Tax Cut Bill Bad News For US Expats And Their Employers

by Mike Godfrey, Tax-News.com, Washington

23 May 2006

A little-known provision inserted at the last minute into the $70 billion tax reconciliation bill signed last week by President Bush will increase the burden of taxation on the many thousands of US expatriate workers employed in foreign jurisdictions.

While the package increased the amount that Americans working abroad can earn tax free to $82,400 from $80,000, income above that level is now typically subject to higher effective tax rates.

Additionally, in something of a double-whammy, US citizens will see the tax exemption on foreign housing expenses significantly reduced. Prior to the new law, Americans working abroad could deduct almost all of their housing expenses. However, the new rules cap the amount that can be deducted to $11,536. Although the Treasury has the flexibility to adjust the deduction cap for countries with high living costs, workers in jurisdictions such as Bermuda, Hong Kong and Saudi Arabia are expected to be substantially worse off.

Employers, who normally absorb these tax costs through higher salaries, will also see their costs rise significantly and it may now be more cost effective for them to recruit workers from jurisdictions with more benign expat tax regimes.

According to Bermudian daily the Royal Gazette, PricewaterhouseCoopers Bermuda tax advisor, Rick Irvine, explained that a single taxpayer or married couple filing jointly who maximise the foreign earned income exclusion and housing deduction would see additional tax costs of $20,806 and $16,811 respectively.

Mr. Irvine added that in Bermuda, it is likely that the greatest impact will be on local or exempt companies which employ Americans.

Meanwhile, a married American citizen with $150,000 in base pay, $30,000 in taxable employer-paid foreign housing expenses, and $15,000 in interest income from a US bank, would be $9,500 worse off in Saudi Arabia, and as much as $20,000 worse off in Hong Kong, according to the Wall Street Journal.

The provision was added to the $70 billion tax package late on in the negotiations by Senate Finance Committee chairman Charles Grassley, in order to help offset the costs of extending business and investment tax cuts. The Joint Committee on Taxation estimates that the provision, which is retroactive to the start of this year, will raise an estimated $2.1 billion in revenue for the US Treasury over the next 10 years.

A 2004 study be the Internal Revenue Service revealed that almost 300,000 individual income tax returns were filed by Americans working overseas in 2001.

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