Update on US Taxation of Americans Overseas in 2007

By Jane Bruno, JD, LLM (Taxation)

October 2007 

For most Americans, tax season is a distant memory—usually of feverish activity in April followed by a welcome refund check some weeks later. However, for Americans overseas, US Taxes occupy either a much larger place in their lives—or no place at all. That is to say, some are very aware of the impact of US income tax on their “bottom line” take- home income and spend considerable effort trying to reduce that impact—and some Americans overseas are gloriously unaware of the need to file US returns and happily go about their business with nary a thought of filing deadlines or other complexities related to US taxes.  

This article is for both—the conscientious filers and the ignorantly blissful non-filers. The purpose is to bring you up to date on what has occurred with US taxation since the law changed significantly in May of 2006.  

Americans Overseas Need to File a US Tax Return

The requirement that Americans report their worldwide income is one aspect of the law that has not changed. Regardless of fairness issues and regardless of what other countries do, the fact remains that, at the moment, Americans overseas need to file a federal tax return to report income received. To reinforce this point, newly issued US passports, on the last page, state, “All U.S. citizens working and residing abroad are required to file and report on their worldwide income.” And one way of enforcing this law is to not issue a renewed passport until evidence of US tax return filing has been provided. So, all you non-filers—take heed. This is serious business and it is in your best interests to start filing US tax returns.

Efforts to Change Law with Respect to Reporting Foreign Income

Having duly chastised all non-filers, it seems appropriate to report on efforts to eliminate the limitation on the foreign earned income exclusion. This is exactly what Senate Bill 1140, introduced by Senator James DeMint (R.-SC) on April 18, 2007, would do. This is the second time he has introduced such a bill and the second time it has been referred to the Committee on Finance where it will probably languish until the 110th Congress adjourns. Most commentators do not believe this bill has a chance of making it through the legislative process with the current Administration.

Revised Housing Cost Amounts Eligible for Exclusion or Deduction

2006--One of the biggest changes brought about by “The Tax Increase Prevention Reconciliation Act of 2005” was the limitation on the amount of housing exclusion/deduction that would be taken. Initially, the limitation was a fixed amount regardless of the geographic location of the housing. In response to an outcry against the unfairness of this, the IRS issued Notice 2006-87 that adjusted the limitations on housing expenses for specific locations. The basis of the adjustments was the Department of State’s Living Quarters Allowance Table. Then, a second notice, Notice 2007-25, was been issued by the Internal Revenue Service that provided modifications and additions to the limitations of the 2006 notice. Note that both of these notices apply to the 2006 tax year and they are significant. For example, a US taxpayer in Bermuda would have a housing limitation of $11,536 under the new law—but it is $26,200 under Notice 2006-87 and $72,000 under Notice 2007-25. To check your housing expense limitation, go to the IRS website (www.irs.gov) and put in the notice number in the search box.

2007—Not long ago still another notice was issued that applies to 2007. Notice 2007-77 outlines in some detail the adjusted limitations on housing expenses based on geographic location. It can be accessed by putting the notice number in the “search” box at www.irs.gov .

2007 Foreign Income Exclusion

For those eager beavers that are already thinking about filing their 2007 tax return, the foreign income exclusion will be $85,700—up from $82,400 for 2006. For taxpayers with an American, working spouse, each can take up to $85,700 for a potential exclusion of $171,400.

Jane Bruno is the author of the “Expat’s Guide to US Taxes” available at: www.americantaxhelp.com, and a tax preparer/consultant. Please contact her with any questions at:janebruno@bellsouth.net or or visit her website at: www.oceanwavestax.com