Tax-Expatriation

Will Congress and the President Finally Act in 2015 to Repeal or Modify U.S. Citizenship Based Taxation?

Posted on March 8, 2015 Updated on March 8, 2015

U.S. citizenship based taxation has been the law since its origins from the U.S. civil war.  See, The U.S. Civil War is the Origin of U.S. Citizenship Based Taxation on Worldwide Income for Persons Living Outside the U.S. ***Does it still make sense?

Throughout most of the last 100+/- years, there has never been a repeal of U.S. citizenship based taxation.  Indeed, it is difficult to locate any legislative proposals from years past (if there were any) that proposed such a modification.

However, it is worth noting the following string of events over the last 18 months, which may indicate U.S. citizenship based tax reform could be possible:

• For the first time, both political parties and the President have identified issues with the current U.S. citizenship based taxation rules which they have proposed to modify;

• Second, there have been a number of serious proposals to modify and repeal U.S. citizenship based taxation.  See, the American Citizens Abroad proposal (ACA proposal).  See, “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,”  by Patrick W. Martin and Professor Reuven Avi-Yonah, among several others;

• Third, a little over a year ago, the Senate Finance Committee, which was then controlled by Democrats identified U.S. citizenship based taxation as an international competitiveness issue.  See, Senate Finance Report on International Competitiveness Identifies Possible “Expatriation” Reforms for U.S. Citizens Residing Overseas. Will U.S. citizens who live outside the U.S. find any relief soon?

• Fourth, in December of 2014, the the Senate Finance Committee Republican Staff issued a detailed report dedicating substantial discussion and analysis to “Non-Resident U.S. Citizens”.  See pages 282 and 283 of the Comprehensive Tax Reform for 2015 and Beyond – Senate Republican Staff

• Fifth, the President in his Green Book proposal in February 2015, addressed (although in only the most narrow of circumstances), the need for reform of U.S. citizenship based taxation.  See, The Proposal by the President to Exempt Certain U.S. Citizens from Worldwide Taxation: – Very Small, Select Group

This is the first time in my career, where both political parties and the President are at least talking about the possibility of tax reform in this area.

There is one key piece of the legislative puzzle missing from the above picture.  The House has not weighed in on a proposal to modify substantially or repeal U.S. citizenship based taxation.  See, former House Ways and Means Committee Chair Camp’s proposal to modify substantially international tax policy and rules (Making America A More Attractive Place To Hire and Invest:  International Tax Reform).  These House proposals do not include U.S. citizenship based taxation reform.  In addition, I am not aware of any Democrats in the House who are pushing such a reform.

Even if there is approval in both the Senate and with the President (as there has been in other major legislative reform proposal, such as immigration), it is entirely possible the House will block any such U.S. citizenship based tax reform.