<\/p>\n
January 7, 2019. This document provides an explanation of the Tax Fairness for Americans Abroad Act of 2018 (H.R. 7358)<\/strong>, which was introduced by Representative Holding (R-NC) on December 20, 2018.[1]<\/a><\/p>\n This explanation was prepared by American Citizens Abroad, Inc. (\u201cACA\u201d) as a service to its members and other interested parties.[2]<\/a>\u00a0 (Click here<\/a><\/strong><\/em> for link to PDF explanation.)<\/p>\n ACA is a membership organization incorporated as a nonprofit organization under the laws of the State of Delaware.\u00a0 It is an exempt social welfare organization (I.R.C. \u00a7 501(c)(4)).\u00a0 Alongside it is American Citizens Abroad Global Foundation (\u201cACAGF\u201d), which is a publicly-supported charity (I.R.C. \u00a7 501(c)(3)).\u00a0 ACA and ACAGF favor a balanced approach to subjects, supporting efforts that provide tangible results.\u00a0 Both are nonpartisan.\u00a0 They do not support or campaign for any candidates.\u00a0 Neither provides tax, legal, accounting, or investment advice or services.\u00a0 For additional information and to join, go to www.americansabroad.org<\/a>.<\/p>\n TAX FAIRNESS FOR AMERICANS ABROAD ACT:\u00a0 TRANSITION FROM CITIZENSHIP-BASED TAXATION TO RESIDENCY-BASED TAXATION<\/p>\n Present Law<\/u><\/p>\n US Citizens.<\/em> Americans are taxed on the basis of their citizenship, not residency. A US citizen, no matter where he or she resides and regardless of the type and source of income, is subject to US federal income tax, if certain income thresholds are met, and that individual must file a tax return with all the associated forms and schedules and, as called for, pay tax. One of the associated forms requires reporting of information about Specified Foreign Financial Assets, including foreign deposit and custodial accounts and certain other foreign assets.[3]<\/a> \u00a0Special rules provide, as part of the regular income tax return, a foreign earned income exclusion, which can include a housing cost amount.[4]<\/a> \u00a0Foreign tax credits can be claimed to offset US tax, but not to the extent of foreign taxes that are allocable to excluded income. This benefit, in effect, is a type of partial residency-based tax treatment for some individuals.\u00a0 Upon an individual\u2019s death, if the individual was a US citizen, his or her estate, if it is of a certain size, must file an estate tax return and pay estate tax with respect to its worldwide assets. \u00a0Similarly, a US citizen is generally subject to gift taxation regardless of where the individual resides and where the assets are situated. \u00a0Other special rules deal with the tax treatment of expatriation.[5]<\/a> \u00a0In addition, if certain thresholds are met, a US citizen must report to the Treasury Department foreign bank account information.[6]<\/a>\u00a0<\/p>\n All other countries, with almost no exceptions, only tax residents of that country, that is, an individual is not subject to the country\u2019s normal panoply of tax rules if he resides outside the country.[7]<\/a><\/p>\n Non-US Citizens.<\/em>\u00a0 Non-US citizens and non-resident alien individuals are generally subject to US withholding tax, at a 30% rate or reduced rates pursuant to a treaty, only on certain US-source income, including interest (other than so-called \u201coriginal issue discount\u201d), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other \u201cfixed or determinable annual or periodical gains, profits\u201d (FDAP income).\u00a0 Also, they are subject to graduated rates of tax, same as US citizens or residents, on income effectively-connected with a US trade or business.\u00a0 Section 871(a) & (b). Their income from US real property is generally taxed under Foreign Investment in Real Property Tax (FIRPTA) rules (\u00a7897); this is collected by withholding.\u00a0 Capital gains, except capital gains of nonresident aliens present in the US. \u00a0183 days or more during the taxable year, are generally exempt from tax under the Internal Revenue Code.\u00a0<\/p>\n There are many details affecting these subjects, but this is the general \u201clay of the land\u201d.<\/p>\n Tax Fairness for Americans Abroad Act of 2018 (H.R. 7358)<\/u><\/p>\n In general, the Tax Fairness for Americans Abroad Act (\u201cTFAA\u201d) would enact alongside existing section 911 (\u201cCitizens or residents of the United States living abroad\u201d) an alternative for nonresident citizens of the US living abroad.\u00a0 New section 911A (\u201cAlternative for Nonresident Citizens of the United States Living Abroad\u201d).\u00a0 A definition of \u201cnonresident citizen\u201d is added to section 7701(b). \u00a0<\/p>\n The new rules would operate only at the US federal level. \u00a0They might or might not affect state income, gift or inheritance rules. \u00a0Also, these tax rules would not affect US immigration and nationality rules. The rules governing the issuance and renewal of a US passport would not change.<\/p>\n The goal of the legislation is to replace the current citizenship-based taxation regime, which has existed since the time of the Civil War, with residency-based taxation (sometimes referred to as territoriality for individuals).[8]<\/a>\u00a0 \u00a0With limited exceptions, \u201cqualified nonresident citizens\u201d on foreign-source income would be taxed like nonresident alien individuals. \u00a0However, they would remain US taxpayers and fully taxable, and subject to normal filing requirements, on US-source income, which is not excludable under new section 911A.<\/p>\n Taxpayers\/Affected Individuals<\/u><\/p>\n An individual benefiting from section 911A is called a \u201cqualified nonresident citizen\u201d (\u201cQNC\u201d). \u00a0QNCs would not be taxed on their specified foreign-source income (see below) while they are resident abroad. They would remain subject to tax on their US-source income.<\/p>\n In order to qualify, a US citizen must meet the definition of a \u201cnonresident citizen\u201d under new section 7701(b), meaning, as to the taxable year in question, an individual who is a US citizen, has a tax home in a foreign country, is fully compliant with US income tax laws for the 3 previous taxable years, and either establishes to the IRS\u2019s satisfaction that he or she has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year (\u201cbona fide residence test\u201d) or has been present in a foreign country or countries during at least 330 full days during such taxable year (\u201cphysical presence test\u201d). \u00a0(See existing section 911(d)(1) as to all except the compliance requirement.) \u00a0The individual must not have made an election under existing section 911 for the taxable year and must make an election for such year under new section 911A.<\/p>\n No \u201caging rule\u201d requiring a minimum number of years of residency outside the US applies.<\/p>\n New section 911A refers only to citizens, not resident aliens. \u00a0See section 7701(b)(1) for definition of \u201cresident alien\u201d.<\/p>\n US citizenship is defined by nationality laws.\u00a0 It includes, with very narrow exceptions, all individuals born in the US regardless of nationality of parents; naturalized citizens; and certain individuals born overseas to a US parent. \u00a0(See below for rules for taxing QNCs\u2019 foreign earned income and foreign unearned income.)<\/p>\n There is no provision for \u201cstacking\u201d excluded income on top of non-excluded US-source income when determining the applicable tax rate.<\/p>\n There is no provision specifically addressing availability of the standard deduction for QNCs.<\/p>\n Resident aliens are not eligible for exclusion of foreign income from gross income under new section 911A.<\/p>\n Interaction with Certain Rules<\/u><\/p>\n Subpart F.<\/em>\u00a0 Under current law, subpart F taxes on a current basis or sometimes defers tax on income of a controlled foreign corporation. \u00a0The Tax Cuts and Jobs Act (\u201cTCJA\u201d), enacted December 22, 2017, adopted a modified form of territorial taxation allowing a deduction for dividends received by a corporate US shareholder from a specified 10%-owned foreign corporation under a new participation exemption system.\u00a0 US taxpayers residing abroad do not benefit.\u00a0 New section 911A would not amend subpart F. \u00a0(See below for rules for taxing foreign unearned income of QNCs.)\u00a0 Subpart F income is not a form of foreign earned income, nor is it income from the sale of personal property. \u00a0Presumably, it is a type of foreign unearned income excludable under new section 911A.<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Transition Tax.<\/em> The \u201ctransition tax\u201d provisions enacted by TCJA would not be amended by TFAA. However, as these provisions cause certain pre-effective date foreign earnings be treated as subpart F income of a so-called \u201cdeferred foreign income corporation\u201d in the last taxable year that begins before January 1, 2018, such income would apparently be excludable as foreign unearned income.<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 GILTI.<\/em> The global intangible low-tax income (\u201cGILTI\u201d) provisions enacted by TCJA would not be amended by TFAA.\u00a0 While GILTI is not subpart F income, which is the same as in the case of income resulting from the transition tax provisions, presumably GILTI is a type of foreign unearned income excludable under new section 911A.\u00a0<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 PFIC.<\/em>\u00a0 Special rules apply under current law to Passive Foreign Investment Companies (\u201cPFICs\u201d) and result in the taxation of PFIC shareholders.[9]<\/a> \u00a0US persons (including individuals who are citizens or residents of the US) are subject to an interest charge on the value of the so-called \u201cdeferral privilege\u201d and ordinary income treatment when the shareholder either disposes of its PFIC stock or receives any \u201cexcess distributions\u201d thereon. \u00a0Both \u201cexcess distributions\u201d and gain upon disposal of PFIC stock are taxable as \u201cexcess distributions\u201d, i.e.<\/em>, as ordinary income. \u00a0Section 1291. \u00a0Each PFIC shareholder must file an annual tax report.<\/p>\n Since both distributions on and income from dispositions of PFIC stock are foreign unearned income under new section 911A, they can qualify for exclusion. \u00a0PFIC stock, however, would appear to be personal property subject to the special exception removing from the definition of \u201cforeign unearned income\u201d income from the sale of such property to the extent such income is attributable to periods during which the individual was not a QNC.<\/p>\n Pass-through Deduction.<\/em>\u00a0 Enacted as part of TCJA was a 20% deduction for certain income of so-called pass-through entities. This benefit does not apply in the case of income not effectively connected with a US trade or business.\u00a0 The rules relating to this deduction would not be changed by TFAA.\u00a0 (See below for rules for taxing foreign unearned income.)\u00a0 While foreign income not effectively connected with a US trade or business does not qualify for the pass-through deduction, such income might be excludable under the general rules applicable to foreign earned income and foreign unearned income.<\/p>\n Tax Treatment of Expatriation\u00a0 <\/u><\/p>\n Rules relating to individuals who expatriate remain the same as under current law. \u00a0New section 911A does not make changes in sections 877 and 877A (rules applicable to citizens who expatriate).\u00a0 If a renunciant is a QNC and a \u201ccovered expatriate\u201d, US-source mark-to-market gain would not be excludable, while such income, which is foreign-source income, might be excludable as foreign unearned income, subject to special rule for income from sale of personal property.\u00a0 Nor does new section 911A make changes in section 2801 (imposition of tax on the recipient of a \u201ccovered gift or bequest\u201d from an individual who has renounced US citizenship). \u00a0If a recipient is a QNC, a covered gift or bequest arguably might be excludable as foreign unearned income.<\/p>\n Taxation of Qualified Nonresident Citizens.<\/u><\/p>\n QNCs are not subject to federal income tax on foreign-source earned income or foreign-source unearned income. \u00a0Special rules apply to income from sale of personal property. \u00a0See below.<\/p>\n As to US-source income (earned income, unearned income or any other type of income), QNCs remain fully taxable.\u00a0 Since not excludable under new section 911A, what would be characterized in the hands of a nonresident alien individual as US-source fixed, determinable, annual, periodical (FDAP) income, is taxed the same as it is in the hands of a non-qualified nonresident citizen (NQNC), i.e.<\/em>, a normal US citizen, wherever resident, in or outside the US. \u00a0Withholding taxes and, therefore, reduced treaty rates apparently do not apply. \u00a0Effectively connected income (ECI), proceeds from the disposition of US real property and US partnership income likewise are taxable as with a NQNC. \u00a0Note: A little non-excludable US-source income will cause the taxpayer to have to meet all the filing requirements of a regular US taxpayer, as there is no de minimis<\/em> rule.<\/p>\n For purposes of new section 911A, the terms used therein have the same meaning as such terms in existing section 911.<\/p>\n Foreign earned income.<\/em> \u00a0Foreign earned income has the same meaning as in section 911(b) but without regard to the annual exclusion amount ($104,100 for 2018).\u00a0 Amounts received will be considered received in the taxable year when the services are performed, not the period during which the individual meets the \u201cbona fide foreign residence test\u201d or the \u201cphysical presence test\u201d.\u00a0 New section 911A(b)(3)(B).\u00a0 Special treatment of community property income does not apply. See section 911(b)(2)(C). \u00a0The requirement of a \u201ctax home in a foreign country\u201d continues to apply as with current law.\u00a0 See section 911(d)(1).<\/p>\n Foreign unearned income.<\/em> \u00a0Foreign unearned income is any and all income other than foreign earned income which is sourced outside the US. \u00a0Exceptionally, with respect only to income from the sale of personal property, only such income attributable to periods during which the individual was a QNC will be excludable. \u00a0Apparently, personal property is tangible or intangible personal property. \u00a0Apparently, existing sourcing rules, like those in section 865, will apply to determine whether this income is foreign.\u00a0 The term \u201cattributable\u201d is not defined in new section 911A.[10]<\/a><\/p>\n Net Investment Income Tax.<\/em> \u00a0There is no change in the net investment income rules (sometimes referred to as the 3.8% investment tax). \u00a0Foreign-source net investment income is a form of foreign unearned income and to the extent it is gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of certain trades or businesses, should qualify for the section 911A exclusion. \u00a0Some investment income is net gain attributable to the disposition of property, other than property held again in certain trades or businesses, and this gain might be subject to the special rule applicable to income from the sale of personal property to the extent such income is attributable to periods during which the individual was not a QNC.<\/p>\n Real Property Income.<\/em>\u00a0 Gain from the sale of foreign real property is not considered foreign earned income.\u00a0 Nor is it personal property income as to which the special rule for income from the sale of personal property should apply. \u00a0Thus, it should be excludable by a QNC.<\/p>\n Social Security Income.<\/em> \u00a0Social Security benefits are included in gross income in any year the sum of half the taxpayer\u2019s Social Security plus all other income, including tax-exempt interest, exceeds $25,000, if single, head of household, qualifying widow(er), married filing separately ($32,000 if married filing jointly).\u00a0 They are reported on a Form SSA-1099 issued by the Social Security Administration.\u00a0 Taxes are withheld only if requested by the recipient.[11]<\/a><\/p>\n Withdrawals from Retirement Arrangements.<\/em> \u00a0Generally, early withdrawals (before age 59\u00bd) from an IRA or retirement plan are taxed with a 10% early withdrawal tax.\u00a0 Required minimum distributions from IRAs, but not Roth IRAs, beginning at age 70\u00bd, are taxed as ordinary income. \u00a0Early withdrawals are not specifically addressed in new section 911A.\u00a0 To the extent these items are US-source income, presumably they are not excludable.<\/p>\n Pension Distributions.<\/em> \u00a0Pension distributions for services performed in the US are generally treated as US-source income and subject to tax.\u00a0 This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). \u00a0This type of income is not specifically addressed in new section 911A. \u00a0To the extent these items are US-source income, presumably they are not excludable.<\/p>\n Capital Gains and Other Investment Income.<\/em>\u00a0 For QNCs, US-source investment income (capital gains from the sale of US securities and US interest income) is taxed, i.e.<\/em>, it is not excludable.\u00a0 Presumably sourcing rules similar to those applicable to nonresident alien individuals under current law will apply.\u00a0 Unlike with nonresident aliens, except those present in the US 183 days or more (section 871(a)(2)), this income is not exempt (excludable).<\/p>\n Non-US citizens, including resident aliens (\u201cgreen card\u201d holders) and non-resident alien individuals, remain taxable as they are under current law.\u00a0 Thus, generally, they remain subject to US withholding tax on FDAP income, perhaps reduced by treaty, and zero tax on US capital gains, other than FIRPTA income.\u00a0<\/p>\n Resident aliens are not eligible for exclusion of foreign income from gross income under new section 911A.<\/p>\n No provision in new section 911A speaks to the availability of the standard deduction for QNCs.<\/p>\n Alternative for Nonresident Citizens of the United States Living Abroad (New Section 911A)\/Qualification <\/u><\/p>\n In order to qualify for taxation as a nonresident citizen under new section 911A (i.e.<\/em>, for residency-based taxation), an individual would have to satisfy the test for \u201cqualified nonresident citizen\u201d under new section 911A(b)(2). \u00a0In general, a \u201cqualified nonresident citizen\u201d is an individual whose tax home is in a foreign country and who is (a)\u00a0a US citizen and establishes that he has been a bona fide<\/em> resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year or (b)\u00a0a citizen or resident of the US and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.\u00a0 An individual can qualify even though he or she is retired, is not \u201cworking\u201d, and receives no \u201cearned income\u201d but only earns, for example, interest, dividends and gains from a securities portfolio. \u00a0He or she might be present in the foreign country but not comply with local rules, including immigration and employment rules.<\/p>\n Election to Opt Out.<\/em>\u00a0 Individuals, in effect, can opt out of \u201cAlternative for Nonresident Citizens of the United States Living Abroad\u201d (new section 911A), by not making the required election.\u00a0 They would continue to be taxed under existing rules and could choose to utilize existing section 911.\u00a0 Section 911 (including both the foreign earned income exclusion and the housing cost amount) would not be repealed by TFAA.<\/p>\n Federal Employees.<\/em> No federal employee will be treated as a \u201cnonresident citizen\u201d.<\/p>\n Treaty Rules.<\/em> Rules in bilateral income tax treaties that apply to residents of the other country are not addressed in TFAA.\u00a0 A \u201csavings clause\u201d in many treaties permits the US to tax, as it does under existing rules, its citizens regardless of their residency in a treaty jurisdiction.\u00a0 Presumably, QNCs would be taxable the same as NQNCs and would not be able to claim reduced treaty rates or exclusions.<\/p>\n Tax Havens.<\/em>\u00a0 New section 911A contains no special rules applicable to \u201ctax haven\u201d countries.\u00a0 Therefore, US citizens resident in a zero or low tax rate jurisdiction can qualify for RBT treatment.<\/p>\n Restricted Countries.<\/em> Residency in a \u201crestricted country\u201d, for example, a country as to which the US imposes certain types of sanctions, does not count toward satisfying new section 911A\u2019s bona fide residency test.<\/p>\n Income from a \u201crestricted country\u201d is excluded from the new section 911A benefit.<\/p>\n Individuals Avoiding Resident Status in Other Country.<\/em> \u00a0If an individual who has earned income from a foreign country has submitted a statement to that country claiming he or she is not a resident and if such individual is not treated as taxable by that country, the individual will not be treated as a bona fide resident of such country for purposes of new section 911A. \u00a0(Similar to existing section 911(d)(5).)<\/p>\n Denial of Double Benefits.<\/em> \u00a0A rule similar to that in existing section 911(d)(6) denying double benefits will apply to deny foreign tax credits or other tax benefits properly allocable to or chargeable against amounts excluded under new section 911A.<\/p>\n No \u201cAging Test\u201d.<\/em>\u00a0 With respect to foreign earned income for purposes of new section 911A (its excludability), an individual can take up residency in a foreign jurisdiction and exclude such income earned at any time during the taxable year, regardless whether the income was attributable to services performed during his or her period of bona fide residency or physical presence.\u00a0 See existing section 911(d)(1)(A) & (B).<\/p>\n Resumption of US Residency.<\/em> \u00a0QNCs lose favored status if they resume residency in the US.\u00a0 Specific rules relating to \u201cstart date\u201d and \u201cending date\u201d are not provided, other than provisions relating to \u201ctaxable year\u201d.\u00a0 See new section 911A(b)(3).\u00a0 There is no specific rule that they must notify the IRS or financial institutions.\u00a0 Arguably, fair market value of foreign assets presumably becomes the basis for any future US tax liability with regard to those assets.<\/p>\n Special Rule for Certain Foreign Unearned Income.<\/em> \u00a0Excluded from gross income is any foreign unearned income from the sale of personal property to the extent such income is attributable to periods during which the individual was a QNC. \u00a0\u201cWhile individuals will not be taxed on gain from the sale of foreign personal property attributable to their time as a qualified nonresident citizen, they will still be taxed on any gain attributable to their time as a resident of the US.\u00a0 In other words, if an individual holds a foreign asset prior to their election of qualified nonresident citizen status and then sells said asset while they are a qualified nonresident citizen, the individual will only owe US tax on the portion of gain attributable to the period prior to their change in status.\u201d\u00a0 \u201cDescription of H.R. 7358 \u2013 Tax Fairness for Americans Abroad Act of 2018\u201d, Office of Representative Holding (provided to ACA on December 20, 2018). \u00a0Apparently, the individual need not be a QNC in the taxable year of receipt.<\/p>\n Estate and Gift Taxation<\/u><\/p>\n Normal Rules. \u00a0<\/em>For federal gift and estate tax purposes, US citizens and residents are subject to gift and estate tax with respect to their worldwide assets. \u00a0Estates with combined gross assets and prior taxable gifts of $10,000,000 or less are not required to file an estate tax return. \u00a0This amount is adjusted for inflation. \u00a0This figure becomes $11.2 million in 2018. \u00a0Couples might be able to double this to $22.4 million. \u00a0Citizenship is defined by nationality laws.\u00a0 \u201cResident\u201d is defined by estate tax rules in regulations (Reg. \u00a720.0-1(b) (essentially domicile, following common law principles)).<\/p>\n Non-residents\u2019 estates must file an estate tax return if the fair market value at death of the decedent’s US-situated assets exceeds $60,000. \u00a0Substantial lifetime gifts of US property by decedent can reduce this figure. \u00a0Estate and gift tax apply to US property including, only as to gift tax, shares in US corporations.\u00a0 Assets in US bank accounts generally are exempt.<\/p>\n Under TFAA, current rules are not changed. US citizens, whether a NQNC or QNC, are subject to same rules as US citizens residing, or more properly domiciled, in the US, i.e.<\/em>, they are taxable on their worldwide assets.<\/p>\n Special Rule – \u201cCovered Expatriates\u201d.<\/em> \u00a0Under current law, there are special rules taxing bequests and gifts to US persons from a so-called \u201ccovered expatriate\u201d (in general, certain US citizens who relinquish citizenship and certain long-term US residents who cease to be a lawful permanent resident).\u00a0 These are, in general, taxed to the recipient at the highest estate tax or gift tax rate then applicable. New section 911A contains no provision amending the existing rules. \u00a0If recipient is a QFNC, a covered gift or bequest might be excludable as foreign unearned income.<\/p>\n Other Subjects<\/u><\/p>\n FATCA.<\/em>\u00a0 The \u201cHiring Incentives to Restore Employment Act\u201d (\u201cHIRE Act\u201d), enacted in March 2010, included the \u201cForeign Account Tax Compliance Act\u201d or \u201cFATCA\u201d.\u00a0 These provisions, among other things, created new Chapter 4 withholding tax rules. \u00a0They also created the requirement for taxpayers to file a Statement of Foreign Financial Assets (Form 8938), overlapping, to a significant degree, the Foreign Bank Account Reporting requirements.<\/p>\n FATCA would not be repealed by the TFAA.\u00a0 FATCA\u2019s rules continue to apply in the case of US accounts, meaning accounts owned by a specified US person (in general, any US person (7701(a)(3)) or US owned foreign entity). See \u00a71.1471-5(a)(2), Treas. Regs.\u00a0 Accounts owned by QNCs continue to be US accounts subject to FATCA.<\/p>\n Same Country Exemption.<\/em> \u00a0A \u201csame country\u201d exemption (\u201cSCE\u201d) for certain accounts of individuals residing in a foreign jurisdiction, where the account is with a foreign financial institution in the same country where the individual resides, is not adopted by TFAA.[12]<\/a>\u00a0<\/p>\n Filing Requirements<\/u><\/p>\n In General.<\/em> \u00a0Taxable citizens and residents must file a Form 1040 and other forms, including, where applicable, a Form 2555 (Foreign Earned Income), Form 1116 (Foreign Tax Credit), Form 8938 (Statement of Foreign Financial Assets), and Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund).\u00a0<\/p>\n QNCs, under new section 911A, would be required to elect annually, with respect to the taxable year, to be taxed under new the new rules. They would need not to make an election under existing section 911 as to that year.\u00a0 They would have to satisfy the requirements to qualify as a QNC.\u00a0 See above.<\/p>\n If no income tax return is required because, for example, the individual did not have the minimum amount of gross income (for 2018, $24,000 for married filing jointly, both under 65), the individual would still need to make the required election and annual certification that he or she remains in compliance with the eligibility requirements.<\/p>\n Any non-excludable US-source income would cause the individual taxpayer to have to satisfy all the filing requirements of a regular US taxpayer, as there is no de minimis<\/em> rule.<\/p>\n Section 6038D.<\/em>\u00a0 Section 6038D, underlying Form 8938 (\u201cStatement of Specified Foreign Financial Assets\u201d), is not affected.\u00a0 An individual holds\/has an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on his or her income tax rate turn.\u00a0 This pertains regardless whether there was any income, etc. in the current year.\u00a0 The taxpayer files Form 8938 even if none of the assets affect tax liability for the year. Exception:\u00a0 If no income tax return is required, then there is no need to file Form 8938, regardless of value of assets. The filing of an election to claim new section 911A treatment arguably comprises the filing of a return.<\/p>\n Special rule with respect to foreign tax credits.<\/em> \u00a0See special rule with respect to foreign tax credits and similar benefits, above.<\/p>\n Special rule relating to first taxable year.<\/em> \u00a0Presumably special rules, similar to those applicable to existing section 911, addressing situation for first taxable year where taxpayer has not yet met either the bona fide residency test or the physical presence test by the return due date, will apply.<\/p>\n IRS User Fee<\/u><\/p>\n Under current law, there is a State Department fee of $2,350 charged for renunciation of US citizenship. \u00a0Under the TFAA, there would be no similar charge for availing oneself of the Alternative for Nonresident Citizens of the United States Living Abroad (new section 911A).<\/p>\n Effective Date; Transition Rules<\/u><\/p>\n New section 911A applies with respect to taxable years beginning after the date of enactment of TFAA.\u00a0 For example, if enacted on August 1, 2019, it would apply to 2020 and taxable years thereafter.\u00a0<\/p>\n No special rules, such as a transition tax, apply.<\/p>\n Anti-Abuse Rules<\/u><\/p>\n No special anti-abuse rules apply.<\/p>\n FBAR Filing Requirement<\/u><\/p>\n Existing rules requiring the filing of Foreign Bank Account Reports (FBARs) would not be changed. \u00a0These rules were first enacted in 1970 as part of the Bank Secrecy Act and are ordinarily treated as separate from the tax rules in the Internal Revenue Code. \u00a0FBAR reporting is defended as a means of combating terrorism, illegal drug trafficking and other money-laundering schemes, as well as the use of foreign financial accounts to evade taxation. \u00a0<\/p>\n Regulations<\/u><\/p>\n Under generally applicable rules, the Secretary of the Treasury shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of new sections 911A and 7701(b)(C).<\/p>\n Offshore Disclosure Rules<\/u><\/p>\n TFAA will likely cause a significant number of Americans abroad to be compelled, or influenced, to \u201ccatch up\u201d with their reporting of taxable income and filing of required returns and forms. \u00a0No changes in the existing rules and procedures governing compliance, such as the process for voluntary domestic and offshore disclosures,[13]<\/a> are proposed as part of TFAA.<\/p>\n Revenue Costs<\/u><\/p>\n No revenue estimates were available as of the date of introduction.<\/p>\n [1]<\/a> H.R. 7358 was introduced on December 20, 2018 and referred to the House Committee on Ways and Means.\u00a0 A Summary and Description were released on the same date. \u00a0A copy of the bill is available on https:\/\/www.congress.gov\/.\u00a0 ACA expects that this bill will be reintroduced early in the 116th Congress.<\/p>\n [2]<\/a> The author is Charles M. Bruce, Legal Counsel, ACA, and Chairman, American Citizens Abroad Global Foundation.\u00a0 Mr. Bruce is Of Counsel, Bonnard Lawson-Lausanne, Switzerland.\u00a0 He is solely responsible for any errors.\u00a0 Comments, questions and corrections should be directed to him at charles.bruce@americanabroad.org.\u00a0 Marylouise Serrato, Executive Director, ACA, and Glen Frost, Assistant Legal Counsel, ACA, contributed to this writing. \u00a0This explanation should not be attributed to any extent to the Office of Representative Holding.\u00a0 \u00a9 Copyright 2019, American Citizens Abroad, Inc.\u00a0 All Rights Reserved.<\/p>\n [3]<\/a> Form 8938 (Statement of Specified Foreign Financial Assets).<\/p>\n [4]<\/a> The exclusion is claimed on Form 2555 (Foreign Earned Income).<\/p>\n [5]<\/a> See section 877 and 877A, dealing with expatriation to avoid tax and tax responsibilities of expatriation.\u00a0<\/p>\n [6]<\/a> The filing of a Foreign Bank Account Report is a Bank Secrecy Act requirement, not an Internal Revenue Code requirement.<\/p>\n [7]<\/a> Exceptions are Eritrea, perhaps North Korea, and perhaps South Africa, all to various degrees.<\/p>\n [8]<\/a> \u201cThis bill would take the first step toward ending citizenship-based taxation by essentially taxing only those individuals that are resident in the United States or have income that is connected to the United States.\u201d\u00a0 Summary, \u00abTax Fairness for Americans Abroad Act of 2018, Office of Rep. George Holding (December 20, 2018).\u00a0 \u00abThe proposal outlined below would effectively end the current citizenship-based taxation system and instead transition to a system that provides territoriality for individuals \u2013 often referred to as residency-based taxation. \u00a0By taking this first step toward ending the onerous burdens of citizenship-based taxation, Americans will become more competitive in the international job market and free to pursue opportunities around the world.\u00bb Description, \u00abTax Fairness for Americans Abroad\u00bb, Office of Rep. George Holding (December 20, 2018).<\/p>\n [9]<\/a> Sections 1291-1298. These rules can apply where a PFIC is owned directly by the taxpayer or the PFIC is owned indirectly, for example, through a pension trust or some other type of deferred compensation arrangement.<\/p>\n [10]<\/a> The term \u00abattributable\u00bb in the sense of attribution to a period of time, as opposed to a person \u2013 individual, corporation, etc. \u2013 or transaction or event or thing, is somewhat unique.\u00a0 However, the term appears in existing section 911(b)(1)(a) (\u201cThe term \u2018foreign earned income\u2019 with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.).\u00a0 If applied to foreign unearned income obviously it could not be tied to when services were performed; and the timing of receipt of income from the sale of personal property is more tractable.<\/p>\n [11]<\/a> The workings of the Windfall Elimination Act, which can disadvantage Americans abroad, are not changed.\u00a0<\/p>\n