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.