From: Laurent Piguet < >
Date: Wed, 11 Jun 2003 10:20:07 +0200
X-Mailer: QUALCOMM Windows Eudora Version 5.2.0.9

An article about the taxation of US residents abroad (applies to Swiss
people returning with a Green Card, and possibly, a US spouse...)

Thanks, Terry.

Laurent

URL: http://www.iht.com/ihtsearch.php?id=97767

     Copyright ) 2003 The International Herald Tribune | www.iht.com

     Expatriates weather tax threat
     Sharon Reier/IHT International Herald Tribune
     Wednesday, May 28, 2003

     Cutting income exclusion would have had minor effect

     PARIS Americans working abroad breathed a collective sigh of
     relief last week as Congress jettisoned an item in the tax
     reduction bill that would have repealed the $80,000 expatriate
     earned-income exclusion. The provision, section 911 of the
     Internal Revenue Service code, allows U.S. taxpayers who are
     foreign residents to exclude up to $80,000 of money earned from
     services performed abroad from their gross income, and calculate
     their U.S. taxes only on the rest.

     Although the proposal died in committee, some observers believe
     it will eventually be enacted. "It is clear the Bush
     administration has targeted this provision," said Samuel
     Okoshken, an attorney in Paris who specializes in taxation.
     "They don't see it as a tax increase for expats, but the closing
     of a loophole," he said.

     For many expats who use the earned-income exclusion-at last
     count there were 358,392 who used it to exclude $15.2 billion in
     income- the change would not be catastrophic. "It is not as
     disastrous as it seems," said Rahul Ranadive, an associate in
     the Miami tax department of the law firm Baker McKenzie,
     "because most people will have the foreign tax credit available
     to them."

     The United States is one of very few countries that tax its
     citizens who live abroad. Although Congress has considered
     dropping the earned-income exclusion, it has made no mention of
     removing the foreign tax credit, which would have indicated a
     frontal attack on expatriates.

     The foreign tax credit entitles taxpayers to reduce their U.S.
     tax liability by the amount of tax they pay in their country of
     residence on that same income.

     Since many countries - particularly European countries - have
     higher tax rates than the United States, payment of foreign
     income taxes in effect cancels most of the tax U.S. expats owe
     in the United States on their earned income.

     Suppose a married couple with two children living in France,
     with one partner working, had $150,000 in earned income and no
     investments. Assuming a euro-to-dollar rate of 1-to-1, their
     French taxes would be $35,500. The same family living in the
     United States with the same $150,000 income would owe $29,600,
     assuming they had no mortgage or other major deductions. With
     the $80,000 earned income exclusion, the family living in France
     would theoretically have $70,000 in taxable income, and owe
     $7,400. But most of this (not all of it, because of the
     alternative minimum tax) would be offset by the foreign tax
     credit, since taxes in France are higher than in the United
     States. In a high-tax country like France, the earned income
     exclusion is in most cases academic.

     But suppose a taxpayer earns $100,000 a year in Saudi Arabia,
     where there is no income tax. With the $80,000 exclusion, he
     would owe taxes on only $20,000 in the United States; without it
     he would be taxed on the full $100,000.

     It should be noted that employees who work in low-tax countries
     frequently do not get the benefit of the tax advantage. Instead,
     the corporations that employ them sometimes use the exclusion as
     a profit center by continuing to withhold tax from the employee
     as if he were still paying U.S. rates.

     The real losers, said Fred Fredricks, a tax consultant in Hong
     Kong, would have been "the people unattached to large
     corporations or governments." That means everything from
     independent business consultants to people who work for
     nongovernmental agencies, free-lance journalists, art dealers or
     independent English teachers.

     Of course, what applies in general does not necessarily apply to
     particular cases. For instance, France offers generous
     deductions to taxpayers with children. A U.S. resident in France
     with a large family might face a smaller tax bill in France than
     he or she would in the United States, and as a result would not
     be paying sufficient taxes in France to offset the U.S. taxes.

     The foreign tax credit is designed to prevent people from being
     taxed in two jurisdictions at the same time. But this safeguard
     collapses when the Alternative Minimum Tax comes into play -
     which could happen when taxable income surpasses $45,000 if the
     $80,000 earned income exclusion is abolished, according to
     Richard Van Ham, a tax consultant based in Paris. The
     Alternative Minimum Tax is designed to ensure that wealthy
     people with passive income cannot totally avoid U.S. taxes.
     Under the tax, only 90 percent of foreign taxes paid are
     eligible for credit, resulting in double taxation on the
     remaining 10 percent.

     Therefore, the hypothetical family living in France would be
     liable for an additional $2,080 in alternative minimum tax if
     the expatriate earned income exclusion were repealed, according
     to Van Ham.

     Paradoxically, a move to drop the exclusion could cause a drop
     in compliance. Many Americans abroad - possibly more than half -
     do not file tax returns. "Most of the people not filing probably
     don't owe much money," Van Ham said. "The $80,000 exclusion is
     an elected exclusion. You don't get it if you don't file."

     Many nonfilers are low-income expats who do not pay local taxes
     either. Currently, the IRS has a program that encourages
     nonfilers to come back into the system if they file three years
     of back taxes. The $80,000 exclusion effectively gives these
     people a tax amnesty, so the taxpayer is not penalized if he
     starts filing. If the exclusion were repealed, expats who pay no
     taxes abroad would be considered to have committed civil fraud,
     for which there is a penalty.

     International Herald Tribune

--
Laurent Piguet
piguet_at_yahoo.com
Office: +41-21-807-1676
Mobile: +41-79-310-3249
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