The United States remains one of only two countries in the world that continues to tax its citizens based on citizenship rather than residency. This unique approach to expat tax means that even if an American lives and works abroad for decades, they are still required to file U.S. tax returns and potentially pay taxes to the IRS, regardless of where their income is earned. For millions of U.S. citizens living overseas, this system has long been viewed as outdated and unfair. As pressure mounts, many are now asking: could the U.S. finally move to a residence-based taxation system for expats?
The Current System: Citizenship-Based Taxation
Under current U.S. law, American expats are required to report their worldwide income to the IRS, regardless of where they live. While there are provisions such as the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) that help reduce double taxation, the reporting burden remains high. In addition to filing Form 1040, many expats must also submit FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act) forms, which can carry steep penalties if filed incorrectly or late.
This approach to expat tax compliance has led to frustration, confusion, and growing resentment among Americans abroad. Many feel penalized for living overseas and find the cost of tax compliance prohibitively expensive—often requiring professional help to avoid costly mistakes.
The Push for Residence-Based Taxation
Residence-based taxation (RBT) would align the U.S. with almost every other developed country. Under RBT, only income earned within a country’s borders is taxed—meaning American expats would no longer be taxed by the U.S. on income earned abroad, as long as they are bona fide residents of another country.
Advocacy groups such as American Citizens Abroad (ACA) and Democrats Abroad have been lobbying for this shift for years. They argue that citizenship-based taxation is no longer practical or justifiable in a globalized world. The administrative burden, coupled with banking restrictions under FATCA, has made life unnecessarily difficult for U.S. citizens abroad. In fact, a record number of Americans have renounced their citizenship in recent years, citing tax complications as a primary reason.
Recent Legislative Momentum
In 2024, Congressman George Holding reintroduced a version of the Tax Fairness for Americans Abroad Act, which laid the groundwork for future reform. More recently, Rep. Darin LaHood and others have voiced support for what’s colloquially known as the “Big Beautiful Bill”—a yet-unfinalized proposal aimed at transitioning the U.S. toward a residence-based system.
While the bill has not yet been formally introduced, early outlines suggest it would exempt bona fide foreign residents from paying U.S. taxes on their non-U.S. sourced income. This would significantly reduce the paperwork and financial strain for millions of Americans living overseas. Experts say such a change would not only simplify expat tax compliance but could also strengthen America’s global workforce and reduce the number of citizenship renunciations.
Challenges and Concerns
Despite strong advocacy and bipartisan interest, there are several hurdles to implementing residence-based taxation. The primary concern is enforcement. How would the IRS ensure that individuals claiming foreign residency are doing so legitimately? Critics argue that a poorly structured transition could open the door to abuse and tax evasion.
Additionally, there are budgetary considerations. The Joint Committee on Taxation would need to assess the fiscal impact of such a change, particularly if it reduces tax revenue from high-income expats. However, supporters counter that the actual tax collected from most expats is minimal, thanks to existing exclusions and credits. Thus, the revenue loss may be negligible compared to the cost of administering and enforcing the current system.
Another challenge lies in educating lawmakers and the public. Many Americans are unaware of how the expat tax system works and are surprised to learn that U.S. citizens must file taxes even when they live and work abroad. Without broader awareness, garnering the political will to enact such a fundamental change remains difficult.
A Fairer Future?
While residence-based taxation isn’t yet law, it’s increasingly on the table. Growing momentum in Congress, pressure from advocacy groups, and shifting global norms suggest that reform is not only possible but perhaps inevitable. The question is not if, but when.
For expats, the change would be life-altering. It would eliminate complex filing requirements, reduce the risk of penalties, and allow Americans abroad to fully integrate into their countries of residence without fear of U.S. tax complications. It could also restore confidence among those who currently feel alienated by their home country’s policies.
Conclusion
The debate over expat tax reform in the U.S. is far from over, but signs of progress are promising. A move to residence-based taxation would align the U.S. with global standards, ease the burden on overseas citizens, and reduce compliance headaches for all involved.
Until then, American expats must continue to navigate one of the most complex tax systems in the world. But with advocacy gaining traction and legislative efforts underway, a simpler and fairer expat tax system may finally be within reach.