It’s Time to Eliminate Double Taxation for Americans Living Overseas

As the new year approaches, the focus shifts to the incoming Trump administration and its potential to rectify the longstanding issue of worldwide taxation that impacts U.S. citizens living abroad. This form of taxation requires American expatriates to report income earned globally to the IRS, even if they have not resided in the U.S. for years. President-elect Donald Trump has expressed his support for ending this double taxation, which he recognizes as both a financial burden and an unfair treatment of law-abiding Americans abroad. The peculiar nature of the U.S. tax system places immense pressure on expatriates, demanding that they account for every dollar earned, regardless of their location or the tax obligations they may already satisfy in their country of residence.

The mechanics of this taxation system reveal its complexity and potential for injustice. U.S. citizens living and working abroad must file tax returns that declare their global income, foreign bank accounts, and various financial assets while navigating through a convoluted array of tax provisions to mitigate double taxation. Unlike most developed nations, the U.S. taxes its citizens based on citizenship rather than residency. This approach not only isolates Americans abroad but also aligns the U.S. with Eritrea, the only other country known to maintain such a taxing structure. For many expatriates, double taxation becomes unavoidable, especially in jurisdictions without tax treaties with the U.S. or for income exceeding the exclusion limits, putting them at a significant disadvantage compared to local taxpayers.

The ramifications of this taxation burden extend beyond mere financial inconvenience; they complicate the everyday financial lives of Americans living overseas. The Foreign Account Tax Compliance Act (FATCA) further exacerbates these challenges by imposing stringent reporting requirements that deter many foreign banks from serving U.S. citizens. As a result, American expatriates often face difficulties in accessing essential financial services such as bank accounts, mortgages, and retirement plans in their host countries. The dual tax obligations they must fulfill—paying taxes in their country of residence while reporting the same income to the IRS—creates an intricate and disheartening situation for many who have established their lives abroad.

In stark contrast to the worldwide tax system, a territorial tax system, which levies taxes based solely on the source of income, could greatly alleviate these burdens. Under such a system, income earned in a foreign country would only be taxed by that country, allowing expatriates to weather fewer financial storms caused by overlapping tax jurisdictions. Though Trump’s tax reform efforts in 2017 introduced a quasi-territorial tax framework for corporations, the fundamental issue of individual taxation remains unresolved, leaving many Americans abroad entangled in burdensome regulations and complexity.

The stakes are especially high for those living outside the U.S. As simple filing errors in this convoluted system can lead to severe penalties, individuals may find themselves faced with exorbitant fines when no actual tax is due. The filing complexities often lead to unintentional mistakes, even for those who employ tax professionals. While there are avenues for the administration to limit the aggressive enforcement of FATCA, comprehensive reform that eradicates the burdensome law will necessitate bipartisan congressional action—a challenging task in the current political climate.

Ultimately, the call for reform of America’s taxation system is rooted in equity and practicality. Transitioning to a residence-based tax model would not only align the U.S. with global standards but would also preserve the government’s ability to tax residents on their worldwide income effectively. Such changes could eliminate the perception of ordinary citizens as financial criminals for merely working abroad and curb the resources wasted on unnecessarily complex tax returns from expatriates. With thoughtful collaboration between the Trump administration and Congress, a more equitable taxation approach could empower American citizens to thrive in the global economy while maintaining ties to their home country.