Blog post

If you’re an American living abroad, you’re likely familiar with the unique complexities of the U.S. tax system. For many of us, the requirement to file U.S. taxes on our worldwide income, regardless of where we live, can be a source of stress and significant expense. A recent legislative proposal, however, aims to change this. Let’s take a look at the Residence-Based Taxation for Americans Abroad Act (H.R. 10468) and what it could mean for our community.

A Long Road: The History of the Bill

The United States is one of only a handful of countries in the world, along with Eritrea, that taxes its citizens based on their nationality rather than where they live. This practice, known as citizenship-based taxation, has been part of U.S. tax law since its inception. For the estimated 4.4 to 5.5 million Americans living overseas, this can lead to double taxation, costly tax preparation fees, and complex reporting requirements.

The idea of moving to a residence-based tax (RBT) system isn’t new. In fact, U.S. citizens abroad have been advocating for this change for nearly 50 years. In recent years, several bills have been introduced in Congress to address the issue:

• 2018: The Tax Fairness for Americans Abroad Act (H.R. 7358).
• 2021 & 2023: Versions of the Tax Simplification for Americans Abroad Act.

While these earlier bills didn’t move forward, the conversation gained new momentum during the 2024 presidential campaign when Donald Trump pledged to end double taxation for overseas citizens. This led to the introduction of the Residence-Based Taxation for Americans Abroad Act (H.R. 10468) by Representative Darin LaHood (R-Ill.) on December 18, 2024. This bill is a comprehensive proposal that significantly departs from previous efforts and represents the first step toward implementing the campaign promise.

Why This Bill Matters to Americans in Canada

Living in Canada while navigating U.S. tax law presents a unique set of challenges that this bill seeks to address.

1. Ending Double Taxation and Filing Burdens:

Many Americans in Canada pay taxes to the Canadian government on income earned here. Under the current system, they must also file with the IRS, reporting worldwide income. As former IRS Commissioner Charles P. Rettig and his former Counselor Tom Cullinan state, these filings “may be largely symbolic from a revenue standpoint, [but] they carry a high personal cost in terms of anxiety, time and money, often several thousand dollars per household, year after year”. H.R. 10468 would allow qualifying Americans abroad to elect to be taxed only on their U.S.-source income, similar to other nonresidents.

2. Overcoming Banking Obstacles (FATCA):

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 to combat offshore tax evasion, has had unintended consequences for many law-abiding Americans abroad. It requires Canadian banks to report information on their U.S. clients to the IRS. Fearing regulatory burdens and penalties, some foreign financial institutions simply refuse to serve U.S. citizens.

According to Rettig and Cullinan, *”it is not uncommon for foreign banks to decline to serve U.S. citizens… U.S. citizens are often unable to open a savings account, take out a mortgage, or buy life insurance in the countries where they live and work. FATCA, meant to promote transparency, has ended up creating exclusion”*.

The bill tackles this in two key ways:

• It would prohibit participating foreign financial institutions from discriminating against U.S. citizens when opening or maintaining accounts.
• It would allow eligible individuals to obtain a “certificate of nonresidency” from the IRS, which would exempt their accounts from FATCA reporting requirements and ease their access to basic banking services.

3. Reducing Complex Reporting:

The proposed law would also exempt electing individuals from filing several burdensome information forms, including the FBAR (FinCEN Form 114) for foreign bank accounts and Form 8938 for foreign financial assets.

What Would Happen If the Bill Passed?

If enacted, H.R. 10468 would introduce a new framework for U.S. citizens living abroad. Here are the key proposals:

• An Election for Nonresident Status: Qualifying Americans abroad could elect to be treated as nonresidents for U.S. tax purposes. To be eligible, you must be a tax resident of a foreign country (like Canada), not be a federal employee, and certify compliance with U.S. tax law for the prior five years.
• A One-Time “Departure Tax” for High-Net-Worth Individuals: To prevent high-net-worth individuals from using the election to avoid taxes, the bill includes a one-time “mark-to-market” tax. This tax would apply only to those with a net worth exceeding the U.S. estate and gift tax exclusion amount ($13.99 million in 2025). There are several exemptions, so this would not affect the vast majority of Americans abroad.
• Special Rule for “Accidental Americans”: U.S. citizens who were born abroad and still reside there would automatically be treated as having made the election, simplifying the process for them.
• Access to Tax Treaty Benefits: Electing individuals could claim benefits under tax treaties, such as the U.S.-Canada tax treaty, which would help eliminate double taxation.

It’s also important to note what the bill does not address. It focuses on income tax and does not change the rules for U.S. gift and estate taxes, which would still apply to worldwide assets. It is also silent on the status of green-card holders living abroad.

What is the Path Forward for This Bill?

The bill was referred to the House Ways and Means Committee after its introduction. Its passage is uncertain, as Congress faces many competing priorities. However, there is bipartisan support for the concept of residence-based taxation.

Advocacy groups like American Citizens Abroad (ACA) are actively lobbying for RBT and see several potential legislative paths forward:

• Inclusion in a government funding bill, which requires bipartisan support.
• Attachment to a tax reconciliation bill, which would not require bipartisan support in the Senate.
• Part of a bipartisan, year-end tax package.
• Inclusion in legislation related to immigration, such as President Trump’s proposed “Gold Card” program, to ensure tax fairness for all Americans abroad.

As the ACA notes, “U.S. citizens overseas have been asking for RBT tax reform for nearly 50 years. It would be wrong and nonsensical to give tax relief to high-net-worth investors while 5 million hard working U.S. citizens continue to be burdened with double taxation”.

For now, the future of the Residence-Based Taxation for Americans Abroad Act remains to be seen, but it represents a significant and well-researched step toward modernizing a tax system that many feel is long overdue for reform.

Sources

• A proposal to end citizenship-based taxation for US citizens living overseas – The Tax Adviser
• American Citizens Abroad (ACA) sees multiple paths to enact Residence-based taxation (RBT) – American Citizens Abroad
• Modernizing Our Tax System: A Matter of Fairness for Americans Abroad – Tax Fairness For Americans Abroad
• H.R.10468 – Residence-Based Taxation for Americans Abroad Act – Congress.gov