In the name of fairness and in an effort to raise revenues, tax writers in the US Congress added a last-minute provision that retroactively increased taxes for Americans living abroad. But the sudden imposition of new taxes has surprised expatriate taxpayers, and it has employers concerned about the added cost.
The increase for Americans abroad was added at the last minute to the US$69 billion tax cut legislation that was signed last week. Americans living overseas paid almost US$3.5 billion in US income taxes in 2001, the latest year for which data is available, according to the Internal Revenue Service (IRS).
The change, which is retroactive to the beginning of this year, is expected to raise taxes on Americans living overseas by US$2.1 billion over the next 10 years.
The suddenness of the move meant that American Chambers of Commerce in Asia did not have a chance to mobilize against the idea as they had in previous sessions of Congress.
"We were held back by the US Chamber because they didn't think it would be popped in this time," said Richard Vuylsteke, executive director of the American Chamber of Commerce in Taipei.
Senator Charles Grassley, the chairman of the Finance Committee, who has long been a proponent of higher taxes on overseas Americans, has said the tax benefits are overly generous.
Americans living overseas say the provision wrongly focuses on allowances that their employers pay to cover higher costs -- like housing, schools and trips home -- that they incur by taking a job abroad. The law changes the way taxes are calculated on subsidies like housing allowances, which should push many of those Americans into higher tax brackets, analysts say.
While the move will have limited effect on Americans living in countries with high tax rates -- European countries, for example -- those living in low tax jurisdictions with high housing costs -- like Bermuda, the Middle East, Singapore and Hong Kong -- will be hit hardest, partners at two major accounting firms said.
Overall, the bill raises taxes on overseas Americans by about 6 percent, but most individuals will pay nothing more, while others will see their taxes quadruple.
Americans working overseas get a dollar-for-dollar credit for income taxes paid to foreign countries to offset their US income taxes. They also get to exclude US$80,000 from the income they report to the IRS. The new law increased the exclusion to US$82,400 this year.
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