Americans Expatriates Are Getting the Tax Shaft

I guess I should be pleased to be back in the states after my UK contract ended. I don't know how it will affect two people that I know that have moved to London to begin their stint for a few years. A new tax law will increase costs for many Americans working overseas and will likely cause changes in company hiring practicies in certain countries.

The increased taxes will hit Americans that are working in countries that have high housing costs and low local taxes. Even though companies guarantee that their workers do not pay more in taxes than they would if there were living in the US, not all Americans have the luxury of tax equalisation. The law, part of a broader tax bill signed in May by President Bush, is retroactive to Jan 1 of this year. So that means I get screwed slightly for my stay in London from Jan 1 to July 3.

Under the old law, Americans working abroad could exclude as much as $80,000 of their foreign-earned compensation, plus certain foreign housing costs, when they filed their US taxes. The new law increases the $80,000 limit slightly to $82,400 this year, but income above that level now is subject to much higher tax rates.

One significant change is that the new law greatly reduces the maximum amount of housing costs that workers abroad may exclude or deduct. The cap will be $11,536 for 2006, though the Treasury Dept has the authority to change this for places with especially high costs. Before the change, there was no cap at all. To me, you have to wonder if they will do such a thing in light of the high budget deficits the government has been having. It really hurts American workers since rent in HK could run as high as $50,000 annually, or for me, at least $30,000 while living in London.

The misconception people have is that Americans working abroad are earning the big bucks, but that is not completely true. As of 2003, there were probably about 306,000 tax returns coming from overseas. The vast majority of them are middle-income wage earners. The new US tax law just makes it more difficult for American workers to compete effectively among their European and Asian counterparts.

$11,536 annually means about $961 per month. If I was living in London, that means I have to find a flat that has a monthly rent of at most 513 pound sterling. You can probably find those places in the outskirts of London or in the outlying areas. That does not help for expats living in Singapore, Hong Kong, and Moscow. It seems that our government representatives forgot to check the currency rates and housing costs of the countries that actually exist outside of the US.

South Carolina Republican, Senator Jim DeMint, has proposed a bill that would eliminate US taxes on income Americans earn while living and working abroad. I am sure he would get the vote of every overseas American, but I doubt it will get passed. At this point in time, our scheming representatives are just trying to find new revenue generating ways to rip off the taxpayer. Quote from Senator DeMint: "America is the only industrialized nation in the world that forces its citizens to pay double taxes while they compete in the global marketplace."

How can we compete abroad?

Note: You have to thank the Republicans for this since when they passed the $69 billion tax cut on May 17, it also passed a $2.1 billion tax hike over the coming decade for Americans living overseas.

Legislation - Tax Increase Prevention and Reconciliation Act of 2005 (HR 4297), signed into Public Law, May 17

Yahoo Finance (Wall Street Journal) - Tax Hike Hits Home for Americans Abroad