As covered in our US Expat Taxes Explained series, the Foreign Earned Income Exclusion (Form 2555) provides American expatriates protection from dual taxation on their expatriate tax return and, for many, the ability to afford a life overseas. With recent legislation, American citizenship is already a bad beginning to any relationship with a financial institution overseas. The potential elimination of the Foreign Earned Income Exclusion could prove to make life as an American living overseas quite expensive. In the long run, it may even have negative effects on America’s presence in developing markets around the world. As reported by The Royal Gazette’s article “US Crackdown Could Threaten Americans’ Tax Break on Foreign Earned Income,” this has been tried before, and let’s just say the results were bad for all parties involved.
“Eliminating the FEIE today would destroy the network of Americans representing U.S. interests in areas such as the Middle East, Hong Kong and Singapore all fast growing markets, vital to the development of U.S. exports. Congress must not repeat the mistake made in the late 1970s when FEIE was eliminated with the Foreign Earned Income Act of 1978 (P.: 95-615).”
What Happens if the Foreign Earned Income Exclusion is Eliminated?
Typically speaking, Americans living abroad hold mid-level or higher management positions at multinational corporations and could face significant taxation on their salaries. A single expat earning $92,900 per year would currently owe nothing on his/her 2010 taxes, but this individual would face income taxes of $16,000 in the event that the Foreign Earned Income Exclusion were eliminated. This could considerably decrease the affordability of representing your country overseas and price US citizens out of overseas jobs.
Why are US Expat Taxes Changing?
“The American Jobs Act 2011, highlighted in President Obama’s “Buffett Rule” speeches, focuses on helping domestic Americans get back to work. H.R. 1265, the “Stop Tax Haven Abuse 2011” has a primary focus based on its name.
Revenues will need to be raised to offset these programmes, and “it is currently thought by some members of Congress that elimination of Foreign Earned Income Exclusion would generate additional tax revenues”, according to the non-profit American Citizens Abroad Executive Director, Marylouise Serrato.”
The need for additional budgetary changes are certainly important for the United States to reduce the current deficit and unemployment. It is, however, important for the government to understand the implications of eliminating the Foreign Earned Income Exclusion before taking drastic moves that could eliminate the American presence in markets and regions that are currently entering their critical growth periods. This move could also discourage US citizens from taking jobs overseas and thus increase unemployment within the USA.
For more information, please visit the American Citizens Abroad website at www.americansabroad.org. For those who would like to contact the Super Committee of Twelve Lawmakers considering the elimination of the FEIE, more information can be found at http://www.aca.ch/joomla/images/pdfs/comm12.pdf.
Additional Information About Your Expatriate Tax Return
- Read our tips about how to save money when filing your expatriate tax return
- Determine whether or not you need to file an expatriate tax return
- More information about The Foreign Earned Income Exclusion