Legislation likely will be introduced this year that would exempt US citizens living abroad from US federal income tax on their worldwide income.

Background

In recent years, US citizens living abroad have become increasingly active in lobbying for reforms to the US taxation system, which mandates that they pay income taxes on their worldwide income regardless of their residence. These groups have argued that the current US tax system leads to double taxation, imposes excessive compliance burdens and creates financial hardships for Americans living overseas.

It is estimated that between 4.4 million and 5.4 million US citizens lived outside the US in 2023 on a permanent or long-term basis. Over the years, several proposals have sought to align the United States with global norms by limiting the application of US federal income tax on US citizens living abroad to only their US-source income.

On December 18, 2024, Representative Darin LaHood, a member of the House Committee on Ways and Means, introduced the Residence-Based Taxation for Americans Abroad Act during the 118th Congress. Although the bill was never considered by the prior Congress, it generated considerable discourse from the expat community and the concept of exempting expats from US taxation was endorsed by President Trump during the presidential campaign, indicating a strong interest in the topic. This bill has not yet been introduced in the 119th Congress (2025), but LaHood's Washington D.C. office confirmed on January 29 that there are plans to reintroduce the bill.

Representative LaHood's proposal

The Residence-Based Taxation for Americans Abroad Act, which would have been codified as IRC Sections 899 and 899A through C, would have allowed certain US citizens living abroad to elect out of citizenship-based taxation. This bill would have established a new taxpayer category known as "nonresident US citizen."

Under this proposed regime, electing taxpayers would have been treated similarly to nonresident aliens and would have remained taxable on specific types of US-source income, including passive income, income effectively connected to a US trade or business, certain taxable gains, and previously deferred income. Notably, foreign-source income earned by electing taxpayers would not have been subject to US taxation, representing a substantial change from current US law. The election would have been effective for tax years ending after the year that election was made.

To qualify for the election, individuals would have to be bona fide tax residents of a foreign jurisdiction and certify under penalty of perjury that they meet the necessary requirements. Once the election was made, it would have remained in effect until the taxpayer affirmatively revoked the election or became a US tax resident once again, with the possibility of a claw back if the taxpayer did not reside abroad for at least three years following the election. The bill would have treated a US citizen born outside the United States as an electing individual until the individual became US tax resident.

The bill would have imposed a mark-to-market income recognition departure tax on individuals who made the election. The departure tax would have applied to an individual's unrealized gains and deferred income, applying a mark-to-market mechanism. This departure tax would have applied to "specified electing individuals" whose net worth exceeded the inflation-adjusted estate tax exemption threshold, which is set at $13.99 million in 2025. Under this mechanism, the bill would have treated all property owned by a specified electing individual above this threshold as sold at fair market value on the day before the election was made. The bill would have allowed electing individuals subject to the departure tax to make an irrevocable election to have a "step-up" in basis on their taxed property.

The bill, however, would have excluded certain property interests from the net worth calculation used to determine whether an individual qualified as a specified electing individual subject to the departure tax. These exclusions would have included any deferred compensation item (e.g., a foreign pension or similar retirement arrangement), any qualified retirement plan as defined in IRC Section 4974(c), any specified tax-deferred account, any interest in a nongrantor trust, any real property located in the United States and any real property located outside the United States if it was owned and used by the specified electing individual as the principal residence for periods aggregating two years or more during the five-year period ending on the election date.

The departure tax would not have applied to certain categories of US citizens who elected into the regime, including those who:

• Had a net worth below the estate inflation-adjusted estate tax exemption ($13.99 million in 2025)
• Had lived abroad continuously and had not been US tax resident since age 25 or since March 18, 2010
• Was "ordinarily resident" in a foreign country and had not been US tax resident for at least three of the past five years and complied with their US tax obligations for each of the three preceding years

Additionally, under this bill, the United States would have waived the application of each "savings clause" in any US income tax treaty with respect to electing individuals, allowing them to benefit from provisions that eliminate double taxation without being hindered by the "saving clause."

The bill also would have authorized the issuance of "certificates of nonresidency" to electing individuals, which would have served as official documentation of their status. These certificates would have allowed electing individuals to no longer be "specified United States persons" for purposes of the Foreign Account Tax Compliance Act (FATCA). The bill would have required the Treasury Secretary to maintain a searchable public database of these certificates, including their issuance and termination dates.

In addition to FATCA relief, the legislation would have explicitly exempted electing US citizens from a wide range of foreign information reporting. Specifically, the bill would not have required electing individuals to report information about their foreign financial assets (Form 8938, Statement of Specified Foreign Financial Assets) and interests in certain foreign corporations (Form 5471, Information Return of US Persons With Respect to Certain Foreign Corporations). Similarly, they would have been exempt from reporting information about their foreign bank and financial accounts (FinCEN Form 114, Report of Foreign Bank and Financial Accounts).

Implications

Representative LaHood's proposal would have aligned the US federal income tax system with other countries' treatment of their respective expat populations. If enacted, US citizens living abroad on a long-term or permanent basis could expect significant relief from US tax and information filing obligations if they elect into the proposed regime or if they are automatically enrolled in the regime. The legislation would permit US citizens living abroad to sidestep the added complexities of juggling two or more tax systems in making everyday personal and investment decisions for their families.

While many or most US citizens abroad can prevent double taxation by offsetting their US federal income tax liabilities with a combination of the Earned Income Exclusion, offsetting tax credits, and specific treaty provisions, the US and other countries' tax systems often do not align perfectly, leading to tax "leakage," whereby certain items of income are double taxed. This is especially true for financial and investment accounts, including many foreign retirement accounts. For instance, US law treats most foreign collective investment funds (mutual funds, ETFs, etc.) as passive foreign investment companies, which are subject to high tax rates on certain irregular distributions (excess distributions); most majority US citizen-owned foreign companies are treated as controlled foreign corporations, which can result in present taxation to the US shareholder of the corporation's earnings and profits, despite the absence of a corresponding dividend. Additionally, many foreign pension and retirement plans are treated as grantor trusts, leading to immediate income recognition (absent an income tax treaty providing relief).

In addition to the tax burden of the US federal income tax laws, US citizens abroad also contend with significant information reporting obligations. They must annually report, in significant detail, their interests in foreign bank and investment accounts, as well as the underlying assets held in these accounts. They must also report their interests in foreign entities, including sole proprietorships, partnerships, companies and trusts, and provide detailed financial accounts in a format that may differ significantly from the format in which these entities' accounts are ordinarily kept.

The proposal to issue a "certificate of nonresidency" to US citizens abroad, stating clearly that they are not considered US persons for FATCA purposes, would allow these individuals to transact with many financial institutions that have, since the enactment of FATCA, often refused to accept them as clients owing to the high internal compliance burden.

Finally, if the legislation does not address the issue of US federal estate, gift, and generation-skipping transfer tax, US citizens living abroad would continue to be subject to these taxes on their worldwide estates, in addition to the estate and inheritance taxes of their local jurisdiction. They would continue to have to plan for both jurisdictions and rely on offsetting credit mechanisms and the application of tax treaties (if available) to prevent double taxation.