Moves to end automatic citizen-based taxation of Americans living abroad

US citizens residing in France and elsewhere abroad may soon be exempt from the automatic requirement to file annual US tax returns of their worldwide income after a congressman proposed new legislation on the subject. 

The ‘Residence Based Taxation of Americans Abroad Act’ was brought forward by Republican Illinois Congressman Darin LaHood yesterday (December 18).

The politician said on social media the Act was based on President-elect Donald Trump’s pledge to cut taxes for Americans living abroad. 

The act will not be passed before next year as the current Congress will soon end and reconvene next year (with new Congresspeople sworn in following November’s elections). However, submission of the legislation before this allows Congress to begin drafting certain legal elements of the Act.

It is not certain that the act will be passed into law or remain in its current state as it passes through the legislative chambers, however the Republican party will have a majority in the upcoming Congress and in theory support it.

It is important to note that the act does not propose exempting US citizens abroad from paying all US taxes where eligible, or affect dual-taxation treaties the US has with other countries including France - for example, under the France-US treaty, US pensions and property income are (only) taxable by the US.

What would the law change? 

Currently, almost all US citizens must file a US tax return regardless of where they live – including those who permanently reside outside of America – and even if they have no US income. 

They may in some cases be subject to US taxation even on some incomes arising abroad, for example, for 2024 income there is an annual 'foreign earned income exclusion' of $126,500, above which the US can tax foreign earnings.

Overseas US citizens who fall below certain income threshold levels ($15,700 for those single and over 65, or $29,200 if you are a ‘qualifying surviving spouse’ in the two years after the death of your partner) are the only ones exempt from filing US tax returns.

Even if they are not required to pay taxes in the US due to their residency or income status, the requirements are complex and often involve spending money to hire an accountant, cited as a significant financial burden for some.

Read more: American expats in France: 5 tips for your first tax season

Congressman Lahood’s new Act proposes removing US citizens (but not other visa or ‘green card’ holders residing overseas) from income tax filing requirements, and being treated like non-resident foreign individuals for US tax purposes.

Eligible Americans will be placed in a new taxation category called ‘nonresident US citizens’ if they fulfill the requirements and opt into the new category.

To be eligible individuals will need to:

• Make a one-time claim to change their tax status to that of an overseas resident and continually meet residency and other requirements.

• Certify under penalty of perjury that they have met all tax requirements for the five preceding taxable years and submit all required evidence.

The changes will also allow US citizens who decide to be classified this way as similar to those who renounce their US citizenship, making them not subject to FATCA reporting rules. 

Read more: US reduces cost of renouncing citizenship for Americans abroad

A ‘transition tax’ may be applied, but not in all cases. The current proposals for what is and is not exempt from the tax can be found here.