or whether they earn income in the U.S.
The bill establishes an elective process for a U.S. citizen living abroad to be treated as a non-resident without having to renounce his or her U.S. citizenship. Under this new tax regime, an electing taxpayer would be subject to U.S. tax only on U.S.-sourced income and gains (such as income from ownership in a U.S. business), distributions from U.S. retirement and deferred compensation plans, income from assets physically located in the U.S. (such as rent from real-estate investments), and other U.S.-sourced income or gains.
The electing individual would be treated for tax purposes like a foreign individual residing outside the United States with U.S.-sourced income.
An electing individual would need to certify compliance with U.S. tax obligations for the five years prior to the election date, with exceptions for certain existing, long-term Americans abroad.
Once the election is made, it would be effective for the current and all future taxable years until terminated (either by the non-resident American self-withdrawing the election or if the individual again becomes a U.S. resident for tax purposes).
Since the election is intended for Americans living abroad over the long term, the bill requires the non-resident American to live abroad for at least three years from the election date or the election would be reversed entirely.
For purposes of Foreign Account Tax Compliance Act only, a non-resident American would be able to apply to the IRS for a certificate of non-residency to use with foreign financial institutions.
By allowing the non-resident American to establish that he or she is not a “specific United States person,” foreign financial institutions would not be required to undertake burdensome reporting requirements under FATCA, which frequently discourage them from offering banking services to Americans living and working abroad.
Similarly, the non-resident American would be exempt from certain reporting requirements (and substantial associated penalties) with respect to foreign assets and transactions, including Foreign Bank and Financial Accounts Reports, or FBARs.
To help ensure fiscal balance and prevent abuse, the electing individual must also pay a departure tax on deferred income, with certain exceptions.
An election would require the individual to pay a departure tax based on deferred income, treating all property as if sold for fair market value on the day before the election with the gains and losses taken into account for purposes of determining the departure tax.
Once the departure tax is paid, the individual’s basis in each asset subject to tax would be the fair market value (stepped up basis).
The bill provides three exceptions to the departure tax, for an individual who:
- Has a net worth (i.e., fair market value of all assets over liabilities) of less than the applicable estate tax exemption amount ($13.61 million for 2024, $13.99 million for 2025); or
- Is a tax resident of a foreign country where the individual has regularly, normally, or customarily lived for three of the past five years, and such individual certifies that he or she has been in compliance with U.S. tax requirements for the three years prior to the bill’s introduction; or
- Has not been a U.S. resident at any time since turning 25 years old or after March 28, 2010 (date that FATCA was adopted) through the date of enactment of the bill.
Expat support
The bill has received support from expatriate advocacy organizations, including American Citizens Abroad and Tax Fairness for Americans Aboard.
“This long-awaited legislation is a critical step forward in bringing about something ACA has worked hard to achieve over many years,” said ACA executive director Marylouise Serrato in a statement. “The bill builds on Congressman [George] Holding’s Tax Fairness for Americans Abroad Act of 2018 and we’re pleased to note, includes multiple features of ACA’s RBT modeling in our
She pointed out that the introduction of LaHood’s legislation aims to set the groundwork for tax language that would ultimately be included in a new bill in the next Congress. It’s not expected to be passed before the current Congress recesses.
The ACA has drafted a
Some of the main aspects of the legislation include:
- U.S. citizens, but not “green card” holders, residing overseas (newly called “nonresident U.S. citizens”), in general, would be removed from the category of individuals subject to U.S. income tax and taxed like nonresident aliens (foreign individuals).
- Individuals need to make a one-time election and continually meet residency and other requirements.
- Electing individuals must certify under penalty of perjury that they have met all tax requirements for the five preceding taxable years and submit all required evidence.
- Individuals resident in a so-called “tax haven” country can qualify for elective RBT.
- Foreign banks can treat individuals who elect RBT as not subject to FATCA reporting rules provided they obtain a certificate of non-residency and give a copy to the bank. (This is similar to treatment of individuals who renounce US citizenship and file a Form 8854.
- There is a tax, commonly called a “transition tax”, on deferred income of certain individuals electing to be subject to the new RBT rules. The tax applies to a deemed sale of all property. Individuals with a net worth not exceeding $13.6 million ($27.2 million-married couples) are excluded. Tied to estate tax unified credit. These amounts revert to $5 million or approximately $7 million when adjusted for inflation, if the Tax Cuts and Jobs Act is not extended.
- There are a number of exceptions, including Individual Retirement Accounts (IRA)s, which will not be subject to “transition tax.”
- A special rule, a type of “grandfather” rule, will exempt many Americans residing abroad from the transition rules.
The National Taxpayers Union also praised the bill. NTU president Pete Sepp, an advisor to Tax Fairness for Americans Aboard, which helped LaHood develop the legislation, expressed its support:
“Americans living abroad face some of the toughest financial and compliance burdens that the U.S. tax system can possibly inflict,” Sepp said in a statement. “It is long past time that American tax laws deliver fairness and relief for these citizens. Congressman LaHood deserves praise from all American taxpayers, not just those living overseas, for developing this tax reform in collaboration with TFFAA and other organizations so quickly and holistically. Now taxpayers have a head start for 2025 on addressing a problem that prominent Democrats as well as Republicans (including President-elect Trump) have acknowledged. With this legislation, we have a very effective tool for the job of righting a great wrong for taxpayers.”
LaHood worked closely with Tax Fairness for Americans Abroad in drafting the bill. TFFAA is a U.S. nonprofit organization whose board members have deep personal experience navigating the pitfalls of U.S. tax and financial services laws that affect Americans abroad. The group’s sole mission is to advocate for a U.S. tax system for Americans abroad that is based on residence and source, not citizenship.
“For the first time in our lifetimes, Americans abroad can see the light at the end of the long, dark tunnel that has cost them huge amounts in accounting fees, ruined relationships, and made it impossible for them to live normal lives,” said Brandon Mitchener, executive director of Tax Fairness for Americans Abroad, in a statement. “We thank Mr. LaHood for his leadership and look forward to working with him to collect feedback on this non-partisan approach and to help advance the bill to the president’s desk next year.”
The Internal Revenue Service declined to commit to expanding its Direct File free tax preparation program nationwide in response to a report from the Government Accountability Office, as the program comes under threat from Republican lawmakers who want to shut it down.
The
However, the program has attracted the opposition of Republican lawmakers and the commercial tax prep software industry. Last week, a group of 29 GOP members of Congress sent a
IRS commissioner Danny Werfel has been a major proponent of the Direct File effort, but Trump has already named a
The GAO report found the IRS is already behind schedule with recruiting and training customer service agents to help taxpayers use it in the 24 states where Direct File is slated to be available next tax season, due in part to insufficient coordination among various IRS offices.
The IRS limits participation in the Direct File program to taxpayers who live in certain states, facilitating coordination between federal and state tax filing. However, the GAO found the IRS could face challenges in reaching agreements with all 50 states, raising equity concerns for taxpayers who are unable to access Direct File due to where they live.
Last tax season, during pilot testing, the IRS accepted 140,803 Direct File returns in the 12 states where it was available, helping taxpayers with lower incomes fulfill their tax filing obligations. Taxpayers reported that Direct File was an easier tax preparation method than they had previously used, according to the report, and that factor contributed to the IRS’s decision to make Direct File a “permanent” option.
The IRS is planning to expand the scope of taxpayers who can use Direct File in 2025 by adding support for the premium tax credit for health insurance coverage under the Affordable Care Act, along with other tax provisions, and by allowing residents of the additional 12 states to use the federal Direct File system.
The report also looked at the online tax filing systems used by some foreign tax authorities, including Australia, Belgium, Estonia, France, Ireland and New Zealand, as well as the U.S. territory of Puerto Rico, and found they prepopulate their taxpayers’ tax returns with information already on file, such as wages reported by employers. The IRS started offering limited prepopulation in April 2024 during the pilot phase of testing Direct File. IRS officials told the GAO they are considering additional prepopulation of taxpayer data but are still in the early stages of planning. Identifying additional data for prepopulation in Direct File and developing a plan for testing its accuracy could enable the IRS to reduce taxpayer burden, the GAO noted.
The GAO made four recommendations in the report to the IRS, including improving coordination among relevant offices to ensure the recruitment of customer support employees, opening Direct File to all eligible taxpayers in the future, and identifying additional data that could be prepopulated in Direct File and testing its accuracy.
The IRS agreed with three of the GAO’s recommendations, but neither agreed nor disagreed with its recommendation to continue coordinating with state revenue agencies to expand access to Direct File and, as necessary, take steps to ensure the availability of the federal Direct File program to eligible taxpayers in all 50 states.
“We acknowledge GAO’s interest in seeing Direct File offered nationwide with expanded eligibility for taxpayers with more complex tax situations, and your recognition of the challenges we continue to explore in the expansion of Direct File,” wrote IRS deputy commissioner Douglas O’Donnell in response to the report. “The complex and nuanced nature of our nation’s tax laws require careful thought and consideration before support for any additional tax provisions can be added to Direct File to ensure nothing compromises its accuracy or usability for taxpayers.”
The Financial Accounting Standards Board issued an
Some examples of intangibles include brand recognition, copyrights, patents, trademarks, trade names, customer relationships and customer lists. There are already several areas of U.S. GAAP that provide guidance on intangibles, FASB noted. An entity currently evaluates the specific facts and circumstances and nature of the intangible — such as the intangible’s purpose and how it was obtained or developed — to determine the relevant areas within GAAP. The recognition of an intangible can vary according to the basis of the nature of the intangible, its stage of development, and whether it was acquired in a business combination or an asset acquisition. That means some intangibles are recognized as assets either in whole or in part, while others are not recognized as assets at all. In some cases, the costs incurred to create an intangible that’s not recognized as an asset are considered to be R&D efforts, while, in other cases, those costs are considered to be normal operating expenses (both general and administrative). If it’s indeed recognized, the subsequent accounting for an intangible asset can include amortization, impairment and remeasurement (such as remeasurement of certain crypto assets to fair value).
The invitation to comment is being issued as part of FASB’s research project on the accounting for and disclosure of intangibles. The ITC aims to explore ways to improve this area of financial reporting, which includes the accounting for acquired and internally developed intangibles. An ITC is a staff document prepared at the direction of the FASB chair in which the board does not express any preliminary views. Responses to the questions in this ITC will help inform the board as it considers whether to add a project to its technical agenda on intangibles.
The ITC uses the term intangibles to include both (1) intangibles recognized as assets in the financial statements and (2) intangibles and related costs not recognized as assets in the financial statements.
Specifically, FASB would like to understand:
- Whether there is a pervasive need to improve GAAP related to the accounting for and disclosure of intangibles (that is, is there a case for change);
- What intangibles, or groups of intangibles, FASB should consider addressing;
- What potential solution(s) FASB should consider — including whether the potential solution or solutions are narrow for a specific intangible or could be applied broadly to a group of intangibles — and the expected benefits and expected costs of the potential solution(s);
- Whether different accounting for intangibles should exist depending on how the asset is obtained (internally developed, acquired in a business combination, or acquired in an asset acquisition); and,
- What information about intangibles an investor utilizes (or would utilize) for its analysis and how that information influences the investor’s capital allocation decisions.
FASB is asking for comments on the
The optional standard mileage rate for automobiles driven for business will increase 3 cents in 2025, the Internal Revenue Service said Thursday, but the mileage rates for vehicles used for other purposes will stay unchanged from this year.
Optional standard mileage rates are employed to compute the deductible costs of operating vehicles for business, charitable and medical purposes, in addition to
Starting Jan. 1, 2025, the standard mileage rates for the use of a car, van, pickup or panel truck will be:
- 70 cents per mile
driven for business use , up 3 cents from 2024; - 21 cents per mile driven for medical purposes, the same as in 2024;
- 21 cents per mile driven for moving purposes for qualified active-duty members of the Armed Forces, unchanged from last year; and,
- 14 cents per mile driven in service of charitable organizations, equal to the rate in 2024.
The rates apply to fully electric and hybrid automobiles, in addition to gasoline and diesel-powered vehicles.
While the mileage rate for charitable use is set by statute, the mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes, meanwhile, is based on only the variable costs from the annual study.
Under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. And only taxpayers who are members of the military on active duty may claim a deduction for moving expenses incurred while relocating under orders to a permanent change of station.
Use of the standard mileage rates is optional. Taxpayers can instead choose to calculate the actual costs of using their vehicle.
Taxpayers using the standard mileage rate for a vehicle they own and use for business must opt to use the rate in the first year the automobile is available for business use. Then, in later years, they’re allowed to choose to use the standard mileage rate or actual expenses.
For a leased vehicle, taxpayers using the standard mileage rate must employ that method for the entire lease period, including renewals.
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