A growing number of Americans are moving abroad, whether for a career change or because they've long dreamed of living in another country. And though they may work and make money entirely in their new country, when tax time comes around they must file not only where they live with but with Uncle Sam as well. The U.S. is an outlier in this department and many of those overseas Americans want the tax situation to change.
Last week, former president Donald Trump acknowledged the issue, telling the Wall Street Journal he supports "ending the double taxation of overseas Americans," though he offered no details on what he meant by it or what the new policy would be.
The U.S. is unusual in that it taxes citizens on their worldwide income regardless of where they live and where the money was earned. This regime requires expats not only to file with the Internal Revenue Service but, in some cases, with the U.S. state where they last resided. Meanwhile, nearly every other country in the world taxes people based on their residency. That said, the notion that Americans abroad pay twice isn't exactly accurate.
"Strictly speaking, there is no double taxation of Americans living abroad," says Mark Luscombe, a certified public accountant and principal analyst at Wolters Kluwer Tax & Accounting. That's because the U.S. allows foreign tax exclusions or a foreign tax credit. The foreign tax exclusion allows qualified Americans living abroad to exclude their foreign earned income by up to $126,500 per person in 2024, meaning they are not being taxed twice on that income.
And the foreign tax credit is based on the income earned and tax paid overseas; generally, if the U.S. tax rate is higher than the foreign tax rate, the American living abroad would pay the difference to the U.S. If the foreign rate is higher, the American may owe nothing back to Uncle Sam. There are also tax exclusions for foreign housing costs. According to the right-leaning Tax Foundation, "most Americans abroad likely owe nothing, or relatively little."
"For the general tax payer, it doesn't mean much. They still pay the tax in the foreign country and if they have domestic income they will pay tax for that as well," says Kathy Alfaro, CEO of Alfa Tax Service, of the potential change. "From [a] policy perspective, I find it to be word play."
A policy shift on the issue wouldn't help a large group of Americans—there are less than 3 million expats eligible to vote—but it could potentially make their tax season a lighter load, and reduce the costs that come with filing taxes overseas.
"The real problem for U.S. citizens living abroad is the administrative burdens of filing a U.S. tax return to do these calculations," says Luscombe. "It is not clear what the Trump campaign is proposing, whether it is to cease U.S. taxation of U.S. citizens living abroad except on their income from U.S. sources, or some more limited steps to try to address compliance burdens."
All that said, U.S. citizens must also report foreign financial accounts—say, bank accounts or investments—with more than $10,000 in them. And each expat's tax burden depends on the country she moves to. While many have tax treaties with the U.S. to avoid double taxation, not all do. Peter Roskam, federal policy team leader at BakerHostetler and a former Republican U.S. Congressman, says how the policy would actually shake out would be highly geographically dependent.
"How this would manifest itself, it would have to be evaluated on a country-by-country basis," says Roskam. "It’s a big declaration."
Currently, Americans living abroad who wish to stop paying U.S. taxes have a way to do so: They can renounce their U.S. citizenship, but that is a step too far for many—and also comes with headaches of its own, such as possibly paying exit taxes based on assets and the immediate distribution of all retirement savings, including pensions (tax laws depend on each individual's situation and change frequently, so it's hard to say definitively what will happen to any one person all the time). It's not something to be taken lightly.
One risk of changing how American expats are taxed is that more wealthy Americans may simply establish residency in a low-tax country, which would have significant ramifications on the U.S. as a whole.
"A billionaire nominally living on a small Caribbean island to avert large amounts of U.S. income tax would be a legitimate policy problem," writes Alan Cole, senior economist at the Tax Foundation. "But a residence-based tax system would make sense for the vast majority of Americans abroad."
So far, Trump hasn't introduced any actual policy details. But he has proposed other tax changes if elected to a second term, including a "no tax on tips" policy that experts say are equally vague on details. The individual tax cuts he championed in 2017 are also set to expire at the end of 2025, which could lead to a Congressional showdown depending on the outcome of this year's election.
"Donald Trump’s pitch is, 'I’ll make it go away.' But how will he do that?" says Roskam. "A lot of these broad tax statements are exactly that. Broad outlines of a direction they want to go and with a particular strong political appeal to a niche audience."
