Resident Based Taxation - is it the future? | Tom Griffiths
Tom LR Griffiths is a tax advisor and consultant, specialising in US expatriate tax matters
Tom LR Griffiths
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Resident Based Taxation – is it the future?

Tom Griffiths - Resident Based Taxation

Resident Based Taxation – is it the future?

When people ask for tax advice relating to the US taxation system, it’s difficult not to go over the top talking about how interesting their tax system is. Of course, whether it is interesting depends on your point of view.

We ask the question, is resident based taxation (RBT) the future?

The resident-based taxation system is based on the principle that people and companies should contribute toward the benefits provided to them by the country they choose to reside in. A US citizen living in London is taxed on their income by the UK system because they earn income outside the US, and their income is unrelated to any economic activity within America.

While this tax system makes perfect sense on the one hand, on the other, it makes no sense at all, which is why people always ask for tax advice relating to resident-based taxation.

Is it fair for a US citizen to pay taxes in the US when living in another country?

The CBT (Citizen Based Taxation) think so, but the RBT (Resident Based Taxation) thinks no. It, of course, depends on one’s own opinion, one’s politics and how either method benefits or denies the bank balance.

In some cases, a US citizen could likely pay tax in both countries when other factors are considered, such as operating a business in the US whilst living abroad, because this falls under a source rule. It can be somewhat more convoluted than this seemingly justifiable and straightforward rule.

If you’re a Spanish citizen and you choose to live and move to Australia, you do not have to continue paying taxes on the income you earn abroad to the Italian government.

So why should you if you’re from the US and move to another country?

Many who want tax advice on CBT wonder if their wealth status comes into play, and many believe it should be a factor. But should the super-rich US ex-pat be able to play the system by manipulating the residency and tax rules while everyone else has to pay?

The truth is, people of means have always played the system, and that is not likely to change any time soon, regardless of whether you are for resident based tax or not.

International governments are at least willing to consider tax proposals in a more balanced way that takes income inequality into account and redress this imbalance. Of course, speaking from a cynical point of view, these measures always consider how these proposals can assist the wealthy.

The carried interest loophole in the US is undeniably beneficial to the wealthy, and the Carried Interest Fairness Act under President Biden would undoubtedly create a great deal more work and cause more people to seek tax advice. The Biden administration’s plan for this bill is to extract more income tax from the top tiers and prevent income tax rises for those earning under $400,000 per annum.

The problem is that the US tax law incorrectly portrays (on the most part) that the 9 million citizens currently living outside the US are wealthy people of means when really, they are everyday working people. These US citizens live abroad for several reasons, including employment, education, marriage, or a relationship.

It is estimated that over 60% of people who moved overseas have a household income of less than $100,00.

Many who move abroad do so for marriage reasons to non-US partners and end up in countries with a higher tax burden than the country they’ve relocated from! These (often) middle-class Americans end up getting hit by the tax system, having to file taxes from abroad and navigate very confusing and convoluted policies and regulations.

This inequality raises the question of whether or not the citizen-based taxation system should remain when so many US residents are subjected to the rigmarole of thinking they owe tax, when in fact, they do not.

So, is resident-based taxation the future? Perhaps it ought to be. For now, though, if you are seeking tax advice and need to speak to a tax expert in US expatriate tax matters, please contact Tom Griffiths today to discuss your case and how we can help.