Biggest tax hit to expatriates in 30 years

[Unlikely Olive]

http://www.iht.com/articles/2006/05/12/news/expats.php

Americans living abroad reacted angrily Friday after the U.S. Senate approved $70 billion in election- year cuts that will benefit wealthy taxpayers in the United States but impose what some tax experts called the biggest tax increase on American expatriates in 30 years.

Americans working abroad will be exempted from paying U.S. taxes on the first $82,400 of their foreign earned income, up from $80,000, but the tax exemption on foreign housing expenses will be significantly reduced, and investment income will be taxed at a higher rate, by up to 20 percent more in some cases.

In addition, the amount of foreign earned income that surpasses the level of exemptions will be taxed as though the income was earned in the United States, at a much higher rate, and income from foreign retirement accounts, which previously did not reach taxable levels, can now be taxed.

"This is the worst hit to Americans living abroad for three decades," said Eric Way, a tax specialist at the Federation of American Women's Clubs Overseas, who also works as a senior engineer in France for Volvo, the Swedish truck company. He estimated that Americans abroad who currently earn $20,000 in investment income could expect to see their U.S. tax bill double.

A single manager living in Paris who earns $75,000 and has his $3,000-per- month housing paid by his company would see his income tax bill rise to $5,110 from $600 because of the capping on tax exemptions for housing costs, Way said.

The changes, will apply to the 2006 tax year. They were introduced in a last- minute modification to the tax bill, which Senator Charles Grassley, Republican of Iowa, chairman of the Senate Finance Committee, helped to guide through Congress. In 2003, he played a key role in trying to eliminate the $80,000 exclusion on income earned by Americans abroad. Grassley called the exclusion an unnecessary "subsidy" and contended that it did little to increase U.S. exports. His efforts to repeal the tax break failed, however, following a corporate lobbying offensive that extended to President George W. Bush, who is expected to sign the current legislation.

Republicans are hopeful that the current tax legislation will give a lift to Bush and the Republican-controlled Congress, which have experienced their lowest approval ratings in polls since his election in 2000.

But many Americans abroad protest that it unfairly targets them. The joint committee on taxation in the U.S. Congress estimated that the new measures would add a new tax burden of $200 million a year for the 4.1 million Americans - excluding military personnel and foreign service officers - living outside the United States.

John Fredenberger, an American tax lawyer living in France, said that the measures would make hiring American workers more expensive and risked undermining the competitiveness of American multinationals at a time when the weakness of the dollar against the euro was already reducing the purchasing power of Americans working abroad who get paid in dollars.

The United States is the only developed country in the world that continues to impose worldwide income tax on its citizens working overseas. Tax experts say that new taxes on Americans working abroad could prompt U.S. companies to start hiring employees from places such as Britain and Canada, while provoking American executives in Europe and Asia to return home.

American taxpayers working abroad can deduct some housing expenses, a benefit that has helped attract American executives to jobs in high-cost European capitals such as London or Paris.

But under the new system, this tax exemption on housing will be capped at $11,536, although is some cases the Internal Revenue Service could adjust it based on geographic differences in the cost of living.

Gregg Svingen, an American living in Brussels and a consultant at the Centre, a public affairs institute and communications consultancy, said that the new tax legislation risked undermining the U.S. presence abroad at a critical time in trans-Atlantic relations.

"At a time when more than ever Americans need incentives to live outside their borders and participate in business and NGOs, this is a clear disincentive to go abroad," he said.

Lucy Stensland Laederich, a freelance translator based in Paris and American liaison for the Federation of American Women's Clubs Overseas, said she was particularly aggrieved that her France- based retirement fund would now be subject to U.S. income taxes.

"We are 4.1 million ambassadors living outside the U.S.," she said. "We buy American products, fly American airlines, send our children to American universities and improve the image of Americans overseas. Why are we being punished?"

[annabel lee]

Originally Posted by Unlikely Olive

But many Americans abroad protest that it unfairly targets them. The joint committee on taxation in the U.S. Congress estimated that the new measures would add a new tax burden of $200 million a year for the 4.1 million Americans - excluding military personnel and foreign service officers - living outside the United States.

That's a "new tax burden" of $50 per person. Seems like there's something wrong with one of those numbers...

[schleprock]

This just seems incredibly misguided. This provision will incent some portion of those 4.1 million US citizens living abroad to release their current jobs to locals, or -- more likely -- to expats from countries with much smarter governments, and return home to take jobs from other Americans. Isn't it usually the Democrats who are supposed to impose tax hikes on relatively small segments of the population at the expense of the economy?

[DW Simpson]

Originally Posted by annabel lee

That's a "new tax burden" of $50 per person. Seems like there's something wrong with one of those numbers...

I think they meant $20 billion, with new average tax burden of roughly 5 grand. This ain't cool, I hadn't expected this to pass.

[tommie frazier]

that would have a HUGE impact on people considering actuarial jobs in cushy off shore locales, no?

[DW Simpson]

Originally Posted by tommie frazier

that would have a HUGE impact on people considering actuarial jobs in cushy off shore locales, no?

Depends on how actuarial employers adjust their compensation packages for this new financial pie in the face.

[Bermuda Onion]

Great. Just great

[wooHoo]

Freakin fantastic....

[Bermuda Onion]

Originally Posted by D.W.

Depends on how actuarial employers adjust their compensation packages for this new financial pie in the face.

Yep, Surely some companies will tax on a tax credit to the housing allowance so that it is all a wash. Some companies will certainly not do this...


In other great news , there is a stacking rule which may have as large or larger effect on our taxes. In short, the first dollar above any exclusions used to be taxed at the first dollar rate (like it was your first dollar earned) now it is taxed lkie it is your 90,000th dollar earned. I am sure I have the math wrong there but that is how my tax professional paraphrased it. He said this would double the effect of losing the housing exclusion for some people.

The bill will...

introduce a “stacking rule” whereby individuals claiming these exclusions would be subject to the same rates of U.S. tax as individuals working in the United States. In other words, the exclusions would no longer be treated as coming “off the top” of an individual’s income. This is similar to the “exemption with progression” method applied under certain income tax treaties.

F U Senator Grassley

[Incredible Hulctuary]

They are taking advantage of the expats' reduced ability to be informed about this beforehand and take action against it.