Tax Advantages for Americans Living Abroad

The first $100,000 of income for Americans living abroad in 2015 was not taxable, as part of the Foreign Earned Income Tax Exclusion. But the exclusion is applied unevenly. If you work for an American company or the American government, you fully report and pay taxes on your full income. Only if you work for a foreign organization do you get to exclude your income. And to claim the exemption, you must reside outside the U.S. for all but 35 days a year.

If a husband and wife both work for foreign organizations overseas, they can each exclude $100,000 from taxation, for essentially a $200,000 exclusion. But if only one spouse works and makes $200,000, he can only exclude $100,000, meaning the second $100,000 is taxable. So, a family with one breadwinner is penalized.

A brief history of the exclusion is here in a book called US International Taxation. Other histories are here

In essence, the foreign income exclusion, first adopted in 1926, is designed to protect Americans living abroad from double taxation.

But some countries, particularly in the Gulf region, do not have a tax system, and so Americans working for, say, oil companies were receiving a lot of tax-free income. The exclusion was repealed in the 1970s, reinstated in 1981, frozen in 1984, fixed in 1986. An attempt in Congress to repeal it occurred again in 1996, but failed to pass.

In 1997, members of Congress sought to make it more equitable, and kept it on the grounds that it would increase US exports, trade overseas, stimulate jobs in the US, remittances from Americans abroad to families or properties in the US, and US influence in the world. It was pointed out that Americans in foreign countries can be faced with paying far more than one-third of their income for housing — for example, $40,000 a year or more for small apartments in the Gulf region, and without a cost of living allowance or a tax exclusion, Americans would have no economic incentive to live abroad.

In 2003/4, 2007/8, and in 2012/13 a few members of Congress again sought to repeal the exclusion, but it didn’t pass. And so it stands, but there continues to be debate about the fairness of it.

I gently complained about the fairness of the $100,000 foreign income exemption per individual on an American Expats Facebook group, and it was quickly pointed out to me that the U.S. is one of the few countries in the world, aside from Eritrea, that seeks to tax citizens’ income abroad when such citizens are already residents of a foreign country paying foreign taxes.

This article was pointed out to me: Only Two Countries Do This Appalling Thing, and the US is One of Them.

Actually, a number of countries do not have an income tax. Some of them do, however, have exorbitantly high rents by American standards. The UAE, for example, typically charges $3000 or $4000 a month or $40,000 a year for a three-bedroom apartment. And since expat children cannot attend local public schools, they must attend private schools, where the costs are typically $20,000 a year. Some employers pay these costs, and some do not. No matter how attractive the expat salary may look from afar, without cost-of-living subsidies from an employer for housing and schooling, the job may not be worth taking.

The U.S. government has sought to tighten reporting of earned income by Americans living abroad. All citizens who have foreign income are required to file an income tax return and report to the IRS their foreign bank accounts and how much money they have in foreign accounts.

Drill Deeper: 

  • A brief history of the foreign earned income exclusion is here in a book called US International Taxation.
  • Another history of the exclusion is here.
  • debate about the fairness of it.

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