In last month's article (IRS or IRAS: Who's Taxing You Now? (Part II)) we looked at how U.S. taxes are calculated and learned that, for U.S. individual income tax purposes, income is first reduced by the Foreign Earned Income and Housing Exclusion (a.k.a. the Section 911 exclusion) and then by the Singapore taxes paid (if there is any foreign earned income left over after taking a deduction for the exclusion). By going through an example, we saw how valuable the Section 911 exclusion is and how it can substantially reduce an individual's overall tax liability by more than just the foreign tax credit alone.
This article will discuss the history of Section 911, the recent attempts to repeal the section and what the future holds.
Section 911 was originally enacted in 1926. Its intent at that time was to promote foreign trade and to place U.S. citizens residing abroad on an equal footing with their foreign counterparts.
Since 1926 the exclusion has been amended, tightened, revamped, decreased and increased but the Section has never been repealed and, actually, the most recent amendment to the Section (in 1987) even increased the general exclusion from $70,000 to $80,000 (over the course of 5 years).
In May 2003, however, Americans working abroad were shocked to learn that the Senate Finance Committee had narrowly approved a bill which included a provision to repeal the Section (a measure the Committee determined was necessary in order to fund other provisions in the bill including across the board tax rate cuts as well as a special tax cut for dividend income received by individuals).
Proponents of repealing the Section argued that the exemption gave foreign-based workers an unfair advantage over U.S.-based employees. Chuck Grassley, chairman of the Senate Finance Committee was quoted as saying: “Part of tax relief is tax fairness. I have to ask whether it's fair for taxpayers to underwrite the cost of sending employees overseas. The Section 911 tax break applies only to private sector employees who move overseas of their own free will. It's not available to government or military personnel stationed overseas. The revenue raised from repeal is mostly because these people don't pay tax to either their foreign host country or the United States. So an American soldier who spends a year in Kabul has to pay his full U.S. tax obligation, but an American working for a private company in Bermuda pays no taxes. A worker in Des Moines pays federal income taxes, but his colleague working for the same company overseas probably pays nothing. That doesn't make sense.”
Proponents for retaining the Section, and even increasing it, argued that:
In the end, the Jobs and Growth Tax Relief Reconciliation Act did not repeal Section 911. One of the reasons for the Section's survival given by David Hamod, Executive Director of the Section 911 Coalition and President of Intercom International Consultants, were the strong letters sent to leaders of the House and Senate from major business groups such as the US Chamber of Commerce and the National Association of Manufacturers. As well, letters, faxes and emails sent by American Chambers of Commerce around the world and the many Americans living and working abroad also had an impact (the full list of Mr. Hamod's “Top Ten” reasons why the Section was not repealed can be found at www. aca.ch/acan129.htm).
So the question is: Where does all of this leave us now and are we out of the woods?
Not according to John F. Leyden, Jr. Executive Director, Hong Kong-U.S. Business Council, International Division U.S. Chamber of Commerce, who says that: “The Senate staff I've spoken with are split on any additional action in this Congress. Some say no some say yea.” Mr. Leyden also remarked that this “indicates we need to stay on top of the issue” and that repeal remains a possibility “as long as Grassley is chair of Finance and as members look for ways to spend without adding to deficits.”