Residence-Based Taxation: Where Do Things Stand?

The United States is one of the only countries in the world that continues to tax individuals based on their citizenship rather than where they live. This means that American citizens living abroad (currently estimated at around nine million) must file annual US tax returns and report their worldwide income, regardless of how long they have lived outside the country.

Source: US Department of State, U.S. Citizens Living Abroad – https://travel.state.gov/content/dam/travel/CA-By-the-Number-2020.pdf

Unsurprisingly, there has been growing interest in reforming this system in favor of residence-based taxation (RBT). Under RBT, the United States would tax only those who actually reside in the country or have US-source income.

A Longstanding Debate

While RBT has picked up momentum in recent years, it’s far from a new idea. Here’s a look at how this debate has evolved:

Key Moments in the RBT Debate:

Why It Was Left Out of Recent Legislation

Earlier in 2024, there was hope that RBT might be included in a budget reconciliation bill. However, the Byrd Rule in the Senate limits what can be included in that kind of legislation.

To qualify, provisions must:

• Directly impact federal revenue or spending
• Not increase the deficit outside a ten-year window
• Avoid making changes to Social Security

Since RBT would likely reduce both income tax and self-employment tax revenue, and particularly because it affects Social Security taxes, it would violate the Byrd Rule and be stripped from any reconciliation bill. Needing to be reviewed after a ten-year period would also not provide sufficient certainty for those impacted, and as a result, any RBT proposal must now proceed through the standard legislative process, which requires 60 votes in the Senate. That is a significantly higher bar, particularly in a divided political climate.

The LaHood Proposal and Current Outlook

In December 2024, Congressman Darin LaHood (R-IL) formally introduced H.R. 10468 — the Residence-Based Taxation for Americans Abroad Act. This marked the first formal legislative proposal of its kind to reach Congress. The bill was referred to the House Committee on Ways and Means and is currently awaiting further action. Advocacy groups, including Democrats Abroad and American Citizens Abroad (ACA), are now focused on building bipartisan momentum, particularly by securing a Democratic co-sponsor.

Source: Democrats Abroad – RBT Update, May 2025

H.R. 10468 — the Residence-Based Taxation for Americans Abroad Act – https://www.congress.gov/bill/118th-congress/house-bill/10468

Cost and Political Realities

Implementing residence-based taxation (RBT) is not without fiscal consequences. While no official estimate from the Joint Committee on Taxation (JCT) has been published to date, the expectation among policymakers is that the net cost to the federal budget could be significant.

This anticipated fiscal impact remains one of the greatest barriers to reform. In a political climate focused on deficit reduction and tightening domestic budgets, granting what could be perceived as a substantial tax benefit to non-resident citizens is a hard sell, regardless of how sound the policy rationale may be. The optics are particularly challenging, especially when juxtaposed against spending cuts or revenue-raising measures affecting residents.

The JCT plays a pivotal role in shaping the legislative outlook for any tax reform. It produces conventional revenue estimates that assess the direct effect of proposed changes on federal revenues over a 10-year budget window, incorporating limited behavioral responses. These estimates are developed using a nonpartisan and methodologically robust approach, drawing on confidential IRS data, economic modelling, and compliance history.

In the context of RBT, the JCT would be tasked with evaluating not only the revenue implications but also a broader set of considerations, such as:

• Behavioral responses by taxpayers and financial institutions;
• Precedents from comparable policies, such as FATCA exemptions or exit taxes;
• Administrative feasibility and implementation costs for the IRS; 

While independent studies, most notably from American Citizens Abroad (ACA) and the District Economics Group (DEG), as well as the Association of Americans Resident Overseas (AARO), have estimated the cost of RBT to be revenue-neutral to modest (around $4.5 billion over ten years), a formal JCT score would carry the most weight in legislative negotiations. Based on the complexity of the reform and conservative assumptions often applied by the JCT, it is likely that their estimate would reflect a materially higher cost than those produced by external advocacy groups. 

Ultimately, the cost of RBT and how it is perceived will remain a central issue in determining whether reform is politically viable.

What It Means for Clients in the UK 

At USTAXFS, we predominantly assist US citizens living in the United Kingdom, many of whom would benefit from a switch to residence-based taxation – including simplified filing, fewer investment complications, reduced exposure to the number of punitive rules that apply to foreign investments, and overall financial and estate planning for individuals living outside the US.

We also recognize that such a change would have a substantial impact on the advisory and compliance landscape. Regardless of the outcome, our commitment is to keep clients informed and prepared.

We continue to:

• Monitor developments in Washington
• Help clients remain fully compliant under current rules
• Offer practical, tailored guidance in an evolving tax landscape

Summary: Where Things Stand as of May 2025

• A bill to enact residence-based taxation has now been introduced as H.R. 10468
• The Byrd Rule continues to prevent its inclusion in budget reconciliation
• Passage depends on building bipartisan support and navigating the standard legislative process, including securing 60 Senate votes
• Clients should continue to comply with citizenship based taxation for now

As always, we will keep you informed of any updates. If you have questions about what these proposals might mean for you, please contact us.