Expatriates Face Tax Hike under New Tax Law

U.S. citizens living and working in foreign countries will be paying higher taxes on their 2006 tax returns thanks to revenue-raising provisions in the Tax Increase Prevention and Reconciliation Act. Section 515 of the new law changed the rules on how expatriates calculate their federal income taxes when claiming the foreign earned income exclusion. Expatraites can exclude up to $80,000 in foreign wages from US income taxes as long as they meet the time requirements of the bona fide or physical presence tests. After the first $80,000, expatriates calculate their federal income taxes using the ordinary income tax rates.

Under the old tax laws, expatriates would calculate their tax starting at the 10% tax bracket. Under the new tax law, expatriates must use the tax bracket that would apply had they not claimed the exclusion. For many expatriates, that means they will start with the 25% or 28% tax brackets, instead of the more favorable 10% bracket.

More information:

• Foreign Earned Income Exclusion
• Foreign Tax Credit
• Foreign Bank Account Reporting
• 2006 Tax Rates
• Tax Increase Prevention and Reconciliation Act - Section 515 (full text of the new tax law)
• Basic Summary of the Tax Increase Prevention and Reconciliation Act

I would urge expatriates to find a tax professional and plan ahead for this tax change. You might want to boost your tax deductions, review your foreign tax credit carryovers, and find out if you need to pay any estimated taxes. It's better to find out now then next year.