*Congress is finally moving on ending citizenship-based taxation. Here's what expats actually need to know.*

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The Hook

The United States taxes its citizens on worldwide income—no matter where they live, work, or pay taxes. Only one other country does this: Eritrea, a single-party authoritarian state with virtually no diplomatic relationship with the US.

This isn't a neutral fact. It's the policy foundation for a $1,500-to-$5,000-per-year compliance burden that most American expats face. You file a 1040, you file FBARs, you file Form 8938, you file FBAR amendments, you navigate Foreign Earned Income Exclusion (FEIE) phase-outs, Foreign Tax Credits (FTC), and exclusion carve-outs. You pay an accountant. You lose sleep.

In December 2024, Representative Eric LaHood (R-IL) introduced the Residence-Based Taxation for Americans Abroad Act—a bipartisan bill designed to change this entirely. It didn't pass. But congressional insiders expect reintroduction in Q1 2026, paired with serious momentum. The American Citizens Abroad (ACA) has identified three pathways to passage: a tax omnibus bill, a government funding package, or immigration legislation.

This bill is no longer hypothetical. For the first time in decades, ending citizenship-based taxation has both bipartisan support and a legislative vehicle. If you're an expat, what happens next matters.

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Section 1: The Misconception That Costs You Money

Most Americans abroad believe they've "solved" the tax problem through the Foreign Earned Income Exclusion (FEIE). They think: I work abroad, I earn money abroad, the first $132,900 is excluded from US taxation, so I don't owe federal income tax. Problem solved.

This is only half the story. And the half you're missing costs you money and compliance complexity every single year.

The FEIE excludes earned income from US *federal* income tax. But it does not eliminate all your filing obligations. You still file a 1040. You still file FBARs if you have foreign financial accounts exceeding $10,000. You still file Form 8938 (FATCA) if your foreign assets exceed certain thresholds. You still calculate whether you qualify for the Physical Presence Test (330 days out of 12 months). You still deal with self-employment tax if you're self-employed—the FEIE excludes income tax but not the 15.3% self-employment tax on 92.35% of your net earnings.

And if you have any US-source income—rental income from a US property, consulting fees from a US client, capital gains—the FEIE doesn't help. You owe federal tax on that.

The Foreign Tax Credit is supposed to help you avoid double taxation on non-excluded income. But the FTC comes with phase-outs, carve-outs, and haircut calculations. It's mathematically elegant only if you understand it. For most people, it's a black box.

Concrete example: An expat in Mexico earning $90,000 from a US-based client and $50,000 from Mexican clients uses the FEIE on the Mexican income ($50,000 excluded). They still owe federal tax on the $90,000 US-source income. They also owe Mexican tax (roughly 25% of their Mexican income). They file a 1040, an FBAR, an 8938, and work with their accountant to calculate the FTC on what they actually owe Mexico. The accountant charges $2,500. The expat has solved nothing—they've merely navigated the system. And next year, the system stays the same.

Under Residency-Based Taxation, this expat would file as a "nonresident alien" and owe tax on US-source income only. The Mexican income wouldn't be touched by the IRS. The compliance cost would drop to zero—unless they had to file at all.

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Section 2: How Citizenship-Based Taxation Actually Works, and Why RBT Changes It

Citizenship-Based Taxation (CBT) rests on a simple principle: the IRS taxes you because you *are* a US citizen, not because you *live* in the US. This applies worldwide income, worldwide assets, and worldwide filing obligations.

It creates a tax residency mismatch. You live in Mexico. You're a Mexican tax resident (paying tax to Mexico on worldwide income). You're also a US citizen (paying tax to the US on worldwide income). Your accountant has to reconcile this for you. The FEIE, the FTC, and the Foreign Account Reporting Rules (FBAR, FATCA) all exist to reduce double taxation, but they don't eliminate it. They also don't eliminate the compliance cost.

The Residence-Based Taxation for Americans Abroad Act would flip this on its head.

Under RBT, the IRS would tax you based on where you *live and work*, not where you were born or hold citizenship. If you're an American living abroad and you've established tax residency in another country, you would file and pay tax as a "nonresident alien" in the US. This means:

- You owe federal income tax on US-source income only (wages from US employers, rental income from US property, US-based business income, capital gains on US assets). - You do not owe federal income tax on foreign-source income, regardless of whether you're a US citizen. - You likely do not file a 1040 at all (unless you have US-source income). - You likely do not file an FBAR (the requirement would narrow). - You likely do not file an 8938 (FATCA reporting would narrow).

The legal mechanism is straightforward: RBT would establish a "bona fide resident" test. If you meet it—essentially, you've been a tax resident of another country for 12+ months and you can document it—the IRS treats you as a nonresident alien for all tax purposes.

Concrete example revisited: The expat in Mexico earning $90,000 from a US client and $50,000 from Mexican clients. Under RBT, they owe federal tax on the $90,000 (US-source). They file a simple return to the IRS reporting that $90,000 and likely claim a foreign tax credit for what they paid Mexico. They file their Mexican taxes. They're done. Their accountant charges $800 instead of $2,500. The compliance burden drops 68%.

More importantly, the psychological burden disappears. You stop viewing the US tax system as a global surveillance mechanism and start viewing it as a simple rule: "You owe tax in the US on what you earned in the US."

This is how every other developed country treats its citizens abroad. Denmark, Australia, Canada, Germany, France—all use residence-based taxation. American expats are global outliers, not global normalcy.

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Section 3: Strategic Insight — What to Do Now

The RBT bill has real momentum, but legislative timing is unpredictable. Congress could pass it in 2026, 2027, or not at all. You cannot plan your tax life around "it might happen."

Instead, optimize for two scenarios: the bill passes, or it doesn't.

If RBT passes: The deadline matters. If the law takes effect January 1, 2027, you want to be clear on your current tax residence status *before* that date. This means: Are you formally a tax resident of your country of residence? Have you filed taxes as a resident for the prior 12 months? Do you have documentation (rent agreement, work permit, residential registration)?

Many expats are tax residents of a country but don't realize it or haven't formally established it. If RBT passes mid-year, having already filed as a tax resident of your country of residence gives you a head start on proving "bona fide residency."

Action now: If you're serious about RBT, confirm your tax residency status in your current country. File as a resident if possible. Keep documentation.

If RBT does not pass: You continue with the current system (FEIE, FTC, FBARs, 8938s). Nothing changes. But you also know that the political and technical groundwork is laid. This makes it more likely the next Congress will revisit it.

Action now: Get your FEIE calculation airtight. Confirm your Physical Presence Test compliance. If you have US-source income, fully understand your FTC position. If you're on the edge of the $132,900 FEIE limit, plan for income timing in 2027.

Both scenarios converge on one action: optimize your current filing position while the law is uncertain. This means: - Clear records of where you lived and worked (for Physical Presence Test). - Clear separation of US-source vs. foreign-source income. - Clear understanding of your Foreign Tax Credit position.

If the bill passes, you've already positioned yourself correctly. If it doesn't, you've eliminated audit risk.

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Section 4: Who Benefits Most (and When)

Not all expats benefit equally from RBT.

Highest benefit: Expats with zero US-source income. If you're a freelancer earning 100% from non-US clients, living in a country with a straightforward tax code, RBT eliminates your IRS filing obligation almost entirely. Your accountant cost drops from $1,500-$3,000 to $0. Your compliance stress drops to zero.

Medium benefit: Expats with mixed US and foreign income. You still owe tax on the US portion, but you stop tracking and excluding the foreign portion. Your accountant cost drops 40-60%.

Lower benefit: Expats with US retirement income, rental property income, or substantial capital gains from US assets. You still file complex returns because you have US-source income. But your accounting cost still drops because you're not reconciling worldwide income.

Least benefit: Expats planning to return to the US within 2-3 years. RBT doesn't help you if you're already a US tax resident again.

Timing consideration: The bill's effective date (if passed) will likely be January 1 of the following year. Don't expect retroactive relief. Plan for 2027 onwards, not 2026 backwards.

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Section 5: Key Takeaways

1. The US is one of two countries that taxes citizens on worldwide income regardless of residence (the other is Eritrea).

2. The FEIE doesn't "solve" taxation—it reduces it while maintaining compliance complexity ($1,500-$5,000/year in accounting fees).

3. RBT would flip the system: Tax you on where you live and earn, not where you hold citizenship.

4. Bipartisan momentum is real: LaHood's bill has serious support and three legislative pathways to passage.

5. You can't wait for the law to change: Optimize your current filing position now. Clear records, clear income separation, and clear tax residency documentation benefit you whether RBT passes or not.

6. Concrete savings are substantial: Expats with zero US-source income could see accounting costs drop from $2,000-$3,000 to nearly zero.

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What's Next

Whether RBT passes or not, your compliance strategy needs to reflect your real tax situation. Most expats are paying for over-complicated returns when a clearer filing approach would cut costs and reduce audit risk.

If you're an expat earning abroad and unsure whether your current approach is optimal, a single 45-minute consultation can clarify your position, identify which parts of your current strategy you can simplify now, and position you for RBT passage (or confirm your strategy if it doesn't).

[Schedule a $69 consultation →](https://calendly.com/brightshadow)