Review Of Tax Exemption For American Expats Inconclusive

By Editorial 26 May, 2014

The Government Accountability Office (GAO) has found that it is unclear whether the foreign earned income exclusion (FEIE), claimed by United States taxpayers living and working abroad, provides any net economic benefits.

Since 1926, a special tax exclusion for foreign earned income, as well as an exclusion and deduction for foreign housing costs, has been available in the US tax code for American citizens working abroad. Those tax breaks cost an estimated USD4.4bn in 2013.

Under the current US citizenship-based system of taxation, Americans abroad remain subject to US taxation as though they were still US residents, although American Citizens Abroad has previously pointed out that "88 percent of all tax filings from overseas result in no tax due."

In the 2014 Fiscal Year, the FEIE will allow taxpayers to exclude foreign earned income up to USD99,200 on their individual income tax returns. The FEIE thereby reduces the tax liability of US taxpayers working abroad even if they paid no foreign income taxes to another country. US taxpayers in higher tax countries can also eliminate their US tax liability using the foreign tax credit, which is intended to prevent double taxation when foreign income is taxed by both the US and a foreign country.

For tax year 2011 (the most recent data available), the GAO discovered that 445,000 tax returns claimed the FEIE, which is 0.3 percent of all individual tax returns filed. About 17 percent of FEIE filers also claimed the foreign housing exclusion or deduction. Over half of FEIE filers reported working for a foreign employer, but less than one-third reported working for a US company. The balance reported working as self-employed or for other entities.

GAO was asked to evaluate the potential advantages and disadvantages of modifying or removing the exclusion.

It found that, "in terms of good tax policy, there is room for debate regarding how potential revisions to the current tax expenditure may affect choices about where to work and who to hire. It may have positive and negative effects on both the efficient allocation of labor resources, but the magnitude of these effects is unknown, making it unclear whether the tax expenditure provides any net economic benefits."

GAO said those uncertainties concerning its effect make it difficult to draw definite conclusions about certain policy alternatives.

It said: "Repealing the tax expenditure would reduce the tax inducement for US citizens to relocate to lower tax countries, but would also make US citizens more costly for any employer to hire than citizens of most other countries, which do not tax foreign earned income."

"Removing the maximum limit for the exclusion would eliminate the tax cost differential with other countries, but would allow high-income individuals to avoid US taxes on foreign earned income," it continued.

It concluded that "targeted tax relief may be justified for extreme cost of living areas, and the design of any alternative would affect the complexity for taxpayers and the Internal Revenue Service, as well as the federal tax cost."

Tags: Individuals | Tax | United States | Tax Breaks | Tax Reform | Individual Income Tax | Expats |


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