Expat
Exclusion Eliminated
Expats Must Pay U.S. And Foreign Taxes ~
By Steven Y.C. Kang
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On
May 8, 2003, the Senate Finance Committee (“the Committee”) by a vote of
12-9 passed the modification, put forth by the Chairman, Chuck Grassley
(R-IA), to the Jobs and Growth Tax Act of 2003 (“the Bill”), containing
many of the tax cuts advanced by the Administration, but with a much smaller
dividend exclusion than the total exclusion advocated by the President.
The full House of Representatives passed its own version of the bill on
May 9. In the revenue offsetting section of the Bill, the Senate
is proposing a repeal of foreign earned income exclusion and housing allowance
for tax years after 2004. Sec. 350 of the Bill and sec. 911 of the
Internal Revenue Code (“IRC”).
The Committee
believes that the exclusion under IRC Sec. 911 may result in an unfair
advantage for individuals who have moved to lower-tax foreign countries,
in that such individuals are taxed at a lower global effective rate than
similarly situated individuals living and working in the United States.
The Committee believes that U.S. citizens living and working abroad still
receive the benefits of U.S. citizenship and thus should pay U.S. tax on
their foreign income, subject to normally applicable foreign tax credit
rules. Sec. 350 of the Bill.
As the House
version of the bill does not contain similar provision, this difference
between the two bills will be reconciled through the Joint Conference Committee
during this summer. The reconciled bill is expected to be up for
vote around September or October of this year.
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Assuming that
the repeal of foreign earned income and the housing allowance is passed,
many US companies and US expats will need to change their compensation
strategy to maximize the applicable foreign tax credits and to lower local
country taxation.
As most European
countries have comparable tax rates as in the US, Americans working in
Europe will not experience an increase in their US tax burden, with proper
application of foreign tax credit. Unlike European countries, most
Asian countries have lower tax rates than in the US. As such, Americans
living in Asia will experience an increase in their US tax burden, even
after proper application of foreign tax credit.
Currently,
many US expats want their income to be sourced to foreign country to maximize
their foreign earned income exclusion and their housing allowance.
If the repeal is passed, then the tax planning will be changed to source
more income to the US while minimizing local country taxation (which is
the exact result that the Congress wants).
Many US companies
equalize the tax burden of its employees working overseas. With the
repeal of the foreign earned income exclusion and the housing allowance,
their equalization policies will have to be updated to incorporate this
change in tax strategy.
* (Update:
May 30th, 2003)
"On
May 28, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation
Act of 2003, H.R. 2. In the final version of bill, the repeal of
foreign earned income exclusion has been dropped. In a narrow vote
(with Vice President Cheney breaking the tie), the foreign earned income
exclusion has been saved."
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| Steven
Y.C. Kang, CPA & Associates offers extensive
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a large library of informative articles. To learn more about these services
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