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Bill鈥檚 Proposals

Election to Be Treated as a Non-Resident

The bill establishes an elective process whereby a U.S. citizen living abroad can be treated as a U.S. non-resident for income tax purposes without having to renounce his or her U.S. citizenship. 聽To qualify for the election, individuals would have to certify their compliance with all U.S. tax obligations for the five years prior to the election date and must pay the tax due (if any) under the departure tax rules described below. 聽

U.S. citizens born outside the United States would be treated as 鈥渆lecting鈥� individuals until such time as they establish residency in the United States.

The timing and other procedures for making the election (such as the required forms to be filed) would be determined by the Internal Revenue Service (IRS).

After making the election, taxpayers would be subject to U.S. tax only on their U.S.-sourced income and gains including income from the performance of services in the United States, income from ownership of a U.S. business, distributions from U.S. retirement and deferred compensation plans, and income from assets physically located in the U.S. (such as rent from real-estate investments).

Once the election is made, it would be effective for the current year and all future taxable years until terminated by the electing individual or if the individual again becomes a U.S. resident for U.S. income tax purposes under the existing residency rules. 聽Individuals who make the election would be required to live abroad for at least three years from the election date, failing which the election would be reversed with retroactive effect.聽

Benefits under Income Tax Treaties

Electing individuals would be entitled to claim the benefit of income tax treaties between the United States and their country of residence notwithstanding the fact that they would remain U.S. citizens. 聽This would be accomplished by a provision in the bill that requires a waiver of the treaty saving clause in relation to electing individuals. 聽Under a standard saving clause, the United States reserves the right to tax its citizens and residents as if the treaty were not in effect, with certain exceptions.

Exemption from Certain Reporting Requirements

The bill would provide electing individuals with an exemption from certain filing requirements, including Form 8938, Statement of Specified Foreign Financial Assets, Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (the FBAR).

Certificate of Non-Residency for Foreign Financial Institutions

Electing individuals and any U.S. citizen born in a foreign country after the date of enactment of the bill would be permitted to apply to the IRS for a certificate of non-residency. 聽The purpose of this provision would be to permit such individuals to establish that they are not 鈥渟pecified United States persons鈥� for purposes of the Foreign Account Tax Compliance Act (FATCA). 聽Hence, foreign financial institutions would not be required to undertake burdensome reporting requirements under FATCA, which frequently discourage those institutions from offering banking services to U.S. citizens living and working abroad.

Departure Tax for Certain High-Net-Worth Individuals

Electing individuals would be required to pay tax on a deemed sale of all their property as if it were sold for its fair market value on the day before the election. 聽Certain property and income items would not be subject to this deemed sale rule, including deferred compensation items, specified tax deferred accounts (including section 529 qualified tuition plans, health savings accounts, etc.), interests in non-grantor trusts, real property located in the United States, and foreign real property that has been owned and used as the individual鈥檚 principal residence for two of the prior five years.

Once the departure tax is paid, the individual鈥檚 basis in each asset subject to tax would be stepped up to the fair market value at the date of the election.

The departure tax would not, however, apply to individuals who meet any of the following exceptions:

• Their net worth is less than the applicable estate tax exemption amount ($13.61 million for 2024, $13.99 million for 2025); or
• They are tax residents of a foreign country where they, normally or customarily lived for three of the past five years, and they certify that they have been in compliance with U.S. tax requirements for the three years prior to the bill鈥檚 introduction; or
• They have not been a U.S. resident at any time since turning 25 years old or after March 28, 2010 (the date that FATCA was adopted) through the date of enactment of the bill.

Footnote:

1聽 For the text of the draft bill, see . 聽

See on the website for Congressman Darin LaHood (R-IL), "" (December 18, 2024).

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