| ................................New Tax Laws On May 17, 2006, President Bush signed into law tax legislation with the interesting title of “The Tax Increase Prevention Reconciliation Act of 2005.” This awkwardly worded law seemed to suggest that taxes would not increase, even though it held out no promise of them being reduced. But Americans living overseas had a big surprise at tax filing time in 2007. Not only did many Americans overseas owe more US tax, but they found the value of the foreign housing exclusion substantially reduced. How did this happen? It seems that Senator Grassley (R-Iowa) pushed through these provisions at the eleventh hour so there was not time to mount a meaningful lobby against them. Keep in mind, though, that there have been other attempts to erode the tax benefits of living overseas. The last effort several years ago would have eliminated the foreign income exclusion entirely and was introduced by a Democrat! What exactly has been changed in the tax law for Americans overseas? There are three primary changes, any one of which may or may not affect you. |
| The good news first: The foreign earned income exclusion increased in 2007 to $85,700 and for 2008, it is $87,600. | |
| The foreign housing exclusion has been capped at 30% of the earned income exclusion | |
| The potentially most expensive change for Americans overseas provides that income and housing expense excluded for tax purposes must be included for purposes of determining the marginal tax rate on other taxable income. |
| These changes have caused quite a stir in the community of Americans overseas. Some taxpayers won’t be affected at all (especially those that make below the exclusion amount, live in high tax countries, or mostly live on retirement income which is taxed anyway). Others will see their US taxes rise dramatically. |
