Last week, Republican presidential nominee Donald Trump stated “I support ending the double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income.
of overseas Americans.” The US, unusually among developed economies, at least nominally requires all citizens to pay income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
, regardless of whether they live or work inside the US. Trump’s proposal would bring the US more in line with most other developed economies, which tax only those who live and work within their borders.
This issue affects relatively few Americans, as most of them live and earn within the US and would pay income tax under any tax system. Only a few million Americans live abroad. But to a small number of Americans who live abroad and do their best to comply with US law, the unusual policy of global taxation at the individual level is a significant burden.
For most, the burden is not the payment of tax: it is the filing of tax. Most Americans abroad likely owe nothing, or relatively little. However, the rules are different from, and more complicated than, the rules for Americans living in the US. Furthermore, as those rules reflect relatively few people, there are fewer resources—such as software or tax professionals—available to help them file.
The main repository of tax information for Americans abroad is IRS Publication 54, which spans roughly 60,000 words. But some of the most important information can be seen right at the top, where the IRS discusses thresholds that change each year from inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
adjustment. Americans are required to file even with very low incomes—functionally, those just above the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
amount. For example, the filing threshold for a single individual was $13,850 in 2023. However, there was also a large foreign earned income exclusion of $120,000 for 2023 filers; this exemption effectively exceeds the income from most jobs abroad, even the relatively high-earning jobs that Americans tend to hold.
One could think of this exemption as a partial—but incomplete—move toward a territorial system for individuals, which would match other developed economies and tax people only where they live and work. However, beyond this exemption—and especially in capital income, whether held in individual brokerage accounts or in foreign pension funds—the rules can become significantly more complex.
Overall, the combination of the low filing requirement and the high exemption for earned income means that many Americans are required to file complex annual returns that ultimately owe little or no tax. From a tax policy perspective, this is the opposite of what we hope for. Taxes should bring in a lot of revenue for relatively little administrative work, not the other way around.
One could understand why the US would not want to use a residence-based system for the absolute wealthiest Americans; a billionaire nominally living on a small Caribbean island to avert large amounts of US income tax would be a legitimate policy problem. But a residence-based tax system would make sense for the vast majority of Americans abroad, whose incomes are relatively ordinary, already taxed by the countries in which those incomes are earned, and not a significant source of tax revenue.
One important development coming in this space is an expected reduction in the fee to renounce US citizenship, from $2,350 to $450. The State Department has not finalized this reduction, but it has given public notice of its intent to do so. US citizens living abroad may renounce their citizenships in greater numbers after this fee is reduced—not because they feel un-American, and not even to avoid tax payments, but to avoid onerous filing alone.
Renunciations have already risen in the recent past as compliance has become more difficult. The US Government Accountability Office (GAO) has found that the Foreign Account Tax Compliance Act of 2010 (FATCA), which was primarily intended to target serious cases of tax evasion, has unfortunately also resulted in duplicative requirements on people with modest incomes who would owe little tax. As a result, the GAO states, “annual approvals of renunciations of U.S. citizenship increased from 1,601 to 4,449—or nearly 178 percent—from 2011 through 2016, attributable in part to the difficulties cited above.”
A tax reform effort in the next Congress, which seems likely primarily for domestic reasons, should also consider simplifying tax filing for Americans abroad, largely by eliminating paperwork requirements for those Americans who would owe little or no tax anyway.
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