U.S. News: Congressman Seeks To Cut Expats' Taxes --- LaHood's plan would let Americans choose residence- based tax system

 

"WASHINGTON -- A new proposal in Congress attempts to put meat on one of President-elect Donald Trump's campaign-trail tax promises, detailing how the U.S. could remove income taxes on Americans living abroad.

Rep. Darin LaHood (R., Ill.) would let expatriates pay income taxes only where they live, removing a requirement that U.S. citizens living anywhere owe U.S. taxes on their worldwide income. LaHood, who introduced the proposal Wednesday, hopes it could be included in broader tax legislation that Congress is likely to pass in 2025.

"There's fundamental unfairness in the way this is currently done, so it's exposing that, reminding people this is being done and letting people know there's a clear remedy," LaHood, a member of the tax-writing Ways and Means Committee, said Tuesday.

Trump backed the general idea in October, drawing cheers from Americans living abroad frustrated by costs and compliance burdens. It is one of several Trump tax promises to discrete voter groups, along with eliminating taxes on tips, overtime pay and Social Security benefits, that Republicans in Congress will try to turn into law when they have full control of the government next year.

The current U.S. individual income tax system for expatriates dates back to the 1860s and the taxes that financed the Civil War, and it is an outlier. Every other major country taxes their residents but doesn't tax their citizens on income they earn outside the home country. The U.S., however, uses citizenship-based taxation, so Americans living elsewhere in the world -- of whom there are more than four million -- must file U.S. tax returns.

Put another way, a German citizen living in Los Angeles pays U.S. taxes on his U.S. income but owes nothing to Germany on that income. But a U.S. citizen living in Berlin would pay German taxes on his German income and then would have to file and possibly pay U.S. taxes on top of that.

The U.S. does offer an exclusion for the first $126,500 in earned income and for some housing costs, and there are foreign-tax credits to prevent double taxation. That means the tax burden of the current system falls on higher-income people, investors and retirees.

Today's system ensures Americans can't escape the U.S. tax net by moving outside the country without renouncing their citizenship. But it can impose a heavy compliance burden on Americans abroad by forcing them to file tax returns even when they don't owe money.

The challenge for Trump and LaHood is to make changes that help middle-income Americans abroad without creating a new opening for the wealthiest Americans to dodge U.S. taxes.

LaHood's bill would let Americans abroad choose whether to join a residence-based system that would exempt their foreign income from U.S. taxes but make them subject to taxes where they live, which could be a country with low or no income tax. They would still be required to pay U.S. taxes on U.S.-sourced income.

Wealthy people -- those with a net worth above the estate tax threshold, which is currently $13.61 million -- would have to pay a departure tax if they leave the U.S. and choose to enter the new system." [1]

1. U.S. News: Congressman Seeks To Cut Expats' Taxes --- LaHood's plan would let Americans choose residence- based tax system. Rubin, Richard.  Wall Street Journal, Eastern edition; New York, N.Y.. 19 Dec 2024: A.4.