Discover how bill H.R. 10468 could revolutionize taxes for US expats by introducing a residency-based taxation system. Learn about eligibility, benefits, and potential impacts on global mobility and tax compliance.
January 10, 2025
By: Bobby Casey, Managing Director GWP
On December 18, 2024, bill H.R. 10468 was introduced in the 118th Congress. Its goal is to amend the Internal Revenue Code of 1986, which currently supports a citizenship-based taxation (CBT) system.
This means that as of this moment, all US citizens must file and potentially pay American taxes on their worldwide income, even if they don’t live in the United States. Many find this CBT system ludicrous, as the US is the only major nation that uses it.
This system has proved problematic, as it results in double taxation for many Americans. In addition, they’re saddled with administrative burdens and financial challenges on top of unique obstacles resulting from living abroad, which can make life especially difficult.
H.R. 10468 would make life much easier for these citizens though. This bill would create an elective residency-based taxation (RBT) system for non-residents, which means that they’d only be taxed on income derived from US sources. They’d only need to pay a departure tax on their deferred income (some exceptions apply).
How to Be Eligible for the New Residency-Based Taxation System
To be eligible, individuals must meet specific criteria, including a duration of physical absence from the US (at least three years) and proving ties to another country of residence. For the latter, this would typically mean having a permanent resident visa, and not a visitor or tourist visa.
Individuals must also prove that they’ve been compliant with US tax obligations for five years before opting out of the CBT system. Those who have been abroad for long periods of time may be exempt.
The Potential Benefits of the New Residency-Based Taxation System
Should individuals be eligible for the elective RBT system, it could streamline tax compliance for them. This is because it’d eliminate the need to report foreign income and comply with complex regulations, like the Foreign Account Tax Compliance Act (FATCA).
In addition, they could experience financial relief. Not only would the bill eliminate double taxation, but it’d also reduce reliance on the Foreign Earned Income Exclusion (FEIE) and foreign tax credits. Do note that while they’d be exempt from taxation on foreign income, they’d still be liable for taxes on income that’s sourced within the United States.
Also, those who receive Social Security benefits will have these taxed as US source income; this means that they’re subject to withholding. If someone’s entitled to claim treaty benefits, then treaty provisions can apply.
The same goes for early withdrawals from an IRA or retirement plan. These will generally be taxed as US source income and will be subject to withholding. Again, treaty provisions apply if an individual’s entitled to them.
Those who opt into the RBT system will enjoy its benefits for both the current and future taxable years. This status may be terminated by either the individual themselves or if they elect to become a US tax resident again.
What’s the Potential Outcome?
Due to these benefits, many expatriates are hopeful that H.R. 10468 will pass. Without these barriers, it’ll be easier to live abroad, which can encourage global mobility. Plus, this can reduce the growing trend of US citizenship renunciations that’s resulted from frustration with the current tax regime.
However, there are concerns that this bill could reduce tax revenues and complicate enforcement by the IRS. Plus, it’s possible that high-income earners who are abroad can benefit disproportionately.
As of now, this bill has been introduced to the House of Representatives, but hasn’t advanced to committee hearings or floor debate. This means that there may be revisions made before potential enactment.
Should the bill not go through, perhaps not all hope would be lost. Ending double taxation for overseas America is a priority for President-elect Donald Trump, so it’s very possible that he’ll put further actions in place or support similar future bills.
Optimize Your Taxes
If you’re interested in learning more about minimizing your taxes as an expat, then contact us today. Global Wealth Protection has years of experience helping people, like you, protect assets and maximize income.
