While everyone knows (or should) that “U.S. persons” (citizens and green card holders) are required (above a very low minimum) to report their worldwide income to the U.S. Internal Revenue Service, many do not actually owe tax because of credits given under tax treaties and because of the Foreign Earned Income Exclusion (FEIE), now $92,400, credited against earned income (not dividends, pensions, etc.).
While the FEIE was created as a protection against double taxation, it has not kept up with inflation (had it done so, it would now be closer to $200,000 or higher) and regularly, it comes under attack, being perceived not as a protection but rather as a “tax break”, with lawmakers forgetting that taxpayers have already paid tax on that “excluded” amount in the countries where it was earned.
Eliminating the FEIE was part of the Wyden-Gregg bill in the last Congress. Senator Tom Coburn, very influential in budget decisions, recommends it in his “Back in Black” plan. The Simpson-Bowles study (Presidential study of December 2010 on the deficit issue) recommends cutting out most “tax expenditures” and the Joint Committee on Taxation classifies the FEIE as a “tax expenditure”, projecting huge but exaggerated and unrealistic tax revenues if the FEIE is eliminated. The present Super Committee of 12 is also considering eliminating “tax expenditures”.
Because overseas Americans are just that – “overseas”, it is easy for Congress to seriously consider a step that would create financial hardship for hundreds of thousands living and working abroad and, as it did in the late Seventies, send many Americans back to the United States (where the economy does not need more people looking for jobs) and deprive foreign markets of the best advocates for American goods and services. If the FEIE is eliminated, the tax burden on many overseas will be intolerable and, for those employed by American companies who cover that tax liability in order to keep American staff abroad, they will literally be taxed out of the market and lose their jobs to other, equally qualified but far less expensive, non-American workers.
As Congress examines possibilities for tax reform, it is important for law- and policy-makers to hear from their overseas constituents. Legislation is ready to be introduced by Representatives Scott Garrett (R-NJ) and Carolyn Maloney (D-NY) to eliminate the cap on the FEIE; you can inform your legislators of the present threat and ask their support for the American Tax Fairness Act of 2011. For a sample letter you can send to your representatives in Washington, click here (and for tips on communicating with them, click ). For the eloquent letter on the FEIE issue sent to the Super Committee of 12 by FAWCO partner ACA, click here.
