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Congress views repeal of foreign earned income exclusion for expatriates

  • For years Congress has been proposing bills to end the foreign earned income exclusion, even though they don't have a clue as to why Internal Revenue Code Sections 913 and 911 were enacted in the first place. This is strictly political and based on votes as members of Congress, and yes sometimes members of our executive administration, often perceive this as a “tax loophole”, or at least they try to sell it as such. The truth is that it was originally intended for a specific purpose and that was to enable U.S. business, and today people seeking employment on a global basis, to remain competitive in relation to other businesses and persons from other countries. It is all about global parity. The United States is one of the few countries that requires that income form all global sources be included in a U.S. tax return regardless of whether the person is residing in the United States. In order to avoid double taxation and to encourage parity with workers from other countries, it recognizes that the increased cost of living overseas must be taken into account when compensating expatriate employees. This additional expense is often included in the wages paid to expatriate employees, and is often subject to tax by the local country (or taxing jurisdiction thereof) as well as being included in the gross income of the U.S. income tax return. Of course not every person is fortunate enough to work for a company that pays a foreign service allowance.
    • The Section 911 foreign earned income exclusion (FEIE) is intended to mitigate the additional living costs, and the resulting tax affect, making the U.S. worker more competitive in relation to employees of foreign countries. It is also intended to encourage U.S. employment overseas, which is not only good for American business and the economy, but also helps U.S. persons who are unable to find work here in the U.S. as well as increase their skills to companies here in the U.S. when they return.
    • Denying the benefits of the FEIE is, in my opinion, a VERY BAD IDEA. Although it may have short term political affects as regards getting cotes from those who do not comprehend global business or economics, it would definitely have an extremely adverse economic affect on our global economic position. It is time that our elected officials stop using the U.S. Tax Code to enhance their popularity by selling this as a “tax loophole” and do what is right for the nation. 
    • Repeal of the FEIE will result in doubling the cash outlay for many multinational employers to pay both foreign as well as U.S. tax on expatriate employee compensation. This is certain to be cause for these employers to consider hiring locals instead of Americans for jobs overseas, which is what happened years ago when Congress first started messing with the FEIE.

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