Lawmaking at the federal level has felt rather hopeless over the past year or two, but great news emerged from the U.S. Congress in mid-December.
The first exciting update for those of us living abroad is the introduction of residence-based taxation legislation on December 18, 2024.
U.S. Representative Darin LaHood (R-IL) introduced the Residence-Based Taxation for Americans Abroad Act, which would allow U.S. citizens living abroad to elect U.S. tax treatment as non-resident individuals (“Elective RBT”). Importantly, you could make this election and still keep your U.S. citizenship!
Here’s how Elective RBT could benefit long-term U.S. citizens living abroad:
- ** Relieving the burden of filing annual U.S. tax returns.
- ** Owning shares in a foreign company without it being classified as a Controlled Foreign Corporation (CFC), thereby avoiding complicated annual tax filings.
- ** Investing in foreign mutual funds (PFICs) without being punitively taxed.
Requirements for Elective RBT would include:
- ** Certification of U.S. tax compliance for the preceding five years.
- ** Tax residency in a foreign country.
- ** Living abroad for at least three years after making the RBT election (or the election will be reversed).
While all of this sounds promising, if the bulk of your income is U.S.-sourced, your U.S. tax treatment may not improve under this regime. Additionally, a “transition tax” could apply to some high-net-worth individuals.
It will be interesting to see if this legislation encounters any immediate hurdles or gets modified as it moves through committees. If something like this is ever going to pass, this could be the year, as passing a large tax package is high on the new administration’s priority list. However, similar legislation failed as recently as 2018, so a healthy dose of optimism is probably in order.
The Repeal of the Windfall Elimination Provision (WEP)
The other piece of exciting news is the repeal of the Windfall Elimination Provision, commonly known as WEP.
As part of the government funding bill – and thanks to the hard work of many organizations over the years – the WEP was repealed on December 21, 2024.
Expats are incidental beneficiaries of this legislation. The main reason for its passage was to help U.S. public sector employees reclaim Social Security contributions that had been unfairly reduced due to other pension income.
Many expats who worked in the U.S. for a significant period and paid into Social Security faced the same issue when collecting a foreign pension. Thanks to the repeal, those expecting to receive both U.S. Social Security and a foreign pension can rest easy, knowing they will now receive their full U.S. benefits. This is incredible news for many expat retirees and those planning to retire soon.
For those planning to retire later? Well, we might not be so lucky. Unless Congress finds a way to keep Social Security solvent, retirees in 2035 and beyond may receive only 83% of their full benefits. So, keep that dose of optimism from earlier on high alert.
