Via TaxProf Blog, we learn that the IRS has released its annual report on Individual Income Tax Returns, 2012. Page 9 has statistics on Foreign Earned Income Exclusion usage, from which we can calculate the average amount of the FEIE per return:
| 2008 | 2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|---|
| Number of returns w/FEIE | 371,885 | 396,405 | 415,519 | 445,276 | 475,386 |
| +6.59% | +4.82% | +7.16% | +6.76% | ||
| Total amount of excluded income (constant 1990 US$ million) |
13,899 | 14,907 | 15,482 | 16,305 | 16,866 |
| +7.25% | +3.86% | +5.31% | +3.44% | ||
| Average FEIE per return (constant 1990 US$) |
37,374 | 37,604 | 37,258 | 36,618 | 35,478 |
| +0.62% | -0.92% | -1.72% | -3.11% |
Here’s another way of looking at these numbers. Assume that all of the FEIE users in 2008 continued to be FEIE users in 2012 (or equivalently, that they were replaced by similar filers or married-filing-jointly couples), and that over that period they suffered the same drop of 0.96% in earned income (in constant 1990 US$) that all U.S. returns demonstrated on average during that period. What would the average FEIE for each of the one hundred thousand marginal new filers have to be in order to fit with the above figures?
Answer (again, in constant 1990 US$): US$29,709, almost exactly the same as the average earned income across all U.S tax returns.
Few “wealthy expats” among new filers or non-filers
The average amount of FEIE has always been higher than the earned income on the average U.S. return. Homeland pundits often take this as confirmation of the stereotype of “wealthy expats getting great tax breaks”. However, the more likely explanation is that well-paid folks often have tax advice to match their wages (e.g. thanks to tax assistance provided as part of corporate international assignment packages) through which they learn of their U.S. filing requirements and hence show up in FEIE statistics, while people of more average means — whether expats in less high-flying jobs, or ordinary employees living in the countries they think of as home — don’t show up in FEIE statistics because they don’t know they have to file.
Of course, the total number of FEIE users remains less than a tenth of the estimated number of “U.S. Persons” outside of the U.S., and the number of FBAR filers is not much higher, either. This suggests that the IRS’ shock-and-awe OVDP-style publicity about “offshore tax evaders!” is doing a piss-poor job at making people aware of their filing requirements.
Naturally, the ranks of millions of non-filing “U.S. Persons” outside of the U.S. will include some financially successful “accidental Americans” from whom the IRS could extract significant taxes, if it can find them and get the cooperation of their governments. But in general, the increase in FEIE filers in the past five years demonstrates that average new filers are likely to be pretty average, and won’t owe the U.S. any taxes on their wages.
Alternative ways to extract money
The IRS might be able to get some money out of these poor folks deemed to be “U.S. Persons” by taxing unrealised gains in their retirement plans (which would be tax-free if they were U.S. plans). However, an average wage earner’s gains in such a plan are likely to be less than their U.S. personal exemption & standard deduction, meaning they wouldn’t owe any U.S. tax on those items either.
In other words, the only way the U.S. government can extract money from average “U.S. Persons” outside of the U.S. is to assess wildly disproportionate fines for their failure to report those plans as “offshore trusts”, or to go ahead with that rumoured hike that could take renunciation fees from their current level of $450 (already expensive compared to other first-world countries) to US$2,400 or beyond.
I think that there are many US homelanders who, when presented with this data, would immediately focus on the almost $17 billion of excluded income and ask “why aren’t we taxing that?”, even though the filers of FEIEs are already paying taxes on that amount in their country of residence, and in many if not most cases those taxes equal or exceed what they would be paying if they were US residents with US income.
Tokyo rose is correct, and it happens every year in a bill, where they call it closing loopholes.
I think we have to use the data to show that this represents the majority of returns.
It might be tough data to use. Those that have very high incomes are pegged at the $90,000 exclusion mark. Hence the data can show that less than half of the people use the exclusion. Those people would be those that are living in low tax districts and the majority in the high tax districts. In that respect, the word “median” would be used, rather than “mean”
The exclusion is the only tool to use in districts which don’t use personal income tax to raise funds. It is also used by most filers because of its simplicity.
Exclusions are necessary in places like UAE, which has a monster corporate tax rate higher than USA, but zero personal income tax. The data is interesting in relation to that populaation
I’ve learned that a wise filer (unlike myself) should use the tax credit so as to be able to carry forward credits to be used if indeed someone should ever need to use them later. For the population of persons who use smart tax professionals, the exclusion is not used and all tax credits (form 1116) are used. So, the people using tax credits are left out of the analysis. This population are those that can afford professional tax help or the time to strategize from home.
(Note that the media and the fair–sharers indeed have a meme war against credit crrying forward).
Great analysis—I will continue to think as to how it can be used.
What it tells me is that they now have another 100,000 returns to process each year, without getting any increased revenue from it. Well done!
If the FEIE is closed people will move to the Foreign Tax Credit. If they remove the Foreign Tax Credit and raise the cost of relinquishing to the rumoured $2400, people will truly be between a rock and a hard place.
@Mark Twain & Tokyo Rose: precisely. The Joint Committee on Taxation ignores the existence of the FTC and computes the “cost” of the FEIE as the tax that would be charged if all of the FEIE’d income were instead U.S. taxable income. They released their latest estimates earlier this month:
https://www.jct.gov/publications.html?func=startdown&id=4663
Their projections, of course, assume that the future growth rate in the number of FEIE users will resemble the past growth rate. But with FATCA, there’s probably going to be a huge one-time jump in the number of filers that their projections don’t take into account: people who learn about their filing requirement for the first time. When those people start filing, the JTC will claim that the “cost” of the FEIE is exploding, both because there’s more people taking it and because they think that future usage will continue to grow at a similar rate.
E.g. their last estimate of the “cost” was about $40 billion total for 2014–18. But if the number of filers is 4x what they expect, then they’ll claim the “cost” is $160 billion over those five years. By my eyeballing, that would make it one of the top 20 “tax expenditures”, beating out (for example) the $250k capital gains tax exemption for the sale of a primary residence. And of course it would be a much more tempting target for repeal than any of those other top 20, since those benefit constituencies that Congresscritters understand and generally sympathise with (e.g. highly-leveraged real estate investors, AKA “homeowners”).
That FEIE data doesn’t catch everyone who files returns owing nothing to Uncle Sam. Sometimes its just easier to use foreign tax credit.
Sally, in my 2010 tax I had to use both the FEIE and the Foreign Tax Credit, plus charitables (in Canada you can declare charitable donations as a covered by the treaty), in order to nullify tax owing. The way you do it is you must calculate how much tax you paid on the part of the income not covered by the FEIE. In Canada, since all income is lumped together, you simply do an equation to deterimine amount tax paid earned income and then the remaining tax was paid on the unearned income.
The US is pushing water uphill to get ex-pats to file. If there are 475000 FEIEs filed and approximately 7M US citizens about that makes a filing rate of only 7%. That means 93% either aren’t aware or won’t file. It’s not a resounding success.
If the US raises the renunciation fee to $2400 it shows the US is continuing an effort to handcuff people to the US. If they do that all they’ll find is people going for relinquishment or not bothering at all.
The US has to understand it doesn’t have full control outside of its borders. For me raising the renunciation fee is yet another reason to be ashamed of the US.
Yawn, FEIE is for idiots honestly. Ah yes, go ahead and report that income, go ahead and document every last cent and send it off. Surely, FEIE will never *poof* vanish, leaving behind a wonderful documentation of how you earn money overseas and every other detail about you that the IRS never had any business knowing. Dare to decide it’s time to reduce the amount you report? There’s a red flag.
Generally, here’s the ticket to follow: lie, lie your ass off. Tell them only of income passing through the US which they 1) already know about and 2) can link directly to you.
Are you married overseas? File SINGLE. The IRS has zero business with your spouse.
Are you running a business overseas and making money? Tell them NOTHING.
With FATCA, the only thing that changes really is I keep shit out of my name… but I’ve been doing that for years anyways. And as for me… I live under a bridge and survive on scraps of cheese left over in thrown away pizza boxes… That’s all the US and IRS need to know.
Very refreshing, Fred. Many will take your advice.
@Fred – Keeping everything out of your name is putting you at risk you shouldn’t have to be left exposed. How about if the person’s name everything is in leaves you or dies? Why should you have to run your finances like a child or someone declared incompetent? Why shouldn’t you have full financial freedom like other persons in the world?
Keeping things out of your name may be a short term strategy, but long term it’s risky.
Personally I don’t want to live in the financial shadows because of FATCA particularly I’m a dual citizen.
FATCA needs to be properly debated and carve out dual citizens.
Eh, just keep everything all nice and contractual. Not on record anywhere until is has to be… and burn that bridge when I get to it.
Fred is right, have you seen the forms, ??? they want your employer, their address, their phone number,. remember you are not a slave, refuse to be treated like one, they can shove their 1040 up their ass, never set foot in the USA and they cant do anything
I wonder how many of these new-found taxpayers will prove to be short-term taxpayers preparing for their renunciations.
Petros, my only point was that if you only look at FEIEs you don’t catch all the cases of “new taxpayers added that don’t owe anything”. There are those that have to do both FEIE and the FTC like you did, and those where one or the other will suffice. Unfortunately we can’t add the new FEIE and FTC cases to get the total new cases that don’t owe anything, because of those who had to do both.
The FEIE number thus is a lower bound.
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