Last month in A Brief Overview of the Alternative Minimum Tax (Part I) we talked about what causes Americans, living both in the U.S. and abroad, to incur an alternative minimum tax liability. In that article, specific attention was paid to the foreign tax credit limitation and its role in causing an AMT tax liability where no tax liability would have otherwise existed.
In the last sentence of that article I said “Congress is studying ways to correct this problem, but until it does, almost anyone is a potential target for this tax”. Well guess what? Beginning in the 2005 tax year this problem will be history because on October 22nd President Bush signed the American Jobs Creation Act of 2004 wherein the 90% foreign tax credit limitation was repealed.
Now please don't think that this repeal was designed with the expat in mind because, although the bill is called the “American Jobs Creation Act of 2004”, it is really a corporate tax cut bill and the reason that the repeal was necessary is because corporations are also subject to the alternative minimum tax (we expats are only inadvertently benefiting from the repeal – much to the chagrin of some Congressmen I'm sure!)
Before I go on to discuss the individual tax impact the passage of this bill (as well as the Working Families Relief Act of 2004 which was signed on October 4th) will have, I wanted to take a moment to explain that the October 22nd legislation was actually designed to repeal the foreign sales corporation/extraterritorial income (FSC/ETI) tax-based trade subsidy and was necessary in order to bring an end to European sanctions on American exporters.
Like many other countries, the U.S. has long provided export-related benefits under its tax laws. In the U.S. for the last two decades, these benefits were provided under the FSC regime. In 2000, the European Union (EU) succeeded in having the FSC regime declared a prohibited export subsidy by the World Trade Organization (WTO). In response to this WTO finding, the U.S. repealed the FSC rules and enacted a new regime, under the FSC Repeal and Extraterritorial Income Exclusion Act of 2000. The EU immediately challenged the ETI regime in the WTO, and in January 2002 the WTO held that the ETI regime also constituted a prohibited export subsidy thus necessitating the need for further legislation hence the American Jobs Creation Act.
That said, the two bills, in my view, really don't impact expats very much at all – especially the Working Families Relief Act which merely extends, or accelerates the phase-in, of certain tax breaks which were enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001.
The only other provision worth taking note of is the increase to the penalty for failure to report an interest in a foreign bank account. As I'm sure most of you are aware, each U.S. person who has a financial interest in, or signature authority or other authority over bank, security or other financial accounts in a foreign country, which exceeds $10,000 in aggregate value at any time during the calendar year, must report that relationship each calendar year by filing form TD F 90-22.1 on or before June 30th of the succeeding year.
Under prior law the penalty for willfully failing to file the form TD F in respect of a foreign bank account was the value of the account up to a maximum of $100,000 and the minimum penalty was $25,000.
Under the new law the penalty for willfully failing to file the form is the greater of $100,000 or 50% of the value of the account.
So for example using an account with a value of $20,000, under prior law the penalty for failing to file the form TD F would have been $25,000 (the minimum penalty) and under current law it would be $100,000 (as $100,000 is greater than 50% of the value of the account).
In addition the American Jobs Creation Act added another civil penalty of $10,000 for non-willful failures to report interests in foreign financial accounts. However, unlike the willful failure penalty previously discussed, the non-willful failure penalty may be waived if any income from the account was properly reported on the income tax return and there was reasonable cause for the failure to report.
Next month's article will resume the discussion of the alternative minimum tax and the impact which the exercising of stock options has on it.