America’s expats are still waiting for tax reform

The U.S. is nearly alone in the world in taxing people based on citizenship rather than residence. An American who moves to Toronto, marries a Canadian citizen, raises a family there, works for a Canadian company and pays Canadian taxes will still spend decades filing annual returns with the IRS.

This is a strange way to run a tax system. And with middle-class Americans finding it difficult to find banks abroad, navigating separate tax systems and renouncing their citizenship, the practice is increasingly difficult to defend.

Last year, Rep. Darin LaHood (R-Ill.) introduced legislation offering a sensible alternative. The Residence-Based Taxation for Americans Abroad Act would allow Americans who genuinely live overseas to select a “nonresident” tax status. They would continue paying U.S. taxes on U.S.-source income, such as rent from American property, income from a U.S. business and similar earnings. But income earned abroad would generally be taxed where it was earned.

In other words, the U.S. would begin treating Americans abroad more like every other developed country treats its citizens.

The legislation expired at the end of the 118th Congress and has yet to be formally reintroduced. LaHood and Sen. Todd Young (R-Ind.) have reportedly been working on an updated version, but progress has been slowed in part by the challenge of obtaining a revenue estimate from the Joint Committee on Taxation.

Now that Congress has returned from recess, it should prioritize finishing that work and bringing residence-based taxation back to the table, ideally as part of the next reconciliation package.

The case for reform begins with a basic principle: Taxes should generally follow economic activity. If an American lives in Germany, works in Germany and consumes German public services, Germany has the strongest claim to tax that person’s labor income. The American passport in his desk drawer should not create a second layer of tax administration thousands of miles away.

Current law provides some protection against actual double taxation through the Foreign Earned Income Exclusion and Foreign Tax Credit . But avoiding two tax bills is not the same thing as avoiding two tax systems.

Americans living abroad still need to navigate complicated filing requirements involving foreign income, bank accounts, retirement plans, corporations and investments. The Foreign Account Tax Compliance Act adds another layer by requiring foreign financial institutions to identify and report American customers. Predictably, some foreign banks simply decide American clients are not worth the compliance burden.

This turns ordinary financial activities into bureaucratic nightmares. Opening an investment account, saving for retirement or owning a small foreign business can become far more complicated simply because someone happens to hold a U.S. passport.

These burdens are not confined to wealthy Americans sheltering fortunes in Switzerland. In fact, IRS data show that most people renouncing their citizenship in recent years have moderate income levels, and about two-thirds have a net worth below $1 million. The burden falls heaviest on teachers, engineers, entrepreneurs and dual citizens who have built ordinary lives abroad.

There is also a strong self-interested economic case for reform. Americans abroad can be valuable conduits for U.S. business, investment and trade. Citizenship-based taxation makes Americans unusually costly employees overseas and can discourage internationally mobile workers from maintaining ties to the U.S.

The government already recognizes a version of this problem with corporations. The 2017 tax reforms moved the U.S. away from attempting to impose full domestic taxation on corporate profits earned around the world. Reformers understood that putting American firms at a permanent disadvantage overseas was self-defeating. American workers deserve the same consideration.

Residence-based taxation would not affect taxation of Americans living in America. U.S. residents would continue paying U.S. taxes on their worldwide income. Nor would Americans abroad suddenly receive a free pass on income generated inside the U.S. The reform would simply draw a more reasonable line between residents and nonresidents.

President Trump recognized the problem during the 2024 campaign and endorsed ending the double taxation of Americans overseas. Congress now has an opportunity to convert that promise into actual tax policy.

With lawmakers back in Washington, residence-based taxation should be on the agenda. The reconciliation is the vehicle Congress uses to make consequential changes to the tax code, and this reform certainly qualifies. After years of discussion, Americans living abroad should not have to hope that another standalone bill and another Congress will deliver.

Americans deserve treatment closer to the international norm. It is time for the U.S. to catch up.

Jack Salmon is a Gibbs Scholar and research fellow at the Mercatus Center at George Mason University.