The United States stands alone among major countries in taxing its citizens on their global income, regardless of where they reside. This unique system, rooted in Civil War-era legislation, affects more than four million Americans living abroad. While other nations adopt residence-based taxation, the U.S. system burdens expatriates with complex compliance requirements and significant costs, even when no taxes are owed.
The United States is one of only two countries globally, that imposes citizenship-based taxation (CBT). Under this system, Americans are required to report and potentially pay taxes on their worldwide income, even if they don’t live in the U.S. This contrasts sharply with residence-based taxation (RBT), the approach used by nearly every other nation. RBT taxes individuals only on income earned in the country where they live or work, eliminating the need for dual tax obligations.
A U.S. citizen living in Berlin, for example, must pay German taxes on their income and still file U.S. tax returns. While measures like the Foreign Earned Income Exclusion and foreign tax credits mitigate double taxation, they do little to alleviate compliance costs.
For many Americans living overseas, CBT creates a heavy burden. While some expatriates move abroad for work, love, or retirement, others find themselves tied to U.S. citizenship without ever having lived in the country. Known as “accidental Americans,” these individuals may have been born abroad to U.S. parents or moved as children. Many have minimal ties to the U.S. and, in some cases, don’t even speak English. Yet, they face the same complex tax filing requirements as U.S. residents, often incurring significant costs and dealing with financial discrimination. This system can lead to outright double taxation for those unable to fully offset foreign tax credits.
President Trump’s proposed tax reforms aim to alleviate this burden. Backed by Rep. Darin LaHood (R-Ill.), the plan introduces an option for Americans living abroad to switch to RBT. This shift would exempt foreign-earned income from U.S. taxes while ensuring income sourced within the U.S. remains taxable. Wealthy individuals choosing to adopt the RBT system would be subject to a “departure tax” on their assets to prevent abuse by those seeking tax havens. Long-term expatriates and compliant taxpayers would see exemptions from this tax.
Advocacy groups like Tax Fairness for Americans Abroad have pushed for reforms for years, calling the current system outdated and inequitable. By addressing these concerns, Trump’s plan offers expatriates relief from the double tax filing obligations and high compliance costs that have plagued them for decades. If enacted, this legislation could provide a more just approach to taxation for millions of Americans overseas.
