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Expat US taxpayers lose FEIE
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wanderer
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PostPosted: Thu May 08, 2003 6:26 pm    Post subject: Expat US taxpayers lose FEIE Reply with quote

Americans abroad may face higher tax
By Deborah McGregor in Washington
Published: May 9 2003 1:12 | Last Updated: May 9 2003 1:12

Americans living abroad would face a big tax increase under a controversial provision in a tax cut bill approved by the Senate finance committee on Thursday.

The repeal of the tax deduction for US citizens working overseas would raise $32bn to help pay for a dividend tax cut in the Senate bill. The provision would end a 57-year-old exclusion that allows Americans abroad to deduct $80,000, plus housing costs, from the income they report to the Internal Revenue Service.

The proposal represents the conflicting impulses of Republicans on Capitol Hill, who are trying to respond to President George W. Bush's push for a substantial tax cut this year while keeping the costs low enough to gain passage in the narrowly divided Senate.

"There's a huge expatriate community in Europe and it just hits all of us," said John Taylor, an American tax lawyer based in London for Allen and Overy. Most of those expatriates, he says, are living in countries where they are already paying high taxes.

The provision also angered large US companies, many of which compensate overseas employees by absorbing the costs of their US taxes.

The repeal represents a big chunk of the $80bn worth of revenue-raising measures the Senate tax-writers have identified as ways to lift the 10-year tax cut package to $433bn without going above the $350bn net cost acceptable to Republican moderates.

Other revenues are to come from extending customs users fees and curtailing the use of tax shelters, including several that were creatively abused by Enron and other corporations.

The House and Senate tax cut bills take dramatically different approaches to dividend tax relief. Neither bill goes as far as Mr Bush would like. He favoured the full elimination of dividend taxes.

The House tax cut bill, which is to be approved by the full House on Friday, would cut taxes on dividend income only for those who invest in US companies - a provision that has triggered a storm of protest from non-US-owned companies.

"For the capital markets in the US, you're not going to see the Nokias or the Daimler-Chryslers come here if there's a 23.6 per cent tax disadvantage embedded in the US tax code," said Todd Malan, executive director of the Organisation for International Investment, which represents US subsidiaries of foreign companies.

The Senate bill does not contain the provision. It does, however, include a politically popular provision to shut a tax loophole that allows US companies to reduce taxes by relocating their headquarters to tax havens such as Bermuda.

The proposal is aimed at companies such as Stanley Works and Ingersoll-Rand that have been tagged by some in Congress as corporate traitors. House Republicans, however, have been less supportive of such penalties, favouring a larger overhaul of US rules on international taxation.

Additional reporting by Edward Alden


http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1051389877846

Interesting how out of step the US is compared to the socialist countries whose approach to expat taxpayers is an "out of sight, out of mind" attitude.

Oh well, two more able bodied adults for the "dole". Wink



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bpp
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PostPosted: Thu May 08, 2003 6:57 pm    Post subject: Reply with quote

Now why is the phrase "No taxation without representation" floating through my head...? Neutral

On the bright side, without the FEIE I would become eligible to open a Roth IRA. Of course, I would still have to pay Japanese taxes on any Roth earnings (oh yeah, that's why I never elected to do it that way before, now I remember), so there goes that bright idea. Confused

Cheers,
Bpp




Last edited by bpp on Fri May 09, 2003 12:21 am; edited 2 times in total
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ben
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PostPosted: Thu May 08, 2003 8:13 pm    Post subject: Reply with quote

I feel sorry for you expat Americans these days! Hopefully your salaries would then be increased accordingly by your companies, or the company will simply pay the taxes up to the old limit, as that was what you based your expatriation decision on in the first place.

My company simply gives us a NET salary - I.e. local taxes will be covered by them. This does naturally not apply to any other home country income (rental income Etc.). A NET salary protects expat employees against sudden changes in tax rules for foreigners in their respective postings.

Of course; if HOME COUNTRY decides to tax ALL their expats simply based on nationality/passport (concept still blows my mind - but might be wave of the future elsewhere too) there is not much to do besides change nationality I guess....
Cool



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wanderer
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PostPosted: Thu May 08, 2003 8:30 pm    Post subject: Reply with quote

I feel sorry for you expat Americans these days! Hopefully your salaries would then be increased accordingly by your companies, or the company will simply pay the taxes up to the old limit, as that was what you based your expatriation decision on in the first place.

i agree. unfortunately, the chances of my employer doing that are slim and none. still, there is the little matter of US accreditation...

My company simply gives us a NET salary - I.e. local taxes will be covered by them. This does naturally not apply to any other home country income (rental income Etc.). A NET salary protects expat employees against sudden changes in tax rules for foreigners in their respective postings.

how sensible!

Of course; if HOME COUNTRY decides to tax ALL their expats simply based on nationality/passport (concept still blows my mind - but might be wave of the future elsewhere too) there is not much to do besides change nationality I guess....

it blows my mind, too. the way i have to contort myself pisses me off. esp. with all the "benefits" that accrue to being a Yankee in this part of the world.

I have seriously considered your suggestion (I would go Canadian or some other nationality). Unfortunately, section 877 lies in wait - for tax purposes, you are assumed to be changing nationalities for tax avoidance purposes if your taxes paid or net worth are above a couple of different, relatively low, thresholds. ie they continue to tax me for the next ten years... That's not a joke. Sad



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wanderer
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PostPosted: Thu May 08, 2003 8:33 pm    Post subject: Reply with quote

Now why is the phrase "No taxation without representation" floating through my head...?

indeed. i purposely did not vote in the last election (even tho the rules said we could) because I wanted no confusion in the fact pattern that our expatariate status was permanent.



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bpp
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PostPosted: Thu May 08, 2003 8:38 pm    Post subject: Reply with quote

Hi Ben,
Quote:
I feel sorry for you expat Americans these days! Hopefully your salaries would then be increased accordingly by your companies, or the company will simply pay the taxes up to the old limit, as that was what you based your expatriation decision on in the first place.


Not all American expats work for American companies. My employer is Japanese, so naturally there is no concept of expatriate compensation. I get the same deal as any other (Japanese, domestic) employee.
Quote:
Of course; if HOME COUNTRY decides to tax ALL their expats simply based on nationality/passport (concept still blows my mind - but might be wave of the future elsewhere too) there is not much to do besides change nationality I guess....


The US is one step ahead of that one, too. If I were to decide, for example, that I can't afford my US passport anymore and traded it in for, say, a Japanese one, and if the IRS/INS/whoever-decides-these-things determined that I had dumped my US citizenship for tax reasons, they can impose huge fines and/or refuse to grant me a visa to re-enter the Old Country to visit my poor, ailing mama in the the hospital. Or something like that -- I forget the details. But anyway, once they have you on their rolls, you're pretty much looking at a life-long commitment.

Cheers,
Bpp


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bpp
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PostPosted: Thu May 08, 2003 8:47 pm    Post subject: Reply with quote

Looks like Wanderer posted while I was writing my last post. So the "screw you too" rule is section 877? Is that IRS regs.? Will have to look that up some time.

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Bpp


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wanderer
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PostPosted: Thu May 08, 2003 11:58 pm    Post subject: Reply with quote

Just talked with wife about the impending tax situation. Guess it's just FEIE going. FTC would still be there so Europe would be attractive.

We would not come back here. Like so many times something goes bad at work or something bad out of our control happens, I said - "I'm glad we saved our shekels."

Pity. We love it overseas.



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bpp
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PostPosted: Fri May 09, 2003 1:32 am    Post subject: Reply with quote

Quote:
Guess it's just FEIE going. FTC would still be there so Europe would be attractive.


Why? Europe is a high-tax jurisdiction. Aren't you in a no-tax area right now? If you take up residency in a high-tax country, they will most likely tax your US holdings as well. You'd have to do the nomadic thing to preserve the gains in any tax-deferred/tax-free accounts you may have in the US. And don't bother opening any such accounts where you live (if they are available), as the IRS won't recognize their locally tax-deferred status.

If the US is going to abolish the FEIE, the equitable way to do it would be to find some way of establishing some kind of cross-border recognition of tax-deferred/tax-free accounts (IRAs, etc.). But that would probably be hard to do without creating huge loopholes, and who is going to make the effort to find a workable solution on behalf of a constituency that doesn't even have a vote in Congress?

Cheers,
Bpp


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wanderer
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PostPosted: Fri May 09, 2003 3:10 am    Post subject: Reply with quote

Why? Europe is a high-tax jurisdiction.

The FTC still exists (apparently). It can offset the double tax issue. Eurozone employers have built it into their pay scheme - they pay higher knowing the tax is higher and that is the only way to attract the talent.

I didn't mention it, but the big(ger) issue is lifestyle and intangibles. I wasn't bs-ing when I said we like the lifestyle. we're all having the time of our lives. I'm 42, so I'm aware of how good life is now and I have an inkling how bad life can suck; the kids will know when they're older.



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PostPosted: Fri May 09, 2003 10:34 am    Post subject: Reply with quote

One offset, amounting to $32 billion, would result in higher taxes for Americans working abroad. The measure would do away with a provision of the tax code that lets Americans working abroad exempt $80,000 of their salaries earned abroad from taxes. The workers would be able to claim a credit for foreign taxes paid.

http://cbs.marketwatch.com/news/story.asp?guid=%7B1AF54C0E%2D1B04%2D431D%2D8392%2D070FCC1AFBEB%7D&siteid=mktw

so useful in a "no tax" jurisdiction...



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ataloss
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PostPosted: Fri May 09, 2003 2:08 pm    Post subject: Reply with quote

One of the reasonable things about the FEIE is that it seems to be very practical. Except for those who are employed by US companies/ big multinationals it seems like the opportunity to fail to report income would be almost unlimited. Taxing the willing with no way to enforce compliance among the others seems like poor public policy.

OTOH, those with demonstrated flexibility will do fine Wink



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bpp
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PostPosted: Sat May 10, 2003 6:25 am    Post subject: Reply with quote

Quote:
One offset, amounting to $32 billion, would result in higher taxes for Americans working abroad.


I did a quick re-calculation of last year's taxes assuming no FEIE, using the Foreign Tax Credit instead, and it appears to be about a wash in my case. Though the paperwork looks somewhat more complicated, and I will have to consult with the IRS office in Tokyo as to exactly which taxes qualify for the FTC. The relevant IRS publications are confusing on this point.

If my case is at all typical, then I don't think this measure is going to end up netting that much more revenue for the IRS after all. But it will increase complexity, ambiguity, and the temptation to cheat, so I can see why it might be politically popular.

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Bpp


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wanderer
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PostPosted: Sat May 10, 2003 9:59 am    Post subject: Reply with quote

I did a quick re-calculation of last year's taxes assuming no FEIE, using the Foreign Tax Credit instead, and it appears to be about a wash in my case.

Not if you live in a no tax jurisdiction. Here there is no:

National income tax
State/local income tax
Sales tax
Property tax (well, there may be - I don't know - since we are located in a foreign camp, I'd just be guessing).

You getthe picture. I think the Senate budget folks may be about to get a lesson in the Laffer Curve. I think the US unemployment rate is about to get worse. Wink



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PostPosted: Sat May 10, 2003 11:25 am    Post subject: Reply with quote

Hi Wanderer,

Yes, I do realize that this will hit you a lot harder.

As far as that $32 billion that the Senate finance committee has their hearts set on, though, I would guess that most Americans abroad are in relatively high-tax jurisdictions to begin with, so there won't be much extra revenue to be had from them. As for folks in your situation, I would guess that as you say, they will make whatever adjustments they can to minimize the impact.

So I bet they don't see much revenue from this. But, I'm sure somebody will get a few nice soundbites out of it.

Cheers,
Bpp


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PostPosted: Sat May 10, 2003 11:47 am    Post subject: Reply with quote

Some numbers:

I seem to recall hearing there are about 4 million Americans living/working abroad. If the elimination of the FEIE exposes to taxation the maximum $80,000 in income from each of them, that is about $320 billion. They would have to assume they can collect 10% of that to project that they are going to get $32 billion in revenue. If we assume that $80,000 is a 28% US tax rate (is it? I think it's somewhere around there), then they have to believe that foreign governments take on average only 18%, leaving a 10% cut ($8,000) for the IRS.

I bet most people don't make $80,000 to begin with, and I bet they don't generally have an $8,000 gap between their foreign tax obligations and their US tax rate. I'd be curious to see how they reached this projection.

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Bpp


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PostPosted: Sun May 11, 2003 5:00 pm    Post subject: Reply with quote

response from a former Big 5 heavy mgr re: likelihood of passage:

"I believe the repeal is in the Senate bill but not the House bill. In any event its effective date I believe is 2005. I think they have scored it at around 30 billion and re-enact it again in 2012. The fight will be in the Conference Committe over the next few weeks so stay tuned. I don't know what lobby group will fight for the exclusion but the xxx periodical did say that "business" would attempt to keep it the law. My guess would be that it has less than a 50% chance of being out right repealed but maybe they more likely will curtail it somehow if they need a revenue gainer."



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bpp
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PostPosted: Sun May 11, 2003 5:31 pm    Post subject: Reply with quote

Hi Wanderer,

I hope your Big 5 buddy is right. I spoke with the IRS representative at the embassy in Tokyo, and it turns out that a lot of the Japanese taxes I pay would not be eligible for FTC treatment. In addition, if I have un-excluded earned income, it seems that I may also have to start paying US social security taxes, on top of the Japanese social security taxes that I already have to pay. So great, then I would be paying into TWO bankrupt systems. And don't anyone try to convince me that I can expect to get double benefits in return.

Well, maybe this measure, if passed, will turn out to be a better revenue generator than I at first thought.

Cheers,
Bpp


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PostPosted: Sun May 11, 2003 6:50 pm    Post subject: Reply with quote

Well, maybe this measure, if passed, will turn out to be a better revenue generator than I at first thought.

to paraphrase kipling: "you're a more forgiving man than I am, bpp." Wink



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PostPosted: Sun May 11, 2003 7:41 pm    Post subject: Reply with quote

http://www.washingtonpost.com/wp-dyn/articles/A32536-2003May8.html



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