Taxation Proposal For Americans Living Abroad

The American Citizens Abroad (ACA) has proposed two changes to US tax laws :

  1. To abolish citizenship-based taxation
  2. To get all withholding taxes at source on all US passive income that also includes dividends, interest, royalties, etc. of Americans living abroad similarly as the US currently collects withholding taxes on the income generated by US assets (shares and bonds) that are owned by non-resident foreigners.

All countries other than the US follow the concept of residency-based taxation. They do not tax their citizens who have established residence outside their country. The US applies residency-based taxation to all foreign nationals and green card holders residing in the US. Per the ACA, Citizenship-based taxation is the reason for many inevitable instances of double taxation and painful unfairness to a large population of US citizens residing overseas.

The US law does not require citizenship-based taxation. In 1924, the Supreme Court merely stated that the US government has the power, but not the obligation, to tax US Citizens regardless of their residence. During 1924, there were very lesser number of US citizens living abroad. Today, after 88 years, the State Department estimates that there are more than 6 million, ( excluding U.S. military personnel overseas). 83% of US citizens living abroad classify themselves as long-term or permanent overseas residents. Many of them were born abroad and have lived their whole lives there.

There are many who hold a second citizenship in addition to US Nationality. The ACA further stresses the negative impact of the current tax policy on the US and to eliminate citizenship-based taxation. They are also of the view that Citizenship-based taxation should also be regarded as a human rights issue, as it does not allow Americans to work and live freely worldwide.

The US is the only country which follows citizenship-based taxation, apart from residence based taxation. The main purpose of citizenship-based is to make sure US citizens and green card holders living abroad pay at least as much income tax as residents of the US. Though some measures have been introduced to lessen the impact of double taxation, they fall short.

It also highlights the issue of tax evasion by US residents hiding unreported income and assets in foreign banks. US citizens residing abroad have to have foreign bank accounts for daily life and they are required to pay taxes to their country of residence. Current US laws does not make any distinction between US residents and residents living abroad.