U.S. expats are facing double tax trouble through twin developments in Washington.
On one hand, the U.S. Internal Revenue Service seeks to force U.S. citizens overseas to outline their financial lives as part of the annual tax filings if they have overseas assets worth more than $50,000.
Less likely but still possible is a proposal in Washington that would eliminate the foreign earned income exclusion that lets U.S. citizens shelter up to $91,500 this year in overseas income.
Three expat organizations, the American Citizens Abroad, the Association of American Residents Overseas and the Federation of American Women’s Clubs Overseas have submitted comments criticizing the proposed reporting proposals.
The Internal Revenue Service has created a draft of a Form 8938 that U.S. citizens would have to file along with their annual tax returns.
“The form requires full details concerning any financial account maintained by a foreign financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person, and/or any interest in a foreign entity,” according to American Citizens Abroad.
In Costa Rica that would mean any U.S. citizen who has deposited money in a bank here to maintain a rentista residency or anyone who holds a mortgage on property.
The deadline for comments on the form was Jan. 3, but because the form only became available just before Christmas, the expat organizations are asking for an extension.
The questions are similar to those that U.S. owners of Costa Rican corporations have to fill out each year, but the requirement would extend the requirement to all overseas Americans with $50,000 or more in overseas financial assets.
The Internal Revenue Service estimates that the form would add about an hour to a person’s tax reporting time, but many U.S. expats have complex financial lives and require the aid of accountants, which costs additional money.
A copy of the proposed form is available HERE.
The foreign income tax exemption has been around in one form or another since the 1920s. In the United States, the Commission for Responsible Federal Budgets, which describes itself as “a bipartisan, non-profit organization committed to educating the public about issues that have significant fiscal policy impact,” has suggested its elimination.
The tax exemption, known as Section 911, is
designed to offset the competitive disadvantage U.S. taxpayers face working abroad, according to a 2005 analysis by Price Waterhouse Cooper. Congress was concerned that tax rules enacted in 1978 made it more expensive to hire Americans abroad as compared to foreign citizens, reduced U.S. exports, made U.S. business less competitive abroad, and were so complex that many Americans employed abroad found it necessary to use professional tax preparers, the analysis said.
Each year U.S. citizens with legitimate residencies abroad can exclude an escalating amount of foreign-earned income from U.S. taxes. The income must be earned, and the taxpayer still has to pay Social Security and other social charges.
Many expats who work online move overseas to avail themselves of this exemption, but the law requires them to be residents, so those living here on a tourist visa do not qualify.
The Commission for Responsible Federal Budgets estimated that the cash-strapped U.S. government would bring in $6 billion if the exemption were eliminated.
American Citizens Abroad said it estimates that eliminating the exemption would in fact bring in perhaps $700 million in additional tax revenue in 2011 from Americans working in countries with tax rates lower than the United States. This is a far cry from the committee’s calculation, it said.
In addition, the American Citizens Abroad said in a letter to the committee that the exemption was temporarily eliminated in the late 1970s, to disastrous effect. Tens of thousands of overseas jobs for Americans were eliminated in the construction and engineering industries, it said, adding that in the face of this major collapse in jobs for American citizens, Congress quickly reintroduced the exemption.