Congress Can Fix Citizenship-Based Taxation

By Daniel Bunn

President and CEO of The Tax Foundation

President Trump has been happy to claim that the One Big Beautiful Bill Act (OBBBA) followed through on his campaign promises. But there’s one important pledge missing. In October 2024, he committed to ending the double taxation of overseas Americans, yet the OBBBA failed to fulfill that commitment.

As policymakers in Washington explore the next steps for tax policy, one proposal should be receiving more attention.

Last December, Rep. Darin LaHood (I-IL) put forward his “Residence-Based Taxation for Americans Abroad Act,” which would transform the tax treatment of US citizens abroad who face a complex and punitive tax landscape.

The United States is unique among countries in its approach to taxing its citizens living beyond its borders. When U.S. citizens live abroad and earn no money from U.S. employment or U.S. sources, the IRS still expects them to file and pay taxes. They are also subject to strict scrutiny by financial institutions. Only Eritrea, a dictatorship on the Red Sea, has a somewhat similar approach.

Some Americans abroad have realized that their only escape from this policy is to renounce their US citizenship. The Government Accountability Office reported in 2019 that annual renunciations rose by 178 percent from 2011 through 2016. In 2024, approximately 4,800 individuals renounced their US citizenship.

Lawmakers on Capitol Hill should recognize that this is a result of bad policy.

Thankfully, Rep. LaHood is interested in addressing the underlying issue.

Elective residence-based taxation

Rep. LaHood’s legislation would accomplish the following. First, it would allow eligible U.S. citizens living abroad to elect into a system that would treat them only as residents of foreign countries for the purposes of U.S. taxation. Second, for individuals making that choice, it would apply a departure tax for high-net-worth individuals. Third, the bill provides for documentation of nonresidency status that eligible U.S. citizens could provide to foreign financial institutions. These certificates of nonresidency would provide protection from obligations under the Foreign Account Tax Compliance Act (FATCA).

This last point deserves more attention from policymakers. FATCA has been a nightmare for U.S. citizens living abroad. As my colleague, Alan Cole, wrote last year, Americans abroad need, at the very least, some compliance cost relief. In April of 2024, I testified before the Senate Budget Committee on the fundamental flaws of citizenship-based taxation and the challenges with FATCA.

Rep. LaHood is right to provide an off-ramp from FATCA in the form of an elective residence-based tax system.

This is not the first time that a member of Congress has weighed in on citizenship-based taxation, nor is it a partisan issue. Previous initiatives by former Rep. George Holding (R-NC) and Rep. Don Beyer (D-VA) were motivated by the same concerns that Rep. LaHood shares.

Mitigating risks

LaHood’s approach is particularly well-developed in evaluating the opportunity for residence-based taxation and mitigating some of the transition risks.

One risk that this legislation addresses is that high-net-worth U.S. residents would use the provisions of Rep. LaHood’s bill to avoid U.S. taxation of their wealth. However, the bill uses the existing estate and gift tax exclusion thresholds to determine whether an individual who is electing into residence-based taxation should pay additional U.S. tax. A high-net-worth individual, based on those exclusion thresholds, would face additional U.S. tax. Such electing individuals would be required to pay tax on all their property based on the fair market value of that property.

There are protections in certain circumstances though. The departure tax would not apply to individuals who have not been residents of the U.S. since turning 25 years old or after the adoption of FATCA in 2010. Americans abroad could also certify that they have complied with U.S. tax requirements for three years prior to the bill’s introduction and have lived abroad for three of the past five years.

This allows Rep. LaHood’s legislation to target potential abuses of the residence-based policy while providing individuals who have been nonresidents for many years with reasonable treatment.

The benefit principle

The proposal thus aligns with what public finance scholars refer to as the “benefit principle.” Americans who have been living abroad for many years haven’t relied on U.S. public services and should be treated differently by the U.S. tax system. But someone who has built significant wealth in the U.S. as a resident throughout their life should be expected to pay taxes before electing to be treated as a nonresident.

That’s where the bill’s approach to using residency rather than citizenship as a test shines through.

Are there other ways to solve the issues that Rep. LaHood’s bill is focused on? Certainly. Lawmakers could be more aggressive in their approach to simplifying tax treatment for citizens abroad. They could tailor tax filing requirements to minimize the number of taxpayers abroad who file and face very little liability. Lawmakers could repeal FATCA. But, even with those alternatives, Congressman LaHood’s approach is worth considering.

Rep. LaHood has yet to reintroduce the legislation in the 119th Congress, and the proposal came so late in the game for the 118th Congress that his initial proposal did not gain cosponsors.

But perhaps, due to President Trump’s unfulfilled campaign promise last fall, LaHood’s next attempt will garner more attention.