Foreign Earned Income Exclusion Under Scrutiny
AARO among the overseas citizen groups consulted
On May 20, the General Accountability Office released a study commissioned by two members of the Americans Abroad Caucus, Representatives Carolyn Maloney (NY 14) and Mike Honda (CA 17), and their colleague Jim McDermott (WA 7).
For its study, the GAO analyzed 2011 IRS statistical data; reviewed the tax code and relevant government and academic literature; and interviewed government officials, experts, and stakeholders, including groups representing citizens working abroad and employers. AARO was asked to contribute to the study and in September 2013, Tax Committee Chair John Fredenberger and President Lucy Stensland Laederich were interviewed by phone.
The report concludes that while it cannot be shown that allowing US taxpayers working abroad to exclude a certain amount of foreign-earned income from taxes boosts exports, other arguments concerning taxpayer equity and competitiveness in foreign markets merit consideration.
Only 0.3% (some 445,000 returns) of all individual tax returns filed for tax year 2011 claimed the Foreign-Earned Income Exclusion (FEIE), with around 17% of these also claiming a foreign housing deduction. Close to 45% of taxpayers claiming the FEIE were able to eliminate all or most of their 2011 tax liabilities.
US taxpayers in high-tax countries can eliminate most or all of their US tax liability using the foreign tax credit, designed to prevent double taxation by both the US and a foreign country. Taxpayers living in lower- or no-tax countries benefit more significantly from the FEIE. Government and Congressional projections of the corresponding tax revenue losses in 2014 range from $4.3 billion to $5 billion.
While the GAO made no recommendation in its report, the Joint Committee on Taxation (JCT) has estimated that repealing the exclusion would increase federal revenue by $6.2 billion in 2015 and $89 billion from 2014 through 2023. It follows that, in the context of the promised overhaul of the US tax code, "Section 911" will inevitably come under scrutiny. One encouraging sign, however, may be that the JCT added that the net effect on economic efficiency of eliminating the tax expenditure (i.e. repealing the FEIE) and taxing all foreign earned income is uncertain.
Click here for the full GAO report.