Benjamin Franklin is famously quoted as saying, “The only things certain in life are death and taxes.” A lot has changed in the hundreds of years since that quip was first spoken, but Ben’s sentiment continues to be relentlessly American. Nearly all of the world’s nations tax their citizens in some way, but the U.S. system is unusual. From our corporate tax laws to our division of federal and state taxes, those of us who are U.S. citizens experience different rules than our global neighbors.
One such way that the United States stands out is our taxation practices for citizens who do not live on American soil. Almost zero nations across the globe bother to tax nonresident citizens’ foreign income–Eritrea and North Korea are often cited as the only other exceptions. US citizens must continue to pay federal taxes like all of their friends back home. Taxes, in short, continue to be life’s pervading certainty.
This issue makes an impact on the lives of an estimated 8.7 million American civilians. Per official 2019 population estimates, only 22% of U.S. states can claim a larger population.
How Did We Get Here?
While the US is unusual, we do have a longstanding precedent for our taxation of expatriates. In 1861, the federal government passed The Revenue Act to help raise funds for the Civil War. This was the first American income tax law. Citizens residing abroad were required to do their part by paying a 5% income tax, though foreign-earned income was explicitly exempt.
Laws that require people who live abroad to pay taxes have evolved over the years. The uncommon practice has been contested many times by legislators and the courts. The controversy reached the Supreme Court in 1924 when the justices ruled that taxing a non-resident citizen on foreign income was within the bounds of the constitution.
Modern Taxation of Expatriate Americans
At the moment, all American citizens who live outside the country must still file an annual Federal Tax Return. This must be submitted by law, even when an individual owes no taxes. Many arguments for this practice revolve around the super-wealthy. The current system makes it more difficult to shirk taxation by leaving the country.
However, opponents point out that these regulations affect all of the U.S. citizens residing outside the country, not just billionaires. Despite paying normal taxes, this group doesn’t get to fully reap their benefits. Charitable donations cannot be deducted from their taxes. Medicaid is not available to them.
Are There Exceptions?
The Foreign Earned Income Exclusion (FEIE) makes many expatriates exempt from paying income tax. If your income is in the form of a salary, it’s only taxable in the US if it’s over the FEIE cutoff. The number shifts annually, but has recently sat around $100,000. This only applies to earned income, though, not gains realized from other sources such as the stock market or property rental.
Understanding how taxation works in the United States is already a notoriously involved process. Throw another nation (or two) into the mix, and it’s highly advisable for world travelers to work with a specialized expert on their new expat taxes. The guidance of a professional ensures that you’re following the law and not accidentally overpaying.
What’s Next for US Expat Taxes?
The 2018 Tax Fairness for Americans Abroad act proposed changing these expat taxation laws to align more closely with the rest of the world. In a nutshell, the legislation would make sure that only expats’ U.S.-based income would be taxed by the U.S.
These changes are still up in the air. Representative Holding of North Carolina, who introduced the bill, is not seeking reelection. As Rep. Holding’s term draws to a close, Rep. Maloney of New York has taken up the reins for expat tax reform. She’s an active advocate, chairing the Americans Abroad Caucus. It’s worth noting that this demonstrates bipartisan support–Rep. Holding is a Republican and Rep. Maloney a Democrat.
The U.S. tax code is in flux, and that’s unlikely to change any time soon. Americans abroad are affected by these stipulations, for better or for worse.