Tax Fairness For Americans Abroad Act 2019

[Jollyquick]

Greetings,

Looks like congress is going to give this another go in 2019.

https://www.theamerican.co.uk/pr/ne-Tax-Fairness-Act-2019-Plans-Solomon-Yue.php

As a US citizen currently living overseas I find this intriguing.

The positives: Greatly simplifies tax compliance for US citizens residing abroad. Ends double taxation issues, such as taxes on Social Security income. Encourages overseas banks to once again open accounts for Americans. Reduces the need to give up US citizenship for tax reasons.

The negatives: Would remove privileged tax status with many countries that have favorable bilateral tax agreements with the US. Would require the renegotiation of literally hundreds of US bilateral tax agreements.

I’ll be keeping an eye on this little piece of legislation!

JQ

 

[Alan]

I’m really hoping this becomes law for our son’s sake. He lives in the UK and has no US income. I just helped him do his US tax return for which he owes zero taxes, so it is a hassle and expense that he could do without. I don’t know the details of the proposed bill but hope that it will also mean he doesn’t have to do the FBAR report, which includes his UK DC pension plan, and will be able to invest in UK stock funds without them being treated as PFICs by the IRS and taxed punitively.

 

[UnrealizedPotential]

I'm sorry, I don't understand this. If this proposal eventually becomes law, does the backbone of the idea mean an expatriate no longer has to file and pay U.S. taxes ,but only is responsible for paying taxes to the country one is currently residing in? That seems unlikely to me. I possibly have it all wrong. Can someone explain it to me please?

 

[Alan]

I'm sorry, I don't understand this. If this proposal eventually becomes law, does the backbone of the idea mean an expatriate no longer has to file and pay U.S. taxes ,but only is responsible for paying taxes to the country one is currently residing in? That seems unlikely to me. I possibly have it all wrong. Can someone explain it to me please?

Currently the USA and Eritrea are the only countries in the world that requires its citizens to pay taxes regardless of where they live. This includes many thousands of “accidental Americans” who happen to have been born to a parent who is a USC or were born in the USA and left as a child to return with their parents to their home country. Once FATCA was passed and implemented a few years ago all countries who want to continue to do business with the USA are required to find and report all USCs to the USA and this includes banks, pension providers etc. The aim of FATCA is to find the big fish USCs who are hiding their wealth abroad but it is also sweeping up a great many minnows who never knew they were supposed to have been filing IRS returns all their adult lives and now have to file back returns or risk large penalties.

This new act as I understand it is aimed at those Americans living abroad and not the regular ex-pats like myself and my wife. Since my wife and I have pensions and investments in the US and lived there for 29 years I don’t expect this new act will apply to us and we will continue to file taxes in both the UK and USA.

PS
You have to be up to date with your taxes before you can give up your US citizens so even accidental Americans who have never lived in the US or even have a US Passport have to file back taxes.

 

[UnrealizedPotential]

So I am not sure at all, but I suspect that it wouldn't help me avoid U.S. taxation either if I moved abroad at some point. I'm not sure, it is unclear to me, but I think if I still have investments in the U.S. ,and that is the origin of the money, it would still be subject to U.S. taxes.

If I had a job overseas as a U.S. citizen with permanent residency in another country, the income from that job overseas could possibly be exempt from U.S. taxes with this bill. That is what I get out of it. So to me, at this point, with my still very limited understanding, it wouldn't help me if I moved overseas as far as filing and paying U.S. taxes while living abroad .

 

[Alan]

So I am not sure at all, but I suspect that it wouldn't help me avoid U.S. taxation either if I moved abroad at some point. I'm not sure, it is unclear to me, but I think if I still have investments in the U.S. ,and that is the origin of the money, it would still be subject to U.S. taxes.

If I had a job overseas as a U.S. citizen with permanent residency in another country, the income from that job overseas could possibly be exempt from U.S. taxes with this bill. That is what I get out of it. So to me, at this point, with my still very limited understanding, it wouldn't help me if I moved overseas as far as filing and paying U.S. taxes while living abroad .

That is the case now without the new act. My son has no US income and is not subject to US taxes on his foreign income up to $120k however he has to file US taxes and exclude that foreign income using form FEIE. He is also a USC by virtue of being our child under 18 when we became USCs. Passage of the act would mean that he would not have to file at all, and do other things that non USCs can do such as have savings in tax free accounts that are not taxed by the IRS and invest in mutual funds in the UK without having to pay PFIC taxes plus a bunch of other stuff such as filing forms for Grantor Trusts because he has a DC pension plan etc.

As USCs with investments and pensions in the US we have to file US taxes which is fair enough. Because of the UK US tax treaty the UK has primary taxing authority and we claim foreign tax credits when we file our US return. I have no problem with all this.

It is the situation where USCs living abroad with no financial connections to the USA that this new act is trying to address.

 

[UnrealizedPotential]

Alan, I got it now! Thank you so much.

 

[theOAP]

This is the text of TFFAA Act for 2018:
https://www.congress.gov/bill/115th-congress/house-bill/7358/text

If passed, the Act would become Section 911A of the Code. It would follow Section 911 (FEIE). There is a suspicion any US Person would still be required to file a yearly US return since Section 911 is of no value unless it is part of a tax return for any given year. At minimum, it is thought some sort of verification of established foreign residency would be required yearly.

The Act concerns "foreign earned or unearned income" only. For the US Citizen, currently resident in the US and contemplating retirement abroad, it is likely most, if not all, their income would be US source and therefore the Act would not alter any reporting from the norm, including dual filing if the new country of residence also taxes worldwide income.

The sting is in the last sentence of the current text:
"(d) Effective date.—The amendments made by this section shall apply with respect to taxable years beginning after the date of the enactment of this Act."

In addition, there is the following:
“(2) QUALIFIED NONRESIDENT CITIZEN.—The term ‘qualified nonresident citizen’ means, with respect to a taxable year, a nonresident citizen who—
“(A) has not made the election described in section 911 for such taxable year, and
“(B) makes an election under this paragraph.

A person can not become a "qualified non-resident citizen" until the Act is passed, and thereby for those already resident abroad there is no 'grandfathering' of past income or investments. Gains on those investments (personal property) can be severely treated by US taxation and the new Act will not alleviate that tax burden for already established investments (such as a personal home).

From the text:
“(c) Exclusion of gain during time as qualified nonresident citizen.—There shall be excluded from gross income of an individual any foreign unearned income from the sale of personal property to the extent such income is attributable to periods during which the individual was a qualified nonresident citizen." [bold mine]

For USCs already resident abroad, or for Accidental Americans, there is also the following:
“(C) NONRESIDENT CITIZEN.—The term ‘nonresident citizen’ means, with respect to a taxable year, an individual who—
“(iii) is in full compliance with United States income tax laws for the 3 previous taxable years,"

The Act is not a get out of jail free card for those who have neglected filing in the past (or Accidental Americans who may never have filed at all).

For those who would relocate abroad after(if) the Act has passed, it would simplify reporting, but much depends, as was said above, on the treatment of foreign investments. Those already abroad would have reporting eased, but could still find complications due to investments made previous to the Acts passage.

Section 911 is part of Code Title 26 (income tax). FBAR reporting is part of Title 31, and therefore it is likely FBAR reporting would continue as is.