The IRS’ Statistics of Income division has released the latest data on individual income tax returns (hat tip: TaxProf Blog). You can download the full PDF, or go to the list of tables. This report is mostly a dry list of figures slicing tax returns every which way. I’ve extracted some numbers which may be of interest to U.S. Persons abroad, and tried to come up with some theories to explain them. If you have any better theories, feel free to suggest them in the comments.
The SOI’s reports are aimed primarily at policy-makers and people with a “macro” view, so they list all dollars amounts in totals. I’ve converted those to average amounts for this summary. The usual caveat about averages applies here: an average is not a median or a mode. Note also that all these statistics relate to 2010. The IRS always has significant delays when releasing data. Even when there’s a law telling them to go faster, they ignore it. Later this year they’ll hopefully be releasing information on how many people filed Form 3520 recently; I’m very curious to see if the numbers show any significant growth as more people become aware — thanks to the OVDI publicity — that their ordinary tax-compliant retirement plans are “foreign grantor trusts” in IRS-speak.
Foreign Tax Credit
[pages 5, 45, 47, 98, 100]
Nearly 6.7 million taxpayers took the FTC in 2010; however, this isn’t a particularly useful indicator of U.S. Persons abroad, because it includes Homelanders with foreign investments as well. The IRS did not provide a breakdown of the categories of income (“general” vs. “passive”) on which foreign tax credits were taken, even though separate Form 1116s must be filed for each category of income. Presumably most of the Form 1116 filers taking FTCs on “general income” (mostly wages) would be U.S. Persons abroad, but unfortunately this report doesn’t help us find out how many of them there are. So I’m not going to bother doing any analysis on this number; I’ve listed the page numbers above in case anyone wants to do their own.
Foreign Earned Income Exclusion
[pages 3, 44, 46, 57, 81]
415,519 tax returns took the FEIE in 2010, up by 4.8% from the previous year. The average amount of income excluded was US$62,147, as compared to $61,709 the previous year. (The rise of seven-tenths of a percent was significantly below inflation for the same year.) 178,227 of these were married-filing-jointly (with an average exclusion of $72,695), 60,997 were married-filing separately (average exclusion of $50,272), 19,441 were heads of household (average exclusion: $68,727), and 156,854 were single (average exclusion: $53,965). Out of those returns, 274,766 resulted in no tax whatsoever collected. It’s not clear whether the rise in FEIE usage is due to an increase in the number of U.S. Persons abroad, or just an increase in the number who have become aware that they should be sending useless pieces of paper to the IRS.
By age, the FEIE was claimed by 15,328 of 18-to-25s (average exclusion: $23,831), 91,819 of 26-to-34s (average exclusion: $52,040), 112,832 of 35-to-44s (average exclusion: $67,379), 101,081 of 45-to-54s (average exclusion: $72,767), 72,047 of 55-to-64s (average exclusion: $65,981), and 22,412 of 65-and-ups (average exclusion: $42,298). I’m a bit surprised that excluded income peaks in middle age rather in later career. Possibly the data for that age group is skewed by corporate assignees who come overseas with big expat benefit packages, and then go home a few years later? Less surprisingly, “earned income” drops significantly after age 65, when most U.S. Persons abroad are depending on pensions and public funds — which the IRS will tax as “unearned income” if those funds are coming from “foreign” countries.
Foreign Housing Deduction
[pages 4, 44, 46, 60]
That number of returns with people taking the FHD fell by nearly two-thirds, from 7,945 to just 2,761. Conversely, the average amount of the deduction was US$26,884, up by more than half from the 2009 value of $17,091. The underlying data at page 60 hints at a sort of bimodal income distribution for people taking the FHD in 2009, with a big clump of taxpayers barely squeaking into the amount of income where it would be useful, and a smaller group who were well within the range; in 2010, the first group of taxpayers found their income reduced so much that they got by with just the FEIE. Of course, some of the drop in the number of FHD users is also attributable to people giving up citizenship or green cards.
The vast majority of taxpayers taking the FHD were married-filing jointly (2,218 returns, average deduction: $23,450), 152 were married-filing separately (average deduction: $32,000), 15 were heads of household (average deduction: $29,000), and 376 were single (average deduction: $45,000). It’s pretty strange that single taxpayers had a much higher average deduction than married ones. Intuitively, you’d expect married U.S. Persons abroad to be spending more so they’d have enough space for their kids. Maybe single U.S. Persons abroad are spending lots of money on nice apartments in hopes of attracting a nice local boy or girl, so that they’ll no longer be single and can get citizenship through them? Or maybe a large number of U.S. Persons abroad married to non-U.S. Persons got conflicting advice about whether the IRS really considers them married?
By age, the FHD was claimed by 21 of 25-to-24s (average deduction: $11,000), 865 of 35-to-44s (average deduction: $34,500), 1,356 of 45-to-54s (average deduction: $15,510), 503 of 55-to-65s (average deduction: $44,500), and 16 of 65-and-ups (average deduction: $46,000). I have no good theory to explain the low average amount of the FHD in the 45-to-54 age group. Maybe this group is most likely to have other deductions for educational expenses relating to their children, but presumably they’d fill out Form 2555 first and calculate their FEIE and FHD before getting to the parts of 1040 where they take deductions for school fees.
Thanks for taking the time to sift through this. It’s too bad they don’t break it down by foreign vs US address, since that would provide a lot more information.
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*Only 415,519 out of 6+ million expats filed FEIE? That seems a bit odd. One would think that the number would be much higher than that.
@swisspinoy: technically speaking it was more like 600k — there were about 180k married-filing-jointly returns, each representing two U.S. Person filers. The married-filing-jointly, married-filing-separately, and head-of-household returns probably also have some U.S. Person dependents. Probably not so coincidentally that’s very similar to the number of FBAR filers — 618,138 FBARs filed in 2011 — which was already a jump of nearly 50% since the previous year.
And of course there’s people who take the FTC only without the FEIE to avoid their passive-category income getting “stacked” into the 28% bracket. Still, even with all that — you’re right, the compliance rate is very low.
Clearly there’s lots more expats to hunt down and cook.
Thanks very much for the stats, will have a look as well.
As for the rise in use of FEIE, could also be do to exchange rates. 2010 saw the dollar decline against many currencies, so this in turn made US taxpayers abroad look richer to the IRS and they may have needed to use the FEIE in 2010 whereas in prevous years they may have been no need. Anyhow 2011 stats should show this more dramatically
@swisspinoy: 6 million is a wild shot-in-the dark estimate of how many people, living outside the United States, are US citizens as US law defines it. It includes people born accidentally in the US who haven’t been there since infants, children born abroad with a USC parent who have never been to the United States, many people who don’t speak English, many people who would be astonished and enraged to find that anybody, let alone the US government, considered them to be US citizens, and on and on. Only a subset of the 6 million are ‘expats’ in any recognizable sense.
@Eric, re numbers of potential US citizens/taxable persons filing married jointly status – is it the case, that a non-US taxable person – with no connection to the US could have agreed to be included in the reporting in order to let the UStaxable spouse file jointly – to get the larger exclusion? Which is an irrevocable election?
Just thinking that in better times – when the US was not so punitive, and was not enforcing the FBARs, or before the penalty structure and conditions of the FBAR wasn’t ramped up, couples with a non-US and a US spouse might have opted to start filing married jointly, and now cannot change that?
Now, it would be a very bad choice to start including an otherwise non-US spouse in the reporting and penalty unless there is an other choice or very compelling reason.
@badger, I have never made much money compared to my wife. So this never came up for me, but it has for other spouses, who file as non-resident aliens. My reaction to this possibility has always been, Yeah, you’d like that wouldn’t you? — Finally, my only choice was to renounce in order to protect my wife’s hard work. This is why I am so adamant about certain filing requirements. I have a duty to protect my Canadian wife from a foreign invaders.
It looks like, we are making the same mistake the homelanders making. This message is assuming only expats file FBAR, FEIC or FTC. Many people, who file FTC may be green card holders or long term residents who have other income in their home countries. Also many Americans have business interests in foreign nations and must file FBAR (e.g. Romney). In fact, rich homelanders who has overseas investments usually depend on cross border CPAs who would know about FBAR and file FBAR.
Thanks for the data. I would like to point out that besides the 274,766 returns with FEIE that resulted in no US tax (66% of all 415,519 returns with FEIE), there are 417,726 returns with foreign tax credit that resulted in no US tax. There may be some overlap between the two.
The 417,726 returns with foreign tax credit that resulted in no US tax probably have almost all of their income from abroad. Of these, 381,651 (91%) have an adjusted gross income of less than $100,000, so they are probably not Americans investing all of their money internationally, but Americans living abroad or immigrants who came to the US after retirement.
@Shadow Raider: nice one. For the overlap between FEIE and FTC, here’s a rough shot at it: page 57 has the breakdown of FEIEs by AGI. About 190,000 had AGI less than $5,000, i.e. the FEIE plus any above-the-line deductions cancelled out most of their income —probably their below-the-line deductions can take care of the remaining couple of thousand dollars, meaning they’d owe no tax. I’m guessing the other 220,000-odd filers would be the ones taking the FTC in addition to the FEIE.
Another thing I always wondered: a few months ago the IRS was trumpeting that story about tens of thousands of Americans who allegedly paid no tax anywhere in the world. But I always wondered: if the taxpayer didn’t include a Form 1116, how would the IRS know the foreign tax paid? It’s really hard making head or tail of this FTC data. Sometimes I think that’s deliberate: easy fodder for bureaucrats and Congresscritters to put some ridiculous spin on it.
@Bharat: I wonder how many Homelanders lie about living abroad so they can take the FEIE. I could swear I read an article about a case a couple of years ago where someone was living in New York but told the IRS he was in London. Of course, the fact that I was reading about it in the newspaper should tell you: they caught the guy. Guess the IRS are more careful about matching up everyone’s W-2s and 1099s these days.
As for FBAR: given that the number of participants in the OVDP was only in the tens of thousands, there’s only two ways to explain the increase of two hundred thousand FBAR filers from 2010 to 2011: either a lot of people suddenly opened foreign accounts (not likely), or a lot of people started making “quiet disclosures” without rectifying past non-filing. My gut feeling is that “quiet disclosures” would mostly be coming from U.S. Persons abroad, who feel slightly more protected from the wrath of the IRS than domestic filers would.
*Do I understand it correctly that US persons abroad may give their non-resident alien spouses $134000 tax-free annually, without such needing to be reported anywhere?
@swisspinoy, From the IRS:
Gifts to your spouse. You must file a gift tax return if you made any gift to your spouse of a terminable interest that does not meet the exception described in Life estate with power of appointment, or if your spouse is not a U.S. citizen and the total gifts you made to your spouse during the year exceed $136,000.
For gifts made to spouses who are not U.S. citizens, the annual exclusion has been increased to $136,000, provided the additional (above the $13,000 annual exclusion) $123,000 gift would otherwise qualify for the gift tax marital deduction.
http://www.irs.gov/instructions/i709/ch01.html
The text of the bill by Carolyn Maloney has been released.
It looks like she is not willing to abolish citizenship-based taxation. The seven matters to be studied by the commission are: financial reporting (FBAR), access to foreign banks (FATCA), citizenship to children, ability to vote, Social Security and Medicare, student loans, and other federal programs. No mention on taxes or the IRS. And the commission would only make recommendations on administrative actions by federal agencies, not on laws.
The members of the commission, if not already US federal employees, would be paid at level 4 of the executive schedule, which is currently $155,500 per year.
There is no need for this commission as the work has already been done by ACA and others, and the relevant information is already available. The $3 million would be better spent on other things.
Spring 2014 Statistics of Income Bulletin has lots of statistics on FTC & FEIE usage, broken down by countries
http://www.irs.gov/pub/irs-soi/14insprbulforearnincome.pdf