| Uncle Sam
Give US Expats Some Good News And Then Some Bad News |
| By Don
D. Nelson, C.P.A., Attorney |
| Just when
it seemed Uncle Sam had forgotten those Americans living abroad, the IRS
and Congress have again changed the expat tax laws involving Americans
living and working abroad. The new tax provisions take effect for
the 2006 tax year and will benefit many expatriates and hurt others.
For many years
the foreign earned income exclusion has been set at a maximum of
$80,000 of earned income for those working and living abroad. That
exclusion has been increased to $82,400 for 2006, and $85,700
for 2007. To qualify for that exclusion you must live and work abroad
for a full calendar year or work abroad for a 12 month fiscal year period
and not return to the US more than 35 days during that 12 month period. |
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| This change
is obviously good for everyone. For partial tax years the exclusion
is pro-rated.
The not so
good part of the change involves the tax that will now be imposed on the
income (foreign or from the US) that you make in excess of the foreign
earned income exclusion. Under the old law, all taxable income in
excess
of the exclusion on your expat tax return began to be taxed in the lowest
brackets (as if you had no previous income) and then the rate increased
as the amount in excess of the exclusion increased.
Under the new
tax law, all income in excess of the exclusion will now be taxed at the
same tax bracket as it would have been taxed if the $82,400 exclusion had
also been taxed. Therefore, for 2006 each dollar of income you make
over the maximum exclusion amount will be subject to a 28% tax bracket
rate if are single whereas previously it would have only been subject to
a 10% tax rate.
This will cause
a lot of high earning Americans in low tax countries to pay taxes since
the higher bracket may not be totally offset by the credit of their
Mexican income tax. |
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| The next
change in the expatriate laws involves the foreign housing exclusion or
foreign housing deduction. Those expenses would be rent expense
on your foreign residence plus cleaning, maintenance and utilities incurred
in connection therewith.
The housing
deduction or exclusion is allowed in addition to the maximum foreign earned
income exclusion and therefore comes into play when you exceeded that
maximum amount. Previously in 2005, you could deduct all of these
housing expenses in excess of approximately $12,000 without any maximum
limit. Now for 2006 you can only deduct these expenses in excess
of $13,184 up to a maximum of $11,536 in most of the world.
The IRS has
published Notice 2006-87 which gives a higher maximum deduction to those
living in countries with a higher cost of living. Hong Kong
is the highest with the maximum over $100,000. So if you are paying high
rent, utilities, etc. you can no longer deduct those amounts. |
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| If you own
your foreign residence, you can still deduct all of your property taxes
and mortgage interest on Schedule A but with some exceptions you cannot
use the housing exclusion or deduction.
Remember, if
you live abroad on 4/15/07, your 2006 return receives an automatic extension
until June 15th, but any tax due (as it may be for the first time in 2006)
is payable on April 15th to avoid imposition of interest and penalties.
Don Nelson
has been assisting expatriates living in abroad for over 31 years. He is
one of the recognized world authorities on U.S. Tax law concerning
residents living abroad. His website is located at www.TaxMeLess.com.
For the most recent news on US expatriate tax matters go to his blog at
www.usexpatriate.blogspot.com
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