As someone who lived outside the US for more than two years, I gladly took advantage of one of the very few perks that the government provides expat Americans.
I’m referring to the “Foreign Earned Income Exclusion” (FEIE) program, in which Congress, in its benevolence, permits US citizens living abroad to exclude up to $82,400 in earned income each year from foreign taxes ($164,800 for a married couple).
Of course, the FEIE doesn’t affect the foreign taxes US citizens working abroad must pay. Fortunately, most (though not all) of these taxes may be credited against US taxes.
Now, the US Treasury has issued a notice that allows expats to exclude from their U.S. taxes more of the cost of housing in foreign locations where housing costs are higher than in the U.S. The change partially offsets the impact of an obscure provision in last year’s tax bill that for the first time imposed tax on housing, educational and other subsidies that are commonly provided by employers to US expats. Among those hit the hardest by the change are Americans working in places with high housing costs and low taxes, such as Switzerland.
The FEIE is a poor substitute for the system in the vast majority of other countries, which for the most part simply removes citizens from the income tax rolls when they depart for a year or more. This sensible system is too much for the tax and spenders in the US Congress to bear, who believe they have the right to tax US citizens on their worldwide income, wherever they live. Even persons who are US citizens by an accident of birth (e.g., with a US mother or father, but born abroad) are supposed to file tax returns with the IRS!
Short of giving up US citizenship, the FEIE is the best choice Americans expats have to shield their foreign earnings from US taxes. For more information on how to use the FEIE, see http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html.
