With Presidential Election Day around the corner, Trump and Harris have been lobbing various promises to win votes among the American people. In particular, Trump has vowed “to end double taxation on our overseas citizens.” On the surface, this sounds like it would be very enticing to the millions of Americans living outside the country who can potentially cast votes. But unlike most of his other proposed tax changes for which at least a minimal amount of detail has been released, this promise is vague at this point in time.
Given the lack of detail, all we can do is speculate about his intentions. In one sense, it is difficult to guess what any policy change would look like because double taxation is not a widespread issue for American expats. Most Americans abroad can mitigate, if not eliminate, double taxation through the Foreign Earned Income Exclusion (which exempts up to a certain amount of income from U.S. tax on an annual basis - $126,500 for 2024) and the foreign tax credit system (which can reduce the U.S. tax liability by the amount of tax paid to a foreign country). Indeed, most Americans living in Canada pay little or no U.S. tax every year as high Canadian tax rates bring about sufficient foreign tax credits. For such people, U.S. filing obligations represent an inconvenience more than they do the potential for tax.
Yet there are certain policy changes that could be made that would be welcome by Americans abroad, some of which seemingly do not trigger a significant decrease in tax revenue for the U.S. government. In fact, some changes could relieve the Internal Revenue Service of processing millions of tax forms every year. Some of these potential changes include:
- Moving from a citizen-based to a residency-based taxation system, consistent with almost all other countries. This could mean the end of tax reporting for Americans living abroad who do not have U.S.-source income.
- Exempting expats with income below a certain threshold from tax reporting. This could eliminate an inconvenience for many American living abroad.
- Modifying or eliminating some of the U.S. tax provisions that are more likely to lead to double taxation of U.S. individuals abroad and very often lead to burdensome tax reporting requirements. These include the “PFIC”, Subpart F and “GILTI” regulations that govern income earned through non-U.S. corporations as well as the regimes that rule on non-U.S. trusts.
- Elimination of the Net Investment Income Tax, which is a 3.8% tax on investment income levied on high-income taxpayers. There is currently no authoritative ruling which allows foreign tax credits to offset this tax, and thus, this is the only annual U.S. tax that many high-income expats pay.
Before a major overhaul, it stands to reason that a one-time transition tax could apply in certain cases as a last-ditch effort to capture tax revenue from expats. Additionally, a condition of transitioning may be that delinquent taxpayers abroad must come into compliance and file tax returns up to the point of the transition.
GG Observations
Americans abroad often complain about the onerous U.S. tax reporting requirements and the stiff penalties for non-compliance. For many, attending to the tax requirements of the country of residence is burdensome enough.
If you’re an American living in Canada and have any concerns about your U.S. tax obligations, please reach out to us. Grewal Guyatt helps U.S. expats remain compliant with both the Canadian and U.S. tax systems, including mitigating double taxation.
