The tax situation of U.S. citizens living abroad is again the topic of a major report produced by the Government Accountability Office. The report quickly came under criticism from an expat advocacy organization.
The report concludes that while it cannot be shown that allowing US taxpayers working abroad to exclude a certain amount of foreign-earned income from taxes boosts exports, other arguments concerning taxpayer equity and competitiveness in foreign markets merit consideration, the Association of Americans Resident Overseas noted.
The American Citizens Abroad, a similar organization, was more critical.
The report was commissioned by Reps. Carolyn Maloney of New York and Mike Honda of California with the support of Rep. Jim McDermott, a Democrat from the State of Washington. Ms. Maloney and Honda are members of the congressional Americans Abroad Caucus.
The Government Accountability Office takes the typical central government position that any money not collected from expats is actually an expenditure of taxes.
U.S. taxpayers overseas were able to exclude from taxable income in 2011 about $30 billion in foreign earned income and housing costs, with about 45 percent excluding all or most of their foreign earned income. 2011 was the most recent data that was available, the accounting office said. The report noted that 445,000 tax returns claimed the foreign earned income exclusion, which is 0.3 percent of all individual tax returns filed.
Since 1926, special tax benefits have been available for U.S. citizens working abroad. Internal Revenue Code section 911, which cost an estimated $4.4 billion in 2013, provides a tax exclusion for foreign earned income, as well as an exclusion and deduction for foreign housing costs.
The advocacy organizations argue that eliminating the deduction would put American workers at a disadvantage in the foreign marketplace. To some extent the exclusion is designed to avoid the double taxation that would result if a citizen had to pay U.S. tax and taxes to a foreign government.
Both American Citizens Abroad and the Association of American Residents Overseas have urged Congress to eliminate the citizenship-based taxation method in favor of a geographical one. The United States is one of the few countries in the world that requires its citizens to pay taxes on money earned outside the country.
The report notes that historically, the tax expenditure has been defended on the grounds that it encourages the employment of U.S. workers abroad who play an important role in promoting U.S. exports, notes American Citizens Abroad, adding that the orientation of the 2014 report is summarized in its concluding observations: “Currently, the federal government is forgoing billions in federal tax revenue for a small but growing population of U.S. citizens working abroad that claim section 911 tax benefits. Yet, there is little evidence that the tax expenditure has a significant effect on export promotion.”
American Citizens Abroad argues that the Government Accounting Office should not compare U.S. citizens aboard with those living in the United States. “In fact, Americans abroad are in a totally different situation from U.S. residents because the majority live in countries with a cost of living significantly higher than in the United States,” it says in its critique. “The devaluation of the U.S. dollar against other currencies has artificially pushed up the dollar value of foreign earned income when translated for U.S. tax purposes.”
The expat organization also said that the report dismisses completely the fact that Americans abroad receive little direct benefits from the U.S. government.
Representatives of both expat organizations expect the foreign income exclusion to be on the table when Congress begins its promised revision of the complicated tax code.
In Costa Rica many U.S. citizens just do not report their earnings, although to elect the income exclusion, a tax return is required. The U.S. government is becoming better equipped to track the bank accounts of its citizens here, also shown by the various rules being set down by the Costa Rica banking regulators.