Donald Trump Pledges to End Double Taxation for U.S. Expats in Israel, but Will It Really Help?

In a recent announcement, former President Donald Trump vowed to end the double taxation burden faced by millions of Americans living abroad, including U.S. citizens in Israel. As the U.S. presidential election approaches, this pledge is aimed at appealing to overseas voters. But for those who remember the 2017 tax reforms, skepticism should remain high.

"I support ENDING the Double Taxation of overseas Americans!" Trump declared, adding that the change would simplify tax compliance for U.S. expats. However, if you recall the last round of tax changes at the end of 2017, there was a similar promise for corporations.? The result though was very harsh for those U.S. citizens living in Israel, with many paying large tax burdens with no real benefit.

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Why U.S. Citizens in Israel Should Be Cautious

The U.S. stands almost alone in taxing its citizens based on citizenship, regardless of where they reside. For those living in Israel, this means filing tax returns in both countries and potentially facing double taxation, even with the availability of tax treaties and foreign tax credits. The compliance process is already burdensome due to the differences between U.S. and Israeli tax systems, particularly regarding pensions, investments, and income reporting.

While Trump's proposal could indeed bring significant relief by eliminating the need to pay taxes in both countries, the last time he implemented tax reforms, the outcome was far from straightforward. The 2017 Tax Cuts and Jobs Act (TCJA) introduced the Repatriation Tax, forcing U.S. citizens who owned Israeli businesses to pay taxes on overseas profits accumulated since 1986. Being a U.S. citizen living in Israel, with an Israeli company was not pleasant. The idea behind it was nice, and was supposed to stop future tax on foreign company income, but there were no real regulations that helped those individuals prevent future income from being taxed in the United States. Furthermore, starting in 2018, the Global Intangible Low-Taxed Income (GILTI) tax was imposed on non-U.S. companies owned by U.S. citizens in Israel, making it clear that tax simplification efforts can have unintended consequences.? This still plagues many small business owners who are “blessed” to have U.S. citizenship.

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What Could a New Reform Look Like?

If history is any indication, a sweeping change in expat tax policy could come with its own set of trade-offs. For instance, a reform similar to the repatriation tax could involve a forced exit tax for U.S. citizens living abroad. Just as the repatriation tax required companies to pay a one-time tax on profits held offshore, a comparable exit tax could mandate that Americans abroad pay taxes on their worldwide assets before transitioning to a new tax system, such as residence-based taxation. This would effectively mean a "settling of accounts" with the IRS before any relief could be granted.

Such a measure could be financially devastating for U.S. citizens in Israel who have built up savings, investments, or businesses over the years, potentially resulting in a significant one-time tax liability. Further more, like what happened to companies at that time, it can lead to double taxation.? Once now, in the US on a pretend sale, and then a second time in Israel when there is a real sale.? This would be similar to how the current exit tax works now for U.S. citizens who decide to give up their citizenship. The implications would be far-reaching, especially for those with substantial non-U.S. assets, who could be forced to liquidate investments to cover the tax bill.

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Is This Really a Game-Changer?

Not paying taxes based on citizenship could indeed be an incredible benefit to millions! For U.S. citizens living in Israel, this could mean less paperwork, fewer headaches, and lower compliance costs. But given the history of U.S. tax policy, there’s a real possibility that any new reforms may come with strings attached, just like the TCJA did.

Advocates for residence-based taxation argue that U.S. expats should only pay taxes where they live and earn their income, a system followed by most other countries. The chance of a full change in the near future is less likely these days than AI taking over most accounting jobs and making the process to file returns easier. What would be a beautiful change though would indeed be if some of the restrictive rules did change.? For example, the passive foreign investment company (PFIC) rules, or if GILTI tax and controlled foreign corporation (CFC) rules were mitigated if the company you own is also in the same country as where you reside.? True change could happen without all the negative strings attached if done correctly.? Instead of taking a bulldozer to the tax rules though, it needs to be more of a surgical procedure.

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A Promise Worth Watching, But Not Holding Your Breath

For U.S. citizens in Israel, the promise to end double taxation could potentially alleviate many tax burdens. However, it’s essential to approach this pledge with a healthy dose of skepticism. Past attempts at reform have left expats and businesses grappling with new complexities, and the introduction of a forced exit tax would only add to the challenges.

While Trump’s latest proposal puts the issue of expat taxation back in the spotlight, history suggests that promises of tax relief often come with unexpected costs.? It doesn’t hurt though to see this and dream of a somewhat better world that we can all get to.