You've heard talk about the Tax Simplification for Americans Abroad Act... but what's in it? How will it help overseas Americans with their US taxes? Here are the FAQs
1. What is the Tax Simplification for Americans Abroad Act?
The Tax Simplification for Americans Abroad Act (H.R. 6057) is a bill introduced into the House of Representatives on November 19, 2021 by Rep. Don Beyer (VA-8th Congressional District) to ease the burden of tax filing for U.S. citizens living abroad.
2. What does the bill do?
• Requires the IRS to create a short form income and tax declaration and certification for Americans abroad that will greatly simplify filing from abroad; and
• Changes the definition of the Foreign Earned Income Exclusion (“FEIE”) to include income from retirement age benefits,foreign government social welfare programs (for the aged, indigent, disabled, children, etc), carer’s leave, interest, dividends, capital gains and education awards.
Click here to download the bill. We encourage you to read it for yourself.
3. Why will this reform simplify filing from abroad?
Congress is instructing the IRS to create a new, simplified form for use by eligible non-resident taxpayers which will replace a number of IRS forms and schedules (listed in the legislation) that they are currently required to file.
4. What are the eligibility criteria?
Taxpayers will be eligible to use the new form if they are non-residents by virtue of the IRS substantial presence test, have income under $400,000 and have $0 U.S. tax liability in the taxable year.
5. If the new form is an income declaration but does not require the taxpayer to calculate the tax, then how can the taxpayer know that they have a $0 tax liability?
Taxpayers with $0 tax liability ordinarily have income below the amount of the FEIE and/or live in a country with a marginal tax rate that exceeds the applicable U.S. tax rate.
Taxpayers uncertain of their eligibility on the basis of having $0 tax liability would also be able to file with the new form. IRS systems are set up to read taxpayer forms and collect the information from them necessary to calculate tax liability. IRS systems would read the new form and confirm or query the taxpayer’s filing. Americans abroad expect to be included in work by the IRS to establish and implement the new form. We would provide advice on the new form and system in order to ensure both truly simplify filing for non-resident taxpayers.
6. Has the IRS ever consulted with Americans abroad organizations in the past and what was the result?
Yes. We expect the IRS consultation process with organizations representing the interests of Americans abroad would be similar to the process followed in 2015, when the IRS implemented the Passport Revocation Provision in the FAST Act. As a result of the consultation, due process protections were agreed so that the safety of Americans abroad is not jeopardized by this tax enforcement action.
7. What are the implications of the changes to the FEIE?
The bill changes the types of income eligible for the FEIE protection to include income typical of low-income, elderly, disabled and out-of-work Americans abroad, thus protecting them from taxation or double taxation.
8. This reform does not lift the legal requirement of U.S. tax filing for those living abroad. For those who do not satisfy the eligibility criteria, this bill will have no impact. Only a switch to residency-based taxation would eliminate the obligation of Americans abroad to file U.S. tax declarations. Why do you support Tax Simplification and not tax filing elimination?
Democrats Abroad has worked for decades to persuade Congress to help Americans abroad by eliminating the double taxation of our income, removing barriers to banking, saving and investing and simplifying tax filing from abroad. We believe the best way to do that is to enact a switch from our current system of citizenship-based taxation to residency based taxation (RBT). See our “Making the Case for a Switch to RBT” briefing note.
As recently as 2018 we worked closely with Congress on a bill to implement RBT. We learned through that process what would be necessary to generate the Congressional support needed to pass an RBT bill. Although we Americans abroad have not yet persuaded Congress to support a switch to RBT, Democrats Abroad will continue to push for RBT legislation that can attract enough votes to be enacted.
In the meantime, we have support in Congress for a bill that will help millions of Americans abroad.
9. Has Democrats Abroad given up on RBT? Whether or not Congress passes the Tax Simplification for Americans Abroad Act, how will you carry on the work to enact RBT?
Democrats Abroad believes the only way to truly eliminate the many areas of the tax code that discriminate against Americans abroad is to implement RBT. We also know from our many discussions over the years with U.S. Senators that they will need to be convinced that the bill does not open tax loopholes to be exploited by the wealthy.
10. Does Democrats Abroad partner with other Americans abroad organizations to advocate for tax relief for Americans abroad?
Yes, Democrats Abroad works on expat tax reform with the other organizations representing U.S. citizens abroad. We collaborate closely with American Citizens Abroad (ACA) and support the work they are doing to model the impact of a switch to RBT on federal government revenue. ACA have invested enormous time and many thousands of dollars to develop the data necessary to analyze this critical policy shift. We know that the Joint Committee on Taxation and the Congressional Budget Office are greatly anticipating this work. Having a credible model that reflects the financial impact of a switch to RBT is essential to passing this reform in Congress. Democrats Abroad expects to continue working side by side with the other Americans abroad organizations who have demonstrated a commitment to this important work.
11. I always get a refund every year when I file with the IRS. If I switch to the new $0 filing ‘short form,’ can I expect to still get my annual refund?
Yes, the use of the simplified “short form” will not impact the calculation of your tax liability.
Now contact your Members of Congress and ask them to support this bill!
In 2018 we had dozens of meetings on Capitol Hill about how to structure and implement RBT. In collaboration with Rep. George Holding and all the other organizations advocating on behalf of Americans abroad, we developed a RBT proposal that would satisfy the demands of U.S. Senators. Senators from both sides of politics were deeply concerned that a system of RBT would be vulnerable to abuse by high-income Americans using offshore residence to push accessible income away from the IRS. Our proposal included a range of anti-tax avoidance provisions to ensure the proposal would generate support in the Senate. The bill, known as the Tax Fairness for Americans Abroad Act, was introduced on the very last sitting day of the 115th Congress and, unfortunately, included few of the anti-avoidance provisions we worked so hard over so many months to build into the proposal. Although it was a disappointing end to an incredibly arduous process, it did leave us with a framework that we can use to build a proposal that will be able to generate Congressional support.
See this hearing by the House Ways and Means Committee which writes tax policy on the House side and this hearing by the Senate Finance Committee which writes tax policy on the Senate side to understand the concern Congress has with tax avoidance and their determination to close the “tax gap”.
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