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Americans Working Overseas May See Big Jump in Tax Bill

Money MattersBy Tom Herman, Wall Street Journal May 20, 2006; Page B4: Many Americans working abroad may be hit with significantly higher tax bills under the new tax law signed Wednesday by President Bush. In some cases, high-paid expatriates could owe tens of thousands of dollars in additional taxes. Among those most likely to get hit are Americans in countries with high housing costs -- such as Hong Kong and Singapore -- and whose companies don't help cover the additional tax burdens of living abroad, accountants say. For companies with special expatriate tax packages, the additional costs could prompt them to send fewer workers abroad -- and possibly bring some back home. Under the old law, Americans working abroad could exclude as much as $80,000 of their foreign-earned compensation for 2006. Under the new law, that figure rises to $82,400 for this year -- but income above that level is now typically subject to higher effective tax rates than before. The new law also greatly reduces the maximum amount of housing costs that overseas workers may exclude or deduct.

Congress's Joint Committee on Taxation estimates the provision, which is retroactive to the start of this year, will raise an estimated $2.1 billion in revenue for the U.S. Treasury over the next 10 years. The new law also protects millions of people from getting stung by the alternative minimum tax this year and extends the lower tax rates on capital gains and dividends through the year 2010, instead of letting them expire after 2008.

It isn't yet clear how companies that employ Americans abroad will react. But the additional U.S. tax burden from the new law "could significantly affect the cost" of an overseas assignment, according to an Ernst & Young report. "Lots of people are mighty unhappy out here," says David Sutherland, head of the tax committee of the American Chamber of Commerce in Hong Kong. The tax increase "will be huge for some people and will cause many Americans to return" to the U.S., he says.

How much of an impact someone will feel will depend on the details of their situation, such as what country they are in, their salary and housing costs, and what arrangements they have with their employer about taxes and housing. The impact could also depend on guidance to be issued by the Treasury Department. Yet it is clear that some people will get hit very hard, according to calculations by PricewaterhouseCoopers.

Consider a married U.S. citizen in Saudi Arabia with $150,000 in base pay, $30,000 in taxable foreign housing expenses (paid for by the employer), and $15,000 in interest income from a U.S. bank. Under the new law, that person's tax tab likely will jump by about $9,500 to around $22,500, according to PricewaterhouseCoopers analysts. In Hong Kong, the additional tax hit could exceed $20,000, it found.

U.S. citizens generally are subject to U.S. income tax on all their income, regardless of where they live and work. They may also be taxed by the country they live in, although they typically can claim a credit against their U.S. income tax for foreign taxes paid. Also, many Americans working abroad in the private sector are eligible to exclude up to a certain amount of foreign-earned compensation from income subject to U.S. taxes, and many are eligible for a foreign housing exclusion or deduction.

Nobody knows exactly how many Americans work abroad. The Internal Revenue Service, in a study published in 2004, said U.S. taxpayers living abroad reported a total of about $27.4 billion in foreign-earned income on 294,763 individual income tax returns filed for 2001.

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