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Thank you, Uncle Sam.

April 11, 2008
tags: , ,

(Note: The computer froze after I tried putting too many pics into the previous post. I’ll fix it tonight when I go home to my apartment that now has firewall-free wireless internet!)

From my *favorite* WSJ column, “The Expat Life” by Alan Paul, this article hits close to home:

The Double (Tax) Life
Of Americans Abroad
April 10, 2008

Like hundreds of millions of other Americans, I am currently sweating over my tax returns. Like many other people on expat packages, our deal includes some accountant services. The reason this is often an included perk is that overseas tax filings can be extremely complicated, as you must pay local taxes where you live in addition to U.S. income tax.

If you make less than $85,700 and live abroad, you have to file the usual return but the tax rate is undeniably generous: nothing. Once you’re over that threshold, however, the process begins to get very convoluted. While the first $85,700 are tax free, you have the added burden of paying taxes on any benefit received, including housing allowances, moving expenses and kids’ schooling.

Sorting all this out can be confusing, but there is one simple, singular truth: The United States of America is the only large Western nation that demands that its residents living full-time overseas pay federal taxes on income earned abroad. Expats who aren’t on a corporate package can feel an extreme pinch from this — especially on the heels of 2006 changes in the tax law, which capped the housing deduction at artificially low rates, among other things.

The impact of the changes wasn’t as direct on the many expats on full corporate packages, which often includes tax equalization. This essentially means that the employer will calculate what tax you would have paid had you stayed in the U.S., deduct that and then pay all of the foreign tax you face plus any U.S. tax you owe over and above what you would have paid had you never gone on assignment. But higher corporate costs are passed down the line, often in terms of hiring fewer Americans or shortening their stay abroad. Further, an increasing number of expats don’t have such benefits, as many companies scale back packages and more people move overseas on their own.

The double taxation can be particularly vexing for long-term expats, who must pay U.S. taxes year after year without receiving much in the way of benefits. Jim Spear, an American who has lived in China for 22 years, readily admits to feeling some resentment this time of the year, as he dutifully files his tax return.

“I am proud to be a citizen of the United States and paying taxes is a civic obligation,” says Mr. Spear. “People who don’t pay taxes are scofflaws and when there are too many of them, society has a lot of problems, which is something I’ve seen often in China.”

Still, Mr. Spear thinks the U.S. would promote foreign trade and exports and that the domestic economy would benefit from not requiring citizens to pay tax on income earned outside the U.S. “That’s the rationale other countries use,” he notes.

The current tax policy actively discourages companies from hiring Americans to fill overseas positions, some believe.

“Hiring and employing Americans is much more complex than any other nationalities because the U.S. is unique amongst developed countries in wanting to tax its citizens regardless of residence,” says Geoffrey Latta, executive vice president ORC Worldwide, a management-consulting firm specializing in compensation. “If you have two candidates for a job [overseas] who are on all other grounds equal and one is American and one is British, the Brit is going to be cheaper because you don’t have all that tax cost. Most companies don’t want to admit it, but that’s what is happening.”

Landis Hicks, who recently finished a term as Chairman of the Asia-Pacific Council of American Chambers of Commerce, says that while the revised law is too recent for hard data to have been accumulated about its impact, there is strong anecdotal evidence that fewer Americans are being retained for international postings.

“The extra cost for compensating employees will simply make Americans less competitive with other nationals, so the number of Americans who are working abroad will decrease in relative number and that has a ripple effect. People tend to use what they know, so procurement, engineering and design will be based on home-country products that are not American,” says Mr. Hicks, an American resident of Singapore. “Many of us also strongly believe that having Americans working outside the United States is extremely useful in promoting American values and assisting in good relations with other countries, so more than just trade or economics is involved.”

The issues have been exacerbated by changes inserted at the last minute into the “Tax Increase Prevention And Reconciliation Act of 2005,” which was passed in May, 2006. Section 515 capped the housing allowance that can be deducted, with anything over the prescribed amount being counted as taxable income. There was initially a hard cap of $24,720 a year, but the law included a provision allowing the Treasury Department to make alterations for high-rent locales, which it has done. The caps were initially raised to $49,137 annually in Beijing and $114,000 in Hong Kong, which illustrates how low the initial number was.

A stacking provision was also added, so that if the benefits move you from below to above the excluded income you are taxed at the higher rate. For instance, someone earning $80,000 would not have to pay income tax. If, however, they had $20,000 in housing expenses above the allowed deduction, they would enter at the rate for $100,000 in income.

The changes were largely considered the work of Iowa Republican Charles Grassley, who at the time was chairman of the Senate Finance Committee. However, in an Oct. 3, 2007, letter to The Wall Street Journal, Sen. Grassley wrote, “The 2006 changes came at the recommendation of the nonpartisan Joint Committee on Taxation after it became clear that U.S. taxpayers living abroad were receiving an overly generous U.S. tax subsidy relative to those living and working in the U.S. … These changes were a matter of fairness. An American in Peoria can’t exclude any salary or housing costs from taxable income. Why should an American in Paris not face reasonable limits?”

The Americans Abroad Caucus believes that the main difference between Sen. Grassley’s theoretical Americans is representation; the American in Peoria knows who to lobby for change while the American in Paris does not. The group is trying to change that. Founded in 2007 by co-chairs Carolyn B. Maloney (D., N.Y.) and Joe Wilson (R., S.C.), the caucus now counts 10 Democrats and five Republicans as members. “This is a significant step forward toward effective representation for overseas Americans on Capitol Hill,” says Andy Coyne, executive vice president of the Association of Americans Resident Overseas. “Without it, we have virtually no voice in Washington.”

The number of Americans living overseas is unknown, but estimates range from 4 to 7 million. Our representation on Capitol Hill is diluted by the simple fact that we vote in our last place of residence in the U.S., so no one senator or representative is obliged to be responsive to unique expat issues. “Though we are millions strong, we can be overlooked or disregarded in a way that could never happen to a state of 7 million citizens,” says Mr. Coyne.

Next week, Mr. Coyne will be in Washington for Overseas Americans Week, a lobbying trip by AARO and its sister organizations American Citizens Abroad and the Federation of American Women’s Clubs Overseas. They will be focused on promoting legislation to make it easier for overseas Americans to participate in U.S. elections and to “level the taxation playing field with workers from other nations.”

They will encourage Congress to pass Sen. Jim DeMint’s (R., S.C.) Working American Competitiveness Act, which would do away with the limit on the foreign earned income exclusion. Mr. Coyne believes that the change is necessary to allow American companies doing business abroad to maintain their competitive edge in the global economy. “American citizens working abroad are competing against people from other nations who are only subject to taxation in the country in which they work and not back home,” he says.

In the meantime, we’ll all keep puzzling over our tax returns, and I for one will celebrate the fact that expats still have one other welcome perk, regardless of our corporate package: an automatic extension to June 15.

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