For decades, American expatriates have faced a unique and often burdensome challenge: navigating the complex world of expat tax under the United States’ citizenship-based taxation system. Unlike nearly every other country in the world, the U.S. requires its citizens and permanent residents to file tax returns with the IRS—and potentially pay U.S. taxes—even if they’ve lived and earned income exclusively abroad for years.
But a growing wave of political discussion and taxpayer frustration has reignited momentum behind a long-sought goal: shifting the U.S. to residence-based taxation (RBT). Could this be the year the U.S. finally joins the rest of the world?
What is Residence-Based Taxation?
Residence-based taxation is the global norm. Under this system, a country taxes individuals based on where they live, not based on their citizenship. For example, a German citizen living and working in Spain pays taxes to Spain, not Germany. Similarly, a Canadian expat in Singapore generally doesn’t owe taxes to Canada as long as they are considered a non-resident.
This approach is simpler, clearer, and avoids the double taxation headaches that many Americans living overseas face.
The U.S. Exception
Currently, the U.S. and only one other country—Eritrea—enforce citizenship-based taxation. This means that no matter where in the world an American citizen resides, they must file U.S. tax returns and potentially pay U.S. taxes on their global income. Even if they haven’t set foot in the U.S. for decades.
Though mechanisms like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) exist to prevent double taxation, these systems are complex, inconsistent, and don’t eliminate the burdens of U.S. tax reporting. Filing requirements such as FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act) add additional compliance obligations that are costly, intrusive, and prone to penalties—even for minor errors.
Growing Support for RBT
Calls for a shift to residence-based taxation have gained momentum in recent years. In 2024, Congressman Darin LaHood reintroduced legislation proposing that Americans living abroad should no longer be taxed by the U.S. if they are bona fide residents of another country.
Organizations like American Citizens Abroad (ACA) have advocated for RBT for over a decade. According to ACA, residence-based taxation would:
- Simplify compliance for Americans overseas
- Eliminate double taxation risks
- Encourage global competitiveness for U.S. entrepreneurs
- Reduce the incentive for U.S. citizens to renounce their citizenship
In fact, one of the most telling signs of tax frustration is the increasing number of Americans choosing to renounce their citizenship. While the U.S. has tightened rules and increased the exit tax in recent years, the financial and administrative burdens continue to drive citizens to give up their U.S. passports.
Why the Change Now?
Several forces have aligned that may finally push the U.S. toward a residence-based model:
1. Policy Pressure
As global mobility increases, Americans working abroad for international companies, startups, NGOs, and even the military face significant obstacles due to U.S. tax policies. Lawmakers are hearing more from constituents who feel penalized for living abroad.
2. Administrative Burden
The IRS is already overwhelmed with domestic enforcement and compliance work. Processing millions of foreign-filed returns—often for minimal tax revenue—strains resources that could be better used elsewhere.
3. International Norms
The U.S. lags behind global standards. The international tax community, including the OECD, has promoted cooperative frameworks and simplified models. RBT is increasingly seen as an essential modernization step.
Arguments Against RBT
While the push for change is strong, there are still counterarguments:
- Potential for tax evasion: Critics claim that allowing wealthy individuals to live abroad and escape U.S. tax obligations may reduce tax revenue and create loopholes.
- Equity concerns: Some argue that all citizens should contribute financially, regardless of residency.
- Implementation complexity: Transitioning from CBT to RBT would require careful policy design to prevent abuse, particularly for short-term expatriates or dual residents.
However, many of these concerns can be addressed through safeguards—such as excluding high-income earners who maintain strong ties to the U.S., or maintaining reporting obligations for offshore assets above a certain threshold.
What RBT Might Look Like
If the U.S. were to implement residence-based taxation, here’s how it could work:
- U.S. citizens who qualify as bona fide residents of another country (e.g., living abroad for 330 days or holding a long-term visa) would be exempt from U.S. income tax.
- Filing requirements could be simplified to only report U.S.-sourced income.
- FATCA and FBAR reporting could be limited to citizens residing in the U.S., reducing burdens for expats.
- A carve-out for military personnel, diplomats, and certain temporary expatriates would ensure accountability.
What Expats Should Do Now
While the shift to RBT is not yet law, expats should:
- Stay compliant with all U.S. tax and reporting obligations (Forms 1040, 2555, 1116, FBAR)
- Consider professional help: Tax laws for expats are complicated, and mistakes can be costly
- Stay informed on pending legislation and updates from the IRS or organizations like ACA
Conclusion
The U.S. stands at a crossroads in tax policy. While its citizenship-based taxation system is increasingly seen as outdated and unfair, meaningful reform could soon be on the horizon. Residence-based taxation would not only align the U.S. with international norms but also alleviate unnecessary burdens for the millions of Americans living and working abroad.
For expat entrepreneurs, retirees, students, and global professionals, this change could mark the beginning of a more equitable and sustainable tax system—one that finally reflects the realities of a globalized world.
