Edvenson Consulting

Subject:  Americans Abroad:  U.S. Personal Income Tax Issues and Update

Folks, Congress passed a new tax law in May, 2006 which will affect some Americans abroad, who are, as we know, supposed to file with the I.R.S. every year for the rest of their lives, no matter where they live, unless they actually fall below the tax-filing threshold income (pretty darned low).  And who will be affected by this new tax law?  Not most, as you might think from reading the gloom-and-doom headlines.  Reason?  Most Americans who live abroad simply do not make that much money;  careerwise, they would have been better off to have stayed 'at home' in the good old U.S. of A.  Foreigners (non-Americans) with green cards can be affected by these requirements also if they are living abroad (not in the U.S.) during all or part of the tax year. 

At any rate, for the benefit of those interested, here are some notes on the tax law affecting Americans abroad, along with a footnote:  If you don't want to deal with this stuff, contact me, and I will deal with it for you.  It is part of my business, and I love my business, just like I love having money to pay bills, for example.

• Most Americans abroad are excluded from tax on their personal income by the I.R.S. because they make less than (for CY 2007) $85,700, the "foreign earned income exclusion."  Generally, if one is taxed on that income in a high-tax country, such as Norway, one can even have extra taxes paid (ie. to Norway) that one can 'use' to offset any other U.S. tax liability one has during the same year (ie. from dividends or interest or other U.S. income in the U.S.) under the "foreign tax credit" provision. 
• The amount one can exclude from taxation from one's earned income (say, the $85,700), is the amount of the income up to that amount, $85,700, but ... only if you did not spend time in the U.S.  If you spent time in the U.S. during that tax year, up to 6 months, there is a sliding scale relationship between your number of visited days and your ability to write down any of your foreign income from tax by the U.S.  What's the logic in that, June?  The logic requires you to think like an American - about individual responsibility, that is:  if you are walking on our sidewalks, breathing our fresh air (well, it is still fresh in quite a few places in the U.S.), and driving around on our super-highways and bridges, you can pay for it by paying taxes, yes, even on your foreign income, and by paying that to us because we are here, keeping the place nice for you to come home to, and to visit once in a while. 
• The other side of the coin is that if one lives in a low-tax country, and reports one's income and tax paid to the U.S. (which is required if you keep your U.S. citizenship...or green card), you can have a tax liability to the U.S. for the difference in tax that the U.S. might have charged you on that same income had you been in the U.S.  Good idea:  watch your total foreign salary in relation to your taxes paid.
• Objective:  For the average Joe, the objective would be to not have made more than $85,700 in salary and wage in foreign countries in 2007, and not to have visited the U.S. for more days than you can afford to lose the difference on in reduced taxable income exemption write-down.  Example:  You spent a month with your married children in the U.S. in 2007, but are still a working teacher abroad (not a retiree):  you lose approximately 1/6th of your exclusion ? we hope you are making less than $85,700 - $14,283, or $71,417. And you are a teacher?  It's likely you are making that or less than that.
• Now, I'll talk to the top rung, those of you making a LOT of money abroad.  The new tax law states that you will be taxed on your first dollar over $85,700 as if it was...oops, not your first dollar of U.S. income for taxation ? that would be a nice break and rate, but as if it was your first dollar after that, ie. as if it was your dollar number $85,701, taxed in the U.S.  To be honest, I don't feel sorry for you folks.  Just pay up or hire someone to invest your income in ways that help you keep more of it, generally, out of the tax-stream. 
• According to the International Herald Tribune, "Expats face 'sticker shock for '07 U.S. taxes," Dec. 29-30, 2007, the twist comes when one is tempted to skip the foreign earned income exclusion, and take the foreign tax credit instead.  If you do, you can be locked out of using the foreign earned income exclusion for the next 5 years.  That is the small print. So, are you sure you want to do that?  Most are not sure.  I won't 'go there,' conceptually;  this is not my client base.
• Big deal, you say?  Are you going to figure out the number of persons concerned, or worry about the size of their U.S. tax obligation?  No, probably not.  If you are glad  to be Americans, you may pay a small bit of tax to America, or ... you could give up your citizenship. (Oops:  That last option is not recommended.) 
• My conclusion:  For most,  there is no cause for concern, with most tax treaty countries.  Why?  First, because most countries permit business deductions that are broader than those permitted by the U.S.  So, write down your income against your related business expenses, to the extent you can do so under the law of the country to which you pay your taxes.  Second, because if one works at it even a small amount, one can plan one's foreign income and U.S. income so as not be burned.  A U.S. financial advisor can easily help anyone with questions on this, but not cashing out huge amounts of U.S. stocks and dividends all at once helps a lot.  After all, we each have a standard deduction and at least one exemption every year, even if we do live overseas.  That gives us about $8,000 in tax-free U.S. annual income, as long as we have paid our taxes on worldwide income overseas in our country of residence at at least comparable rates.  That's not bad, and is even legal, seems to be a side-step around the problem, and should suit most affected persons in most years in which they are overseas.