Barron's International Tax Service

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Recent Legislation Affects Americans Abroad

The representative for the Internal Revenue Service in Paris chose the Ides of May to provide details of a new tax increase that could be the most costly affecting Americans abroad in 30 years. Applied under IRC Section 911, the announcement of TIPRA (Tax Increase Prevention and Reconciliation Act) appears innocuous. But a writer for the International Herald Tribune has scathingly condemned it. The Foreign Earned Income Exclusion (FEIE) has been raised to $82,400 from $80,000. But anyone whose income exceeds this threshold will be taxed at the rate applied to taxable income in the range between $80,000 and $100,000.

What this means is that if you have $10,000 in taxable income after taking FEIE and assuming you file married jointly, your tax liability would be $2,500 rather than pre-law $1,000. Or anyone having investment income in addition to excluded earnings of $82,400 will also be taxed at 25% (in this example) and not 10-25% as before. Of course if you happen to be filing Single or Married Separately, the tax rate percentages are even higher.

And what about the hallowed foreign housing cost exclusion (FHCE)? The new law limits the exclusion to $11,536 assuming 365 days of foreign residence. An example of this change is provided in the Herald Tribune article in which an American in Paris earning $75,000 and receiving $36,000 housing allowance would have to pay over $4,500 more in federal income taxes. Finally foreign pensions will be subject to US income taxes. Naturally concerns have already been raised that Americans will have a more difficult time being hired abroad simply because employers will find them more expensive.

Yet the United States remains one of the lowest income taxing countries. U.S. workers earning an average wage are subject, for instance, to 24% for both income taxes and Social Security. By comparison workers pay between 41 - 50% in many European countries. European countries also charge hefty Value Added Taxes amounting to as much as 25% as compared to 5 - 7% stateside.

The higher European taxes allow for universal health care systems as well as more generous state-provided pensions. Although lower taxes mean that Americans have more discretionary income, medical problems and unemployment hurt Americans more than Europeans.

Still even though Americans living in Europe may benefit from social systems here, they are bound to feel that Congress is hitting below the belt as they are already subject to European taxes, particularly as the new law adds another $200m annually to their tax burden. In 2003 Senator Charles Grassley wanted to eliminate the $80,000 FEIE as an unnecessary subsidy. So American expatriates were already targeted. Now with the erosion of FEIE and FHCE, more Americans are likely to find living abroad less affordable as they suffer this Congressional 911!