As part of their newly-published paper on “Options for Reducing the Deficit“, the Congressional Budget Office has suggested, as Option 12 (at page 130), to “Include All Income That U.S. Citizens Earn Abroad in Taxable Income” — in other words, to eliminate the Foreign Earned Income Exclusion and Foreign Housing Deduction. They estimate that this would bring in US$33.3 billion over the next five years, and US$88.5 billion by 2023 — roughly an order of magnitude more than the US$8.7 billion that FATCA is expected to reap in the course of a decade.
This is the third proposal this year to eliminate the FEIE. Eight months ago, the Congressional Progressive Caucus derided the FEIE as the “Foreign Earned Income Loophole” and claimed that eliminating it would raise US$71 billion over ten years (not clear whether they include the FHD in that number). Days before that, when Dennis Ross (R-FL) presented his own hilariously hypocritical plan to kill the FEIE so that corporations could enjoy territorial taxation, the Joint Committee on Taxation estimated that cutting both the FEIE and the FHD would raise US$36.3 billion over five years. CBO states that they are are using the JCT’s new estimates as updated for 2014.
As previously pointed out, the JCT estimates seem to assume that the “cost” of the FEIE is the foregone tax on all of the excluded income by U.S. Persons who file form 2555 — 415,519 excluding an average of $62,147 each, according to 2010 data — when in reality, if the FEIE were eliminated, many of them would simply switch to using the more-complicated Foreign Tax Credit, incurring higher tax preparation costs, but offering no corresponding benefit to the U.S. Treasury. Bizarrely, CBO acknowledges this prospect in their report, but doesn’t adjust their estimates to account for it:
U.S. citizens who live in other countries must file an individual U.S. tax return each year, but several provisions of the tax code reduce their U.S. tax liability. First, those citizens may exclude from taxation some of the income they earn abroad: up to $97,600 for single filers and up to $195,200 for joint filers in calendar year 2013. (Those amounts are adjusted, or indexed, for inflation.) Second, under certain circumstances, U.S. citizens living abroad can also claim an exclusion or deduction for any allowance their employers provide for housing in a foreign country. Those two tax provisions—combined with the personal exemptions and deductions available to taxpayers living in either the United States or other countries—mean that U.S. citizens who reside abroad and earn over $100,000 (or, in the case of married U.S. citizens living abroad, over $200,000) may not incur any U.S. income tax liability, even if they pay no taxes to the country in which they live. Third, if those citizens pay taxes to the country in which they live, they can receive a credit on their U.S. taxes for foreign taxes paid on any income above the U.S. exclusion amount. As a result, most U.S. tax filers who live abroad do not have any U.S. tax liability.
This option would retain the credit for taxes paid to foreign governments but would require U.S. citizens living overseas to include all of the income they earned abroad, including housing allowances, in their adjusted gross income. (Adjusted gross income includes income from all sources not specifically excluded by the tax code, minus certain deductions.) As a result, U.S. citizens living in countries with lower tax rates than those in the United States would tend to owe more—and, in some cases, potentially much more—in U.S. taxes than under current law, while U.S. citizens residing in countries with higher tax rates would generally continue not to owe U.S. taxes on their earned income. The staff of the Joint Committee on Taxation estimates that implementing such a change would increase revenues by $89 billion over the 2014–2023 period.
(Of course, there are far more than 415,519 Americans residing abroad, but contrary to the assumptions behind FATCA and similar laws, no one actually knows if these non-filers are earning much income at all, nor what portion of them live in low-tax countries and what portion live in high-tax countries. If non-filers are on average more like average residents of their countries, and are living in the more typical destinations for Americans abroad such as Canada, Mexico, and Western Europe — and less like the Middle East corporate assignees with Big 4 assistance who are the most likely to be aware of their U.S. filing requirements — then the U.S. is going to find very slim pickings from the pockets of its newly FEIE-less diaspora, especially in comparison to the cost of hunting down all these non-filers and processing their paperwork.)
The Congressional Budget Office goes on to demonstrate that — like far too many Homelanders — they do not understand the difference between moving overseas and renouncing citizenship:
One rationale for eliminating the partial exclusion for foreign earnings is related to a certain concept of equity—that U.S. citizens with comparable income should incur similar tax liabilities, regardless of where they live. Under the option, people could not move to low-tax foreign countries to escape U.S. tax liability while retaining the benefits of U.S. citizenship. (To discourage U.S. citizens from moving abroad to avoid taxes, the Heroes Earnings Assistance and Relief Tax Act of 2008 instituted a significant “expatriation tax” on the net worth of wealthy taxpayers who renounce their U.S. citizenship for any reason.)
As repeatedly noted by Brockers, this “expatriation tax” applies not just to “wealthy taxpayers” but anyone who cannot certify under penalty of perjury on Form 8854 that they filed every single one of the ridiculous paperwork messes the Homeland imposes on Americans abroad in the name of “horizontal equity”. And it is already the case under current law that people cannot “escape U.S. tax liability while retaining the benefits of U.S. citizenship” — if you live in a foreign country and receive unemployment or disability payments from them (funded out of high taxes you paid in prior years), the U.S. considers that “unearned income” and taxes you on it without any FEIE.
On the bright side, unlike every time they previously brought up the FEIE, at least Congress admits:
However, the United States is the only member of the Organisation for Economic Co-operation and Development that taxes the income of its citizens on a worldwide basis; therefore, eliminating the exemption for income earned abroad would move the United States further out of alignment with the rest of the world in terms of the tax treatment of foreign-earned income. Another argument for not making this change is that U.S. citizens who live in other countries do not receive all of the same services from the U.S. government that are available domestically, and they may receive fewer services from the low-tax countries in which they reside.
The fact that they point this out at all is a certain measure of progress compared to last year, and is doubtless in no small part thanks to Shadow Raider’s ongoing efforts to educate Congressional staffers on the uniqueness of the U.S.’ system of citizenship-based taxation.
@ Shunrata
You have mirrored my situation exactly apart from the country where we live. Oh my . . . I thought I was giving my kids advantages by helping them get US passports.
@shunrata
I’m very sorry to hear of your childrens’ situation, especially that of your son. I think you’re quite right to worry. If your son has filed a W-9 to get a TIN, that means the IRS will know about him. At some point I suspect their computers may pick up on the fact that he has a TIN but hasn’t filed a return (as you’ve said), and that might (or might not) set off alarm bells. I agree, at some point it’s quite likely he’ll show up on IRS radar.
I’m a little surprised to hear that so many “US persons” living in Israel are ignorant of the situation, or are ignoring it. When I first learned of FATCA in late summer of 2011, I came across several articles on-line I think from Jerusalem Post and other sources that suggested that Israeli-resident so-called US persons were getting caught in an OVDI meat-grinder. Unless they’ve been filing all along, my guess is they may be in for a very rough and disturbing ride, probably sooner rather than later.
As Atticus says above, anyone who is a long-term (or life-time) US expat is running out of reasons to retain US citizenship. If they’re not already out of reasons now.
@schubert
When my children were born my mother kindly arranged social security numbers for them(!)…
I have seen articles here and there in the Israeli press but I think the general understanding is that only wealthy people with millions they’re hiding in Israel or elsewhere are affected. Most people I know/knew there (I no longer live in the country) are definitely not in that category, just middle class or below.
So the more with-it ones file, others don’t, and like I said the children are almost totally oblivious.
When I lived there in the early 2000’s there was a drive by local accountants to get more people filing (and of course increasing their own business) by promoting the dependent child refund. Free money from Uncle Sam? What’s not to like? So a lot of people whose children may have otherwise stayed under the radar got SSN’s for their children and started listing them on their tax returns. Even worse, it was an impetus for some grandparents to arrange US citizenship for their grandchildren who did not automatically acquire it at birth because their parents didn’t spend the required years living in the US. I don’t know if it was part of a diabolical plot to snare more “US persons” for harvesting, but if so it worked rather well!
So these people who jumped on the bandwagon are possibly better off, as they are now tax compliant and don’t have to worry about getting hit for non-filing, but the question is what is going to happen with their children, many of whom have become adults in the meantime?
@shunrata
“Even worse, it was an impetus for some grandparents to arrange US citizenship for their grandchildren who did not automatically acquire it at birth because their parents didn’t spend the required years living in the US.”
I don’t understand how a child can acquire US citizen when neither of his parents have met the physical presence test.
I don’t understand how a child can acquire US citizen when neither of his parents have met the physical presence test.
Well, there’s special naturalization under 8 USC § 1433. Theoretically, the application has to be sent in by the parents (grandparents can only apply on behalf of the grandkid if the US citizen parent is deceased and the current guardian doesn’t object to the application). But I wouldn’t be surprised if State or USCIS were less than entirely stringent about checking for that consent, so as to herd as many people as possible into the barn.
And probably there’s some cases where the citizen parent does meet the physical presence test, deliberately chooses not to register the kid, but grandma & grandpa find out and disagree strongly enough to do it themselves by hook or by crook.
Nice present, grandpa and grandma!
A little off topic, but interesting: The US customs regulations classify people into residents and nonresidents. The details say that US citizens are deemed residents unless they show otherwise, and that anyone can claim to be a nonresident if staying in the US only temporarily, but the basic rule is still residence, not citizenship.
Maybe Customs operates on “International norms” as contrasted to Treasury, IRS and Congress…
I agree with Polly that RBT will never happen. Congress does not have the backbone to pass any effective legislation. RBT will also be incorrectly seen as a costly measure. As for earned income deduction, I always just exclude foreign taxes paid with IRS form 1116. Its quite simple to fill out if you don’t bother with trying to find deductions, which I do not need since I always owe zero taxes to Uncle Sam (I live in Canada).
@kermitzii
“I always owe zero taxes to Uncle Sam (I live in Canada)”.
I live in Canada as well. The problem with the foreign tax credit is that you can only apply it towards taxes that Canada and the US have in common, ie salary/capital gains. I think the biggest issue with the taxation portion of this ridiculous situation is that the US taxes things that Canada does not. Canada does not tax the gains from the sale of your primary residence, gains made in RESP’s, TFSA’s, RDSP’s etc., or lottery winnings. In all of those situations you would owe Uncle Sam the full pop because there is no Canadian tax credit to be applied.
Have most US persons in Canada been listing these types of income/gains on their US taxes? I doubt it. They probably just take their Canadian tax return, which only declares things that are taxable in Canada, and have a tax preparer transfer it to a US tax return. I believe that is why we hear so many US person Canadians say things like “I’ve been filing taxes for X number of years and I’ve never owed a dime”.
I can’t afford to pay all of the high applicable taxes here in Canada, then turn around and pay US taxes against all of the things that Canada does not. Most of us can’t.
@Marie
That’s a great explanation. Roger Conklin said, if you think doing your US taxes from abroad is easy, you must be doing something wrong. The only way to not owe the US a dime is to not be invested in many of the things that non-USP’s are invested in. Many people are now waking up to the fact that they are 2nd class Canadians due to US tax law.
The FEIE is now a subject of a TIGTA report… (note the bold comment)
The Referral Process for Examinations of Tax Returns Claiming the Foreign Earned Income Exclusion Needs to Be Improved
IMPACT ON TAXPAYERS
To alleviate double taxation of taxpayers earning foreign income while residing overseas, Internal Revenue Code Section 911(a) provides for the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion/Deduction. For Tax Year 2012, the FEIE allowed taxpayers to exclude foreign earned income of up to $95,100. Qualifying taxpayers living and working in a foreign country may also claim a limited exclusion or deduction for the amount of their housing expenses. These benefits can significantly reduce or eliminate taxpayers’ United States (U.S.) income tax liabilities regardless of whether they paid any foreign income taxes.
WHY TIGTA DID THE AUDIT
Because of the large dollar amount of this exclusion, it has a significant impact on an individual’s tax return. It is important for the IRS to ensure that taxpayers are properly qualified for and accurately claiming this exclusion. The overall objective of the review was to provide an overview of tax returns claiming the FEIE and the Foreign Housing Exclusion/Deduction.
WHAT TIGTA FOUND
Of approximately 140 million Tax Year 2009 individual income tax returns filed during Processing Years 2010 and 2011, 372,119 (0.27 percent) tax returns included a Form 2555/2555-EZ, Foreign Earned Income/Foreign Earned Income Exclusion. The exclusions, credits, and deductions claimed were as follows:
$23.3 billion in the FEIE.
$5 billion in Foreign Tax Credits.
$2.7 billion in Foreign Housing Exclusions.
$102.6 million in Foreign Housing Deductions.
From a statistical sample of 150 tax returns from a population of 331,405 Tax Year 2009 individual income tax returns claiming the FEIE and/or the Foreign Housing Exclusion/Deduction filed during Processing Year 2010, TIGTA estimated that U.S. taxpayers living and working in foreign countries who claimed the FEIE reduced their Federal income taxes by $562 million. Taxpayers claiming the Foreign Housing Exclusion/Deduction reduced their Federal income taxes by an additional $174 million for Tax Year 2009.
In addition, during Fiscal Years 2009 through 2011, 2,851 (99 percent) of the 2,876 individual income tax returns examined where a Form 2555/2555-EZ was present were not referred to an international examiner as required by IRS procedures. TIGTA estimated that improving the audit referral process could result in approximately $2.7 million in additional tax assessments, or $13.5 million over five years. Moreover, 1,583 examinations that were not required by the IRS to be referred might warrant referral to international examiners. (Note: Looking for more tax revenue) Referral of these tax returns could potentially result in approximately $1.5 million in additional tax assessments, or $7.5 million over five years.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS ensure that: 1) domestic examiners and their managers are aware of the international referral criteria and a cross reference to those criteria is incorporated into the Campus Reporting Compliance section of the Internal Revenue Manual and 2) the international referral criteria process is evaluated to determine if it should be expanded to include the Wage and Investment Division.
In their response to the report, IRS officials agreed with the recommendations and plan to take corrective actions.
Note: ACA has their report out and circulating it to Congress, fighting the impression that the FEIE is a ‘Tax Expenditure’. For those of you so impacted, you should be following this carefully…
The Section 911 Mirage (6 pages) Why the Foreign Earned Income Exclusion and the Foreign Housing Exclusion should be maintained.
Marvin,
My principal concern about this GAO report is the unintended, but perhaps the intended consequence of the focusing on the FEIE. Both the “average” Congressman and the average astute staff member that was probably not aware that it even existed, will be focused on this “Tax Break Giveaway” gift to those traitorous tax-evading Americans who live overseas to use this FEIE to escape paying their fair share of the great privilege of being an American.
To top off this fear the JTC already routinely identifies this is a tax expenditure right now as things are today. That makes it low-hanging fruit which can be easily harvested.
We should not be surprised if there is a rash of bills introduced in Congress to totally abolish this “tax revenue giveaway” as a direct result of this report, since it does nothing to make Congress aware of how important to our nation’s welfare it is to have Americans living and working abroad spreading American influence and selling American products that create jobs and prosperity here at home.
It also focuses attention on the additional tax revenue give-aways so generously bestowed on Americans who have left the country to evade paying their fair share of the tax burden which every American should bear. They are the allowing credits paid to foreign governments as well as the housing exclusions and deductions which total far more than the foreign earned income allowance itself.
Americans here at home are not permitted to deduct their housing costs on their tax returns, so why should this be permitted for those who flee abroad to escape paying their fair share? I hope I am wrong, but I fear this report may create more bloody battles against Americans living abroad.
Am I wrong? I sure hope so, but I fear that I am not.
@Roger Conklin, who could then bring to their attention the fact that they should not alienate American Citizen living abroad?
The GAO released their study of the FEIE. It basically said that the FEIE does not have a significant effect on exports, but that it can still be justified by fairness since citizens abroad use fewer (none?) services from the US government. The report also briefly mentioned ACA’s proposal as an alternative, but did not make any recommendation.
I’m glad that the GAO exposed the truth. I hope that this report will make Congress stop trying to justify everything with “economy” or “competitiveness”, and finally discuss the fundamental arguments, as we saw in the CBT forum earlier this month.
Huh, “exposed the truth”?!? It’s incredible how many misconceptions and false assumptions there are in that short article. And in the end they make no recommendation. Fantastic.
Thank you for posting the report, Shadow Raider. Sometimes these reports are more valuable for what they don’t say, such as how much the US would “save” in FEIE expenditures if the US went to residency based taxation!
@shadowraider
What worries me a bit is that the report is more cautious than the 1 page summary. I learned about the report from an article that was based on the one page summary and it didn’t sound good.
What I don’t understand is why they think that a foreign employer would eat the cost of any tax at all, especially for someone who is earning less than the FEIE. It would be the American employee who would be out of pocket.
I was surprised by how large the percentage was of people claiming the housing allowance (which I think is incredibly generous). I don’t know anyone who gets that. The rate for an area not far from where I live would essentially allow a person to rent a quite luxurious five-bedroom house, so I can see why homelanders get upset.
FEIE is fine for short-term expats who plan on returning to the US. It does nothing for emigrants who build lives outside the US with the intent of returning only for temporary visits.
IMO the report barely scratches the surface of the truth. Overall, it is just a bunch of whitewash to justify the status quo.
http://www.gao.gov/assets/670/663322.pdf
From page 35:
Benefits received principle:
An individual’s tax payments should bear some relationship to the government benefits that individual receives. Some experts we interviewed noted that U.S. citizens working abroad for the long term receive significantly smaller benefits from U.S. government services than those living in the United States, and that this difference may justify some tax relief for the former. However, other experts said that U.S. citizens living and working abroad benefit from federal services—such as national defense, foreign affairs, income maintenance, and basic research—that produce social or humanitarian benefits that are not directly apportioned to specific individuals. For example, citizens abroad benefit from years of public investment in their education, the cost of which is typically recaptured over their lifetimes. Regardless of the benefits they receive, U.S. citizens overseas must file a U.S. tax return and pay taxes owed unless they renounce their citizenship.63
Public investment in education? It took me ten years to pay off my student loans.
Can I get a rebate for any of those benefits I haven’t received? I am surprised that a government accounting office would take something as unsubstantiated as this from the homelander handbook. I guess other nation’s investmentments into their citizens is not of value compared to the good ol’ US of A’s!
We’re all more deserving of danger pay for what the US has provided for us while living outside of the US.
Alison Christians has an excellent comment on the GAO report
https://plus.google.com/107161554848887586356/posts
I tried to read the GAO report. There are a few glimmers of recognition of the reality for americans abroad, but a lot of hogwash.
I see my comment was poorly worded.
I tried to read the GAO report – it was full of hogwash. Alison’s comment was great
National defense? Foreign affairs? You mean like drone strikes?
Interesting that Afghanistan and Iraq were 4th and 7th respectively in relation to the number of forms 2555 filed (22,987 and 13,938). China also figured high up – 5th with 22,362.