Aequify Editorial
Taxation of U.S. Citizens Living Abroad Explained
Imagine you moved to London or Tokyo when you were just a little kid. You grew up there, you work there, and you pay your taxes to that country. You might not have stepped foot in the United States for thirty years. But because you have a U.S. passport, the IRS says you still owe them a report on every dollar you make. This is called Citizenship Based Taxation. It is a very rare system. In fact, out of nearly 200 countries in the world, only the U.S. and a small country in Africa called Eritrea do this. For the nine million Americans living abroad, this is more than just a bit of paperwork: it is a massive financial burden that never goes away.
The History: Fighting the Wartime Skulkers
This whole system started during the American Civil War in the 1860s. Back then, the government usually got its money from trade taxes. But the war was incredibly expensive, and the government was running out of cash. William Pitt Fessenden, head of the Senate Finance Committee, became the architect of the first tax laws. He first tried to create an income tax in 1861, but it did not have any way to actually catch people or force them to pay, so it did not raise much money.
The real reason the U.S. started taxing people living in other countries was because of anger. During the war, many wealthy Americans moved to Europe, especially to Paris, to avoid being drafted into the army. Members of Congress were furious. They thought it was unfair that poor people were staying home to fight and die while the rich were living in luxury in a foreign capital. Senator Jacob Collamer was one of the loudest voices against these people. He famously argued that a man who drew money from U.S. property but stayed in Paris was skulking away from his duty. He believed these absentees should pay a much higher tax rate because they were not sharing the risks of the war.
By the time the Revenue Act of 1864 was passed, the law officially applied to every citizen of the United States residing abroad. Back then, the tax only hit the very wealthy because most regular workers did not make enough money to qualify. Decades later, the Supreme Court looked at this rule in a famous 1924 case called Cook v. Tait. The court decided the government has the legal right to tax you anywhere in the world. Their reason was that being a citizen gives you benefits like protection from the government and the right to come home whenever you want.
Boris Johnson and the 50,000 Dollar Surprise
The most famous example of this system in the modern world involves Boris Johnson, the former Prime Minister of the United Kingdom. He was born in New York because his parents were working there for a short time. He moved back to England when he was only five years old. He always called his American citizenship an accident of birth and felt he had no real tie to the U.S..
In 2014, while he was the Mayor of London, he sold his house in north London. In the UK, you do not have to pay taxes when you sell the home you live in. But the IRS told him he owed them more than $50,000 in capital gains tax because he was still a U.S. citizen. In a famous interview with National Public Radio (NPR), he sounded very angry. He called the tax demand absolutely outrageous and asked why he should pay tax to a country he had not lived in since he was a toddler. He eventually paid the bill so it would not hurt his political career, but he was so fed up that he officially gave up his U.S. citizenship in 2016. He was one of a record 5,411 people who renounced that year to get away from the IRS forever.
Giving Up the Passport to Save the Kids
There is a growing and sad trend of people giving up their U.S. citizenship. Most of them are not trying to avoid taxes: they are trying to protect their children. Many American parents living abroad realize that if they pass their citizenship to their kids, they are also passing down a huge headache.
If a child is a U.S. citizen, they have to file complicated IRS forms every single year of their life, even if they never live in America. It can cost thousands of dollars just to hire an accountant who understands the rules. Even worse, a law called FATCA makes many foreign banks afraid to have American customers. Banks often refuse to let Americans open simple savings accounts or get a mortgage because the bank does not want to deal with the U.S. government. Parents are now renouncing their own citizenship to ensure their kids can have a normal life and be treated like regular citizens in the country where they actually live.
A Ray of Hope - The LaHood Bill
There is finally a serious plan in Congress to fix this problem. It is called the Residence Based Taxation for Americans Abroad Act (H.R. 10468). It was introduced by Representative Darin LaHood and Senator Todd Young.
The Residence Based Taxation for Americans Abroad Act is a plan that would let U.S. citizens living in other countries choose to be treated like non residents for their taxes. To use this new rule, a person would have to prove they have lived in another country for at least three of the last five years and that they have followed all U.S. tax laws in the past. Once they sign up, they would only have to pay U.S. taxes on money they make inside America, like from a rental property or a U.S. company. Their foreign paychecks would finally be left alone by the IRS, which would help them compete for jobs against people from other countries. The bill includes rules to make sure the super rich do not use it to hide money, including a one time departure tax for people with a lot of wealth. It also removes the need to file many of the most annoying forms that currently make it hard for expats to get bank accounts. Supporters say this bill is the best way to help regular families without costing the U.S. Treasury much money. You can read the full text of the bill here
Groups Fighting for You
There are several groups working very hard to convince Congress to pass these new rules. Here are some of the the organizations you should know about:
Tax Fairness for Americans Abroad (TFFAA): This group is run by volunteers who worked directly with Representative LaHood to write the new bill. They collect stories from regular people to show Congress that the current system hurts the middle class and accidental Americans.
American Citizens Abroad (ACA): This is a non profit group based in Washington D.C. that has been around for 45 years. They do scientific research to prove to the government that changing the tax laws will not lose the U.S. any money.
Association of Americans Resident Overseas (AARO): Based in Paris, this group represents Americans in more than 180 countries. They focus on many issues, including making sure expats can still vote and that their Social Security is protected.
Democrats Abroad (Taxation Task Force): This is the official arm of the Democratic Party for people living outside the U.S. They run webinars and surveys to help expats understand the laws and lobby politicians to make things easier.
Association of Accidental Americans (AAA): This group is famous for fighting in court. They represent people who are only U.S. citizens because of where they were born and are currently challenging the IRS in European courts over privacy rules.
How You Can Help Support This Cause
The fight for a residency based tax system is closer than it has ever been, but it needs your help to get across the finish line. Lawmakers need to know that this is an important issue for regular families, not just the wealthy. Here are three things you can do right now to help:
Contact your representative in Congress. Even if you live abroad, you are still represented by the person in the district where you last lived in the U.S.. Call or write to their office and tell them you support the Residence Based Taxation for Americans Abroad Act (H.R. 10468). Ask them to sign on as a co-sponsor to show their support.
Share your personal tax story. Groups like Democrats Abroad and TFFAA look for real life examples of how these laws hurt regular people. If you have been denied a bank account or had to pay thousands of dollars in accounting fees, your story can help humanize the problem for politicians in Washington.
Support advocacy organizations. Groups like American Citizens Abroad and TFFAA are run by people who volunteer their time, but they need donations to pay for professional research and legal advice. Joining these groups or making a small donation helps them continue the hard work of lobbying Congress for a fairer system.
Conclusion: Time to Leave the 1800s Behind
The U.S. tax system for expats is a leftover from a war that ended 160 years ago. Back then, it was meant to punish people for running away. Today, it mostly punishes regular people who just happened to move for a job or for a better life. By moving to a residency based system, the U.S. could finally treat its citizens abroad like people instead of suspects.
Reference Links and Resources
Historical Context
News and Case Studies
Legislative Text
