Tax Position Of US Citizens Overseas
The concept of 'offshore' is not very useful to a US national from a residence point of view.

Foreign Earned Income Exclusion
The income must be for services performed in a foreign country during a period of foreign residence or presence, whichever applies.

Foreign Housing Exclusion
To claim the housing exclusion, a person must meet the Physical Presence Test or the Bona Fide Resident Test.

The Tax Reconciliation Act 2005
The new law caps the Housing Exclusion at 30% of the foreign earned-income exclusion.

Foreign Tax Credits
Foreign taxes paid by a US taxpayer can often be credited against US tax liability or deducted in figuring taxable income on a US income tax return.

Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.

The Tax Reconciliation Act 2005

Under the Tax Reconciliation Act 2005 (signed by President Bush in May, 2006) the Foreign Earned Income Exclusion was indexed to US inflation as of the 2006 tax year, meaning that the maximum deduction in 2006 was $82,400, up from $80,000 in 2005.

For 2009, the maximum foreign earned income exclusion is up to $91,400 (2008: $87,600) per qualifying person. If married and both individuals work abroad and both meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $182,800 (2008: $175,200) for the 2009 tax year.

For 2008, the limitation on a claim for housing expenses is $26,280 for the tax year. However, the limit will vary depending upon the location of the qualifying individual’s foreign tax home and the number of qualifying days in the tax year.

Another significant change, known as a 'stacking' provision, was designed to tax US-source income as if it was earned on top of the excluded foreign income; previously, the excluded foreign income was disregarded in calculating taxable US income. Evidently, this pushed many taxpayers into a higher tax bracket for their US-source income, affecting many middle-income people - higher-earning individuals are probably already in top tax brackets.

The IRS confirmed that: "Effective for tax years beginning after 2005, the amount of foreign earned income (and foreign housing costs) excluded from an individual's gross income will be used for purposes of determining the rate of income and alternative minimum tax (AMT) that applies to his or her nonexcluded income."

"The Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) adds a new section 911(f) to the Internal Revenue Code. An individual's tax will be the excess of the tax that would be imposed if his or her taxable income were increased by the amount(s) excluded, and the tax that would be imposed if his or her taxable income were equal to the excluded amount(s)."

"For this purpose, the excluded amount(s) will be reduced by the aggregate amount of any deductions or other exclusions otherwise disallowed. In many cases this will have the effect of increasing an individual’s U.S. federal income tax to an amount greater than it would have been under prior law."

When tax credits are available against the additional taxable income (they cannot be claimed in respect of excluded income), then if the foreign income was taxed highly, as is the case in most of Europe, there would be no signicant effect on after-tax income; but if the foreign location has low income taxes or none (as in many offshore locations, eg Bermuda), then the 'stacking' provision would hit home.

In reality, many multinational corporations have no choice but to pay the higher tax bills of expat executives. Many employers already offered either tax reimbursement or tax equalization. Under the former, the employer pays the tax on expat benefits such as school fees and home leave, which are considered income; under the latter, it pays the difference between actual tax liability and what the executive would have paid at home.

It was anticipated at the time that the legislation was introduced that it would lead to a tendency for multinational corporations to employ fewer Americans; and less incentive for the expats themselves to want to work abroad.

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Tax Position Of US Citizens Overseas
The concept of 'offshore' is not very useful to a US national from a residence point of view.

Foreign Earned Income Exclusion
The income must be for services performed in a foreign country during a period of foreign residence or presence, whichever applies.

Foreign Housing Exclusion
To claim the housing exclusion, a person must meet the Physical Presence Test or the Bona Fide Resident Test.

The Tax Reconciliation Act 2005
The new law caps the Housing Exclusion at 30% of the foreign earned-income exclusion.

Foreign Tax Credits
Foreign taxes paid by a US taxpayer can often be credited against US tax liability or deducted in figuring taxable income on a US income tax return.