Tax Fairness for Americans Abroad Act Introduced in Final Minutes of 2018

expat tax filing

In the final few hours before the US government closed for the 2018 Christmas holiday, Congressman George Holding of North Carolina delivered the Tax Fairness For Americans Abroad Act of 2018 (H.R. 7358), aimed at alleviating the issue of American citizens who live abroad (expats) having to file US taxes on their worldwide income as well as taxes in another country.

It is an issue that affects all nine million American expats, regardless of whether they are abroad temporarily or permanently. It also affects so-called ‘Accidental Americans’, foreigners with perhaps an American parent or grandparent (even if they’ve never lived in the US or enjoyed the rights of American citizenship), and even people born in America to foreign parents who were just in the States temporarily.

Taxing expats dates back to the Civil War, however it wasn’t enforceable until the 2010 Foreign Account Tax Compliant Act (FATCA) successfully forced all foreign banks and investment firms to hand over their American account holders’ financial details directly to the IRS. Americans with foreign financial accounts are required to report them each year by filing an FBAR, so the IRS can now use the information provided by banks to ensure that expats are filing their FBARs and federal tax firms accurately.

How does the new Bill address the issue?

While debate has been going on for years about how best to address the issue of taxing expats (while still allowing the IRS to police tax evasion, as FATCA and FBARs are intended to) the Tax Fairness For Americans Abroad Act of 2018 (H.R. 7358) aims to allow Americans who can demonstrate that they have another tax home (i.e. that they pay foreign taxes in another country) to opt out of paying US income taxes on their foreign-sourced income

“Congressman Holding’s bill creates a tax regime that is simpler, fairer and more competitive for Americans around the world.” – ACA

The Bill is quite a neat solution to the differing problems with the status quo. Expats who pay taxes abroad would have to file a declaration each year demonstrating that they pay foreign income taxes. If accepted, they would then only pay US taxes on any US-sourced income that they may have. If their only income was foreign-sourced, they wouldn’t have to file a US tax return. They would however still have to file an FBAR to report any qualifying foreign accounts they may have.

The proposal also includes the provision that qualifying expats who make the election wouldn’t pay US capital gains tax on foreign asset disposals on any gain made while they were a foreign resident, and neither US income tax on foreign earned income or on foreign sourced passive income (e.g. rents, dividends, interest etc).

As well as demonstrating that they pay foreign taxes, expats would also have to pass the same foreign residency tests as those claiming the Foreign Earned Income Exclusion, namely proving either that they are a legal resident in a foreign country, or that they spent at least 330 days outside the US in a tax year.

Furthermore, expats would also have to demonstrate that they are US tax compliant for the last three years. Thankfully the IRS has an amnesty program called the Streamlined Procedure that allows Americans who aren’t wilfully avoiding paying US taxes to catch up without facing any penalties, and, for most people, without owing any tax (many in fact find they are due a refund that they weren’t aware of).

The Bill neatly addresses many US tax issues that expats face.

There are however two major caveats. Firstly, the Bill won’t provide any relief to expats with foreign corporations who face new taxes following the Trump Tax Reform (the so-called ‘Apple Tax’).

Secondly, the Bill is going to face a struggle to become law at all, as the midterms have left Congress and the Senate divided, and furthermore because the Bill was introduced so late last year, there was no time to debate it.

Whatever happens, we recommend that expats ensure that they are up to date with their US tax filing obligations, and if they have any doubts or questions, to avoid possible fines they should communicate with an expat taxes specialist at the earliest opportunity.

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