U.S. tax bill would end foreign income exemption

Democratic members of the U.S. Congress are trying to eliminate the overseas income exemption that allows citizens in foreign lands to earn up to $92,900 a year without paying Stateside taxes.

The legislative change is deep inside the so-called Tax Equity and Middle Class Fairness Act of 2011. The measure would eliminate health savings accounts, certain expense provisions and some depreciation rules.

For U.S. residents living overseas, the major issue is the repeal of the exemption that is designed to keep them competitive with foreign workers. The United States is the only country in the world that taxes its citizens even if they live in another country and pay taxes to that country, according to American Citizens Abroad, an expat advocacy group.

American citizens Abroad has launched a campaign to get the clause eliminated from the bill. The measure contains a number of unrelated items that are being pushed by President Barack Obama.

The bill was introduced by Rep. John Tierney of  Massachusetts. The five cosponsors are Steve Cohen of Tennessee, Keith Ellison of Minnesota, Raul  Grijalva of Arizona, Jesse L. Jackson, Jr., of Illinois and Betty McCollum of Minnesota. Due to local politics, Ms. McCollum and Ellison are listed as members of the Democratic-Farmer-Labor Party.

The measure, H.R. 2495, is being considered in the House Ways and Means Committee. The wording of the bill characterizes exemptions, deductions and depreciations as tax expenditures.

“Ironically, the bill does not touch the foreign housing exclusion which allows Americans the possibility of excluding some foreign housing expenses from their U.S. taxable income,” said American Citizens Abroad.

“Actually, this particular paragraph in H.R. 2495 could hardly be expected to increase tax revenue by the promised amount of $5.4 billion as U.S. taxpayers living abroad would start using various tax credits such as foreign taxes paid in an effort to reduce their U.S. tax bill,” said the organization.  “Filing U.S. tax forms will become even more complicated for Americans abroad and tax revenue will not increase.”

The organization noted that Americans living overseas pay taxes to the local government. The organization is campaigning in Congress to reform the tax system to one that is based on residency instead of citizenship.
In other words, U.S. citizens who are legitimate overseas residents would not pay U.S. tax on foreign earnings.

The Geneva, Switzerland,-based association noted that the citizenship-based taxation by the United States has cause hardships with the new Foreign Account Tax Compliance Act.

This 2010 measure has caused foreign banks to close accounts held by Americans due to the complexities of the U.S. Internal Revenue Service reporting requirements.

Another expat advocacy group that also is targeting the Tax Compliance Act is the Association of Americans Resident Overseas, based in Paris, France.

The U.S. rules of the foreign income tax exemption are HERE!

An Academic paper posted online by Ryan M. Borgmann gives a concise history of the foreign tax exemption. He notes that U.S. citizens did not pay taxes on overseas earnings until 1953 when Congress put a $20,000-a-year cap on it. Congress tried to eliminate it completely in 1976, he noted.

He is a lawyer who did the paper as part of graduate work on taxation at the DePaul University School of Law in Chicago, Illinois.

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