Higher Tax for US Expats
How the recently passed Tax Increase and Reconciliation Act of 2005 affects Americans working abroad
Congress recently passed the curiously-named Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), retroactively increasing taxes for some Americans working abroad
The widely-hyped change which gave the law its name now indexes the foreign earned income exclusion to inflation several years earlier than originally planned. Under the old rules the exclusion would have remained at $80,000 until being indexed to inflation beginning in 2008. Under the new rules, the 2006 exclusion amount is $82,400 (and $85,700 for 2007).
Despite the name of the tax act, there are other changes that may increase taxes for highly compensated taxpayers in excess of the savings to be gained from accelerating the indexing of the exclusion.
Higher Marginal Tax Rates
Long-term expats know that that the US allows its globetrotters to exclude earned income and/or some housing costs from US taxation up to certain thresholds. These thresholds and the way they are calculated have been modified by TIPRA. Expats earning just above the old thresholds used to pay tax at the lowest income bracket on the non-excluded income. No more! Expats that have taxable earned income above the maximum exclusion amounts (earned income, housing or both) will now pay “ordinary income tax rates”. Under the new law, expatriates must use the tax bracket that would apply had they not claimed the exclusion. For many people, that means they will start with the 25% or 28% tax brackets, instead of the more favorable 10% bracket.
The foreign tax credit (Form 1116) continues to be available and will reduce some of the impact of this change for expats living in countries with high relative individual tax rates.
The second change is in the way that the foreign housing exclusion is calculated. The result of the calculation change is an increase in the “base amount” (the part you can’t exclude). The new law subjects more income to tax. The formula is somewhat complex but the maximum amount that can be excluded for 2006 is $11,536 for someone who qualifies for the whole year. There are additional regulations that adjust this exclusion depending on what country you are living in.
This article is intended to be an overview. The issues are complex and you should read the information available at www.irs.gov or seek the advice of a tax professional. For further information, we recommend you consult:
• Rev Proc 2006-51 for the foreign earned income exclusion amount
• Notice 2006-87 for foreign housing exclusion
• When it becomes available refer also to the 2006 edition of Publication 54
CFO2GO is an independent consultancy focused on assisting SMEs and their owners and executives to achieve their operating and objectives when internal or alternative means of doing so are inadequate to the task. We work closely with executives to help them comply with their personal Czech and US tax obligations.
The comments in this article are not intended to constitute an opinion regarding any specific tax issues because additional tax issues may exist that could affect the tax treatment of the tax issues addressed in this memo. This memorandum does not consider or reach a conclusion with respect to those additional issues and was not written and cannot be used for the purpose of avoiding penalties under code section 6662(d).
For further information, please contact CFO2GO Europe.
Video on YouTube
US Ambassador Schapiro ends his term by Raymond Johnston - Prague.TV (Foto: Anglo American University Prague)
Incoming president Trump has asked all political appointees to step down on inauguration day
Filing US Taxes Abroad by Emily Prucha - Prague.TV (Foto: fotolia)
Expat taxes for Americans living & working in the Czech Republic
Exchange of Kč 50 notes ends soon by Raymond Johnston - Prague.TV
More than 11 million of the invalid banknotes are still out there
Congress Center Prague to get overhaul by Raymond Johnston - Prague.TV (Foto: Congress Center Prague FB)
The unpopular communist-era building will be revamped but not destroyed
Prague's economy growing again by Raymond Johnston - Prague.TV
Statistics show the entire country has improved
Did you join the CDK Global Bored? Bus for a Career with More Colour? by Raymond Johnston - Prague.TV
The Business Service Center once again brought colour to the streets on Prague!
Prague passes Kč 62 billion budget by Raymond Johnston - Prague.TV (Foto: Prague.eu)
Transportation will get the biggest single portion of spending
Certified translations covers more than just diplomas by Raymond Johnston - Prague.TV
Martin Straňák has seen all kinds of documents in his career
CDK Global Announces ‘Bored?’ Contest Winners following The Beatles Revival Summer 2016 Tour! by Raymond Johnston - Prague.TV
It's time for a career with more colour!
Dalai Lama discusses secular ethics by Raymond Johnston - Prague.TV
The Tibetan religious leader was in Prague for Forum 2000
Don’t miss out on historical low Czech mortgage rates!
Feel the rhythm and party to the biggest hits of the 80’s!
Have fun. Help. Volunteer overseas - Let us organize your...
Get discounts on speed dating and meet other singles...
IT advisory, development and outsourcing
Advokátní kancelář Šoralová
Delivering on our promises through medical innovation
Explore Careers at SAP