Introduction and initial reactions
Join us for the discussion tomorrow! How the party of #FATCA promises to make life easier for US expats. Join us for the discussion live at 8:30 am EDT tomorrow with @ExpatriationLaw https://t.co/tU0S1mhyVO
— IRSMEDIC (@IRS_MEDIC) September 14, 2023
Today, U.S. Representatives Don Beyer (D-VA) and Dina Titus (D-NV) announced the introduction of the Tax Simplification for Americans Abroad Act, legislation to help American taxpayers living overseas comply with their U.S. tax obligations by calling on the IRS to create a short form certification for Americans living abroad who owe no U.S. tax and earn below $400,000 annually. The bill would expand the Foreign Earned Income Exclusion to include additional types of income that are earned overseas like pensions and distributions from retirements funds. It would also consolidate duplicative and burdensome forms that taxpayers must file under the Foreign Account Tax Compliance Act (FATCA) and the Bank Secrecy Act.
“Ordinary Americans living abroad are often overlooked when U.S. tax policy is written, which can make it extremely difficult and expensive for them to navigate the tax system,” said Rep. Don Beyer. “I saw a record-breaking number of Americans renounce their citizenship when I served as the U.S. Ambassador to Switzerland, and the needless complexity of the U.S. tax code was often cited as a reason. This bill would help ordinary Americans fulfill their obligations without having to retain an expensive accountant to certify that they owe no U.S. taxes, and remove some of the frustrations faced by Americans living abroad who just want to follow the law.”
“Americans abroad face a uniquely complex set of reporting requirements that we here at home aren’t subject to. I’m joining Rep. Beyer to create a simplified income tax return for taxpayers living abroad because Americans shouldn’t have to jump through extra hoops simply because they reside or work overseas,” said Rep. Dina Titus, Chair of the Americans Abroad Caucus.
The announcement is here and that actual bill is here.
https://beyer.house.gov/news/documentsingle.aspx?DocumentID=5981
https://beyer.house.gov/uploadedfiles/americans_abroad.pdf
A pdf version of the bill is available here:
This bill does NOT eliminate U.S. citizenship taxation – it is an attempt to make compliance with the existing rules of citizenship taxation easier!
Notably this is very similar to Congressman Beyer’s H.R. 6057 which was introduced in November of 2021. My analysis of H.R. 6057 is here:
My first impressions of this bill are captured in the following twitter thread:
The values of a country are revealed by its tax policies. This bill cannot imagine a world where citizenship can exist independently of the control, obligations and disabilities of taxation. @RepDonBeyer deserves thanks for clarifying that “All Roads Lead To Renunciation!” https://t.co/Y6HF1CxaXc
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 14, 2023
A “Readers Digest” Explanation Of The Bill
It’s important that “Section 2”, “Section 3” and “Section 4” are logically independent legislative proposals. To be specific:
– “SEC. 2. SHORT FORM FOR CERTAIN TAXPAYERS LIVING ABROAD”;
– “SEC. 3. EXPANSION OF INCOME ALLOWED AS FOREIGN EARNED INCOME”;
– “SEC. 4. INFORMATION RELATING TO SPECIFIED FOREIGN FINANCIAL ASSETS”
are independent of each other and are designed to achieve separate results.
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Tax Simplification for Americans Abroad Act’’.
SEC. 2. SHORT FORM FOR CERTAIN TAXPAYERS LIVING ABROAD
What it is intended to achieve: The overall purpose is to make compliance easier by creating a new kind of tax return for Americans abroad which will consolidate all the reporting information (and forms) into one form.
Who is allowed to use the new form: The tax return can be used ONLY by individuals who meet the following conditions:
– they qualify under the 911 “Foreign Earned Income Exclusion”
– they have a “gross income” (presumably as defined under IRC 61) of not more than $400,000 (indexed to inflation). Note that this $400,000 would NOT include income that is excluded under the Foreign Earned Income Exclusion. Therefore the practical meaning of this requirement would be no more than (1) the maximum income exclusion under the FEIE (currently $120,000) plus (2) an additional $400,000 of “GROSS income”
– they have zero U.S. tax liability … Note that this may be a very difficult condition to meet. Much of the income that cannot be excluded under the FEIE is income that typically attracts U.S. tax (GILTI, Subpart F, PFIC, phantom capital gains, sale of principal residence). Note also the spectre of the 3.8% Obama surtax in addition to the income tax.
Note that all three of these conditions must be satisfied. The requirement of zero U.S. tax may be difficult to meet.
SEC. 3. EXPANSION OF INCOME ALLOWED AS FOREIGN EARNED INCOME.
Like its predecessor (H.R. 6057) the bill tries to improve the situation for Americans abroad by expanding the definition of earned income. It does NOT increase the amount of income that can be excluded under the FEIE. It’s interesting to see what is now included as earned income and what is specifically excluded from the definition of earned income.
Specific inclusions in the definition of “earned income”
In addition to income from employment …
– pensions and foreign government benefits now qualify as earned income
Specific exclusions from the definition of earned income
– investment income does NOT qualify as earned income (brokerage accounts, savings accounts, etc.)
– dividends from small business corporations do NOT qualify as earned income
– interest, dividends, capital gains from investment accounts (including UK ISA and Canada TFSA) continue to be income
– GILTI, Subpart F and PFIC (fake income) are still included in income
– interestingly (carried over from H.R. 6057) income from 402(b) plans does not qualify as “earned income”. (Many consider the income from Australian Superannuations to be 402(b) income.)
These exclusions from “earned income” are “gross income” and count toward the $400,000 threshold to be eligible to use the new simplified filing procedure. Assuming no U.S. tax is owing the person would be eligible to use the “simplified filing procedure”. The problem is that “gross income” includes certain kinds of “fake income” that often create U.S. tax liability.
If the individual is not eligible for the new simplified filing process, he would file under the existing rules.
(See Appendix C below for the technical details.)
SEC. 4. INFORMATION RELATING TO SPECIFIED FOREIGN FINANCIAL ASSETS.
SEC. 4 contains provisions directed to both (1) Individuals and (2) Foreign Financial Institutions described in IRC 1471 (FATCA).
Provisions aimed at individuals
Generally (“The devil is in the details”) this is an attempt to relieve both the FBAR (FinCEN 114) requirement and the Form 8938 requirement for certain Americans abroad.
FBAR Relief – generally trying to make the threshold reporting the same as FATCA Form 8938 reporting:
It amends the FBAR Statute (31 U.S.C. 5314) as follows:
(1) IN GENERAL.—If a person makes a transaction that would require reporting under subsection (a), and such transaction involves a specified foreign financial asset, the reporting requirements described in subsection (a) shall—
(A) only apply if the transaction involves an amount that exceeds the aggregate value threshold set forth in section 6038D of the Internal Revenue Code of 1986; and
(B) be satisfied by attaching to such person’s return of tax for such taxable year the information required under section 6038D of the Internal Revenue Code of 1986.(2) SPECIFIED FOREIGN FINANCIAL ASSET.—
15 For purposes of this section, the term ‘specified foreign financial asset’ has the meaning given the term in section 6038D(b) of the 2211 Internal Revenue 18 Code of 1986.
Form 8938 Relief – Providing some exclusions from Form 8938 reporting including accounts that are excluded from reporting under Annex II in FATCA IGAs:
The most notable provision (and this is intelligent) is to NOT require reporting of accounts that are exempt from reporting under Annex II of the FATCA IGAS (generally retirement accounts).
(2) CERTAIN ACCOUNTS EXEMPT FROM FINANCIAL REPORTING.—An account is exempt from the reporting requirement under subsection (a) if it is an account—
(A) the maximum balance of which does not exceed $600 for the entire duration of the taxable year,
(B) the usage of which is limited to a single merchant, or
(C) the type of which is listed as an exempt account in Annex II of the Foreign Account Tax Compliance Act Intergovernmental Agreement in effect between the United States and the country in which such account is held.
Provisions aimed at “Foreign Financial Institutions – Amendments to IRC 1471
The language of the Beyer ‘‘Tax Simplification for Americans Abroad Act’’ in SEC. 4 includes:
(c) FURNISHMENT OF INFORMATION BY FOREIGN FINANCIAL INSTITUTIONS TO OWNERS OF SPECIFIED FOREIGN FINANCIAL ASSETS.
Section 1471(c) of such Code is amended by adding at the end the following new paragraph:
‘‘(4) REQUIREMENT TO PROVIDE INFORMATION TO ACCOUNT HOLDERS.—
If a foreign financial institution submits a report under this section, such institution shall provide account holders with a copy of such report within 15 days of such submission.’’
By its express terms this provision (found in Chapter 4) imposes additional administrative obligations on Foreign Financial Institutions. This additional obligation would certainly increase the motivation of banks to avoid doing business (past, present and future) with “U.S. citizens”.
As a practical matter, the FATCA obligations are governed by the FATCA IGAs and not the Internal Revenue Code. The “Tax Simplification for Americans Abroad Act” does NOT change the content of the FATCA IGAs. Therefore, I believe this specific legislative amendment, imposing obligations on the banks that are NOT included in the FATCA IGAs,IRC 1471 can be ignored by the foreign banks.
Conclusion …
While appreciating the sentiments of Congressman Beyer and Congresswoman Titus this bill keeps citizenship taxation intact. It provides certain “carveouts” for certain people, under certain circumstances and at certain times in their lives. It is not a solution, but it will (for some) make the “prison of citizenship taxation” more comfortable.
John Richardson – Follow me on Twitter @Expatriationlaw
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Appendix A – Beyer 2021 Bill – H.R. 6057
Post 1 – November 21, 2021
Post 2 – November 27, 2011 – Podcast
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Appendix B – IRC 911 – The Foreign Earned Income Exclusion In Its Present Form
26 U.S. Code § 911 – Citizens or residents of the United States living abroad
U.S. Code
(a)Exclusion from gross income
At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year—
(1)the foreign earned income of such individual, and
(2)the housing cost amount of such individual.
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(b)Foreign earned income
(1)Definition
For purposes of this section—
(A)In general
The term “foreign earned income” with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.
(B)Certain amounts not included in foreign earned income
The foreign earned income for an individual shall not include amounts—
(i)received as a pension or annuity,
(ii)paid by the United States or an agency thereof to an employee of the United States or an agency thereof,
(iii)included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or
(iv)received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed.
(2)Limitation on foreign earned income
(A)In general
The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate equal to the exclusion amount for the calendar year in which such taxable year begins.
(B)Attribution to year in which services are performed
For purposes of applying subparagraph (A), amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are performed.
(C)Treatment of community income
In applying subparagraph (A) with respect to amounts received from services performed by a husband or wife which are community income under community property laws applicable to such income, the aggregate amount which may be excludable from the gross income of such husband and wife under subsection (a)(1) for any taxable year shall equal the amount which would be so excludable if such amounts did not constitute community income.
(D)Exclusion amount
(i)In general
The exclusion amount for any calendar year is $80,000.
(ii)Inflation adjustment
In the case of any taxable year beginning in a calendar year after 2005, the $80,000 amount in clause (i) shall be increased by an amount equal to the product of—
(I)such dollar amount, and
(II)the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2004” for “2016” in subparagraph (A)(ii) thereof.
If any increase determined under the preceding sentence is not a multiple of $100, such increase shall be rounded to the next lowest multiple of $100.
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(c)Housing cost amount
For purposes of this section—
(1)In general
The term “housing cost amount” means an amount equal to the excess of—
(A)the housing expenses of an individual for the taxable year to the extent such expenses do not exceed the amount determined under paragraph (2), over
(B)an amount equal to the product of—
(i)16 percent of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which such taxable year begins, multiplied by
(ii)the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1).
(2)Limitation
(A)In general
The amount determined under this paragraph is an amount equal to the product of—
(i)30 percent (adjusted as may be provided under subparagraph (B)) of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which the taxable year of the individual begins, multiplied by
(ii)the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1).
(B)Regulations
The Secretary may issue regulations or other guidance providing for the adjustment of the percentage under subparagraph (A)(i) on the basis of geographic differences in housing costs relative to housing costs in the United States.
(3)Housing expenses
(A)In general
The term “housing expenses” means the reasonable expenses paid or incurred during the taxable year by or on behalf of an individual for housing for the individual (and, if they reside with him, for his spouse and dependents) in a foreign country. The term—
(i)includes expenses attributable to the housing (such as utilities and insurance), but
(ii)does not include interest and taxes of the kind deductible under section 163 or 164 or any amount allowable as a deduction under section 216(a).
Housing expenses shall not be treated as reasonable to the extent such expenses are lavish or extravagant under the circumstances.
(B)Second foreign household
(i)In general
Except as provided in clause (ii), only housing expenses incurred with respect to that abode which bears the closest relationship to the tax home of the individual shall be taken into account under paragraph (1).
(ii)Separate household for spouse and dependents
If an individual maintains a separate abode outside the United States for his spouse and dependents and they do not reside with him because of living conditions which are dangerous, unhealthful, or otherwise adverse, then—
(I)the words “if they reside with him” in subparagraph (A) shall be disregarded, and
(II)the housing expenses incurred with respect to such abode shall be taken into account under paragraph (1).
(4)Special rules where housing expenses not provided by employer
(A)In general
To the extent the housing cost amount of any individual for any taxable year is not attributable to employer provided amounts, such amount shall be treated as a deduction allowable in computing adjusted gross income to the extent of the limitation of subparagraph (B).
(B)Limitation
For purposes of subparagraph (A), the limitation of this subparagraph is the excess of—
(i)the foreign earned income of the individual for the taxable year, over
(ii)the amount of such income excluded from gross income under subsection (a) for the taxable year.
(C)1-year carryover of housing amounts not allowed by reason of subparagraph (B)
(i)In general
The amount not allowable as a deduction for any taxable year under subparagraph (A) by reason of the limitation of subparagraph (B) shall be treated as a deduction allowable in computing adjusted gross income for the succeeding taxable year (and only for the succeeding taxable year) to the extent of the limitation of clause (ii) for such succeeding taxable year.
(ii)Limitation
For purposes of clause (i), the limitation of this clause for any taxable year is the excess of—
(I)the limitation of subparagraph (B) for such taxable year, over
(II)amounts treated as a deduction under subparagraph (A) for such taxable year.
(D)Employer provided amounts
For purposes of this paragraph, the term “employer provided amounts” means any amount paid or incurred on behalf of the individual by the individual’s employer which is foreign earned income included in the individual’s gross income for the taxable year (without regard to this section).
(E)Foreign earned income
For purposes of this paragraph, an individual’s foreign earned income for any taxable year shall be determined without regard to the limitation of subparagraph (A) of subsection (b)(2).
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(d)Definitions and special rules
For purposes of this section—
(1)Qualified individual
The term “qualified individual” means an individual whose tax home is in a foreign country and who is—
(A)a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B)a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.
(2)Earned income
(A)In general
The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.
(B)Taxpayer engaged in trade or business
In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income.
(3)Tax home
The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.
(4)Waiver of period of stay in foreign country
Notwithstanding paragraph (1), an individual who—
(A)is a bona fide resident of, or is present in, a foreign country for any period,
(B)leaves such foreign country after August 31, 1978—
(i)during any period during which the Secretary determines, after consultation with the Secretary of State or his delegate, that individuals were required to leave such foreign country because of war, civil unrest, or similar adverse conditions in such foreign country which precluded the normal conduct of business by such individuals, and
(ii)before meeting the requirements of such paragraph (1), and
(C)establishes to the satisfaction of the Secretary that such individual could reasonably have been expected to have met such requirements but for the conditions referred to in clause (i) of subparagraph (B),
shall be treated as a qualified individual with respect to the period described in subparagraph (A) during which he was a bona fide resident of, or was present in, the foreign country, and in applying subsections (b)(2)(A), (c)(1)(B)(ii), and (c)(2)(A)(ii) with respect to such individual, only the days within such period shall be taken into account.
(5)Test of bona fide residence
If—
(A)an individual who has earned income from sources within a foreign country submits a statement to the authorities of that country that he is not a resident of that country, and
(B)such individual is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earnings,
then such individual shall not be considered a bona fide resident of that country for purposes of paragraph (1)(A).
(6)Denial of double benefits
No deduction or exclusion from gross income under this subtitle or credit against the tax imposed by this chapter (including any credit or deduction for the amount of taxes paid or accrued to a foreign country or possession of the United States) shall be allowed to the extent such deduction, exclusion, or credit is properly allocable to or chargeable against amounts excluded from gross income under subsection (a).
(7)Aggregate benefit cannot exceed foreign earned income
The sum of the amount excluded under subsection (a) and the amount deducted under subsection (c)(4)(A) for the taxable year shall not exceed the individual’s foreign earned income for such year.
(8)Limitation on income earned in restricted country
(A)In general
If travel (or any transaction in connection with such travel) with respect to any foreign country is subject to the regulations described in subparagraph (B) during any period—
(i)the term “foreign earned income” shall not include any income from sources within such country attributable to services performed during such period,
(ii)the term “housing expenses” shall not include any expenses allocable to such period for housing in such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer is present in such country, and
(iii)an individual shall not be treated as a bona fide resident of, or as present in, a foreign country for any day during which such individual was present in such country during such period.
(B)Regulations
For purposes of this paragraph, regulations are described in this subparagraph if such regulations—
(i)have been adopted pursuant to the Trading With the Enemy Act (50 U.S.C. 4301 et seq.) or the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), and
(ii)include provisions generally prohibiting citizens and residents of the United States from engaging in transactions related to travel to, from, or within a foreign country.
(C)Exception
Subparagraph (A) shall not apply to any individual during any period in which such individual’s activities are not in violation of the regulations described in subparagraph (B).
(9)Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing rules—
(A)for cases where a husband and wife each have earned income from sources outside the United States, and
(B)for married individuals filing separate returns.
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(e)Election
(1)In general
An election under subsection (a) shall apply to the taxable year for which made and to all subsequent taxable years unless revoked under paragraph (2).
(2)Revocation
A taxpayer may revoke an election made under paragraph (1) for any taxable year after the taxable year for which such election was made. Except with the consent of the Secretary, any taxpayer who makes such a revocation for any taxable year may not make another election under this section for any subsequent taxable year before the 6th taxable year after the taxable year for which such revocation was made.
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(f)Determination of tax liability
(1)In general
If, for any taxable year, any amount is excluded from gross income of a taxpayer under subsection (a), then, notwithstanding sections 1 and 55—
(A)if such taxpayer has taxable income for such taxable year, the tax imposed by section 1 for such taxable year shall be equal to the excess (if any) of—
(i)the tax which would be imposed by section 1 for such taxable year if the taxpayer’s taxable income were increased by the amount excluded under subsection (a) for such taxable year, over
(ii)the tax which would be imposed by section 1 for such taxable year if the taxpayer’s taxable income were equal to the amount excluded under subsection (a) for such taxable year, and
(B)if such taxpayer has a taxable excess (as defined in section 55(b)(1)(B)) for such taxable year, the amount determined under the first sentence of section 55(b)(1)(A) for such taxable year shall be equal to the excess (if any) of—
(i)the amount which would be determined under such sentence for such taxable year (subject to the limitation of section 55(b)(3)) if the taxpayer’s taxable excess (as so defined) were increased by the amount excluded under subsection (a) for such taxable year, over
(ii)the amount which would be determined under such sentence for such taxable year if the taxpayer’s taxable excess (as so defined) were equal to the amount excluded under subsection (a) for such taxable year.
For purposes of this paragraph, the amount excluded under subsection (a) shall be reduced by the aggregate amount of any deductions or exclusions disallowed under subsection (d)(6) with respect to such excluded amount.
(2)Special rules
(A)Regular tax
In applying section 1(h) for purposes of determining the tax under paragraph (1)(A)(i) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds taxable income (hereafter in this subparagraph referred to as the capital gain excess)—
(i)the taxpayer’s net capital gain (determined without regard to section 1(h)(11)) shall be reduced (but not below zero) by such capital gain excess,
(ii)the taxpayer’s qualified dividend income shall be reduced by so much of such capital gain excess as exceeds the taxpayer’s net capital gain (determined without regard to section 1(h)(11) and the reduction under clause (i)), and
(iii)adjusted net capital gain, unrecaptured section 1250 gain, and 28-percent rate gain shall each be determined after increasing the amount described in section 1(h)(4)(B) by such capital gain excess.
(B)Alternative minimum tax
In applying section 55(b)(3) for purposes of determining the tax under paragraph (1)(B)(i) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds the taxable excess (as defined in section 55(b)(1)(B))—
(i)the rules of subparagraph (A) shall apply, except that such subparagraph shall be applied by substituting “the taxable excess (as defined in section 55(b)(1)(B))” for “taxable income”, and
(ii)the reference in section 55(b)(3)(B) to the excess described in section 1(h)(1)(B), and the reference in section 55(b)(3)(C)(ii) to the excess described in section 1(h)(1)(C)(ii), shall each be treated as a reference to each such excess as determined under the rules of subparagraph (A) for purposes of determining the tax under paragraph (1)(A)(i).
(C)Definitions
Terms used in this paragraph which are also used in section 1(h) shall have the respective meanings given such terms by section 1(h), except that in applying subparagraph (B) the adjustments under part VI of subchapter A shall be taken into account.
(g)Cross references
For administrative and penal provisions relating to the exclusions provided for in this section, see sections 6001, 6011, 6012(c), and the other provisions of subtitle F.
https://www.law.cornell.edu/uscode/text/26/911
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Appendix C – Focusing on the specific changes to 911
26 U.S. Code § 911 – Citizens or residents of the United States living abroad
U.S. Code
(a)Exclusion from gross income
At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year—
(1)the foreign earned income of such individual, and
(2)the housing cost amount of such individual.
JR Commentary: The $400,000 of income is calculated after the foreign earned income is excluded.
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(b)Foreign earned income
(1)Definition
For purposes of this section—
(A)In general
The term “foreign earned income” with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual ‘‘attributable to services performed by such individual or benefits received by such individual’’ during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.
(B)Certain amounts not included in foreign earned income
The foreign earned income for an individual shall not include amounts—
(i)received as a pension or annuity,
(i)paid by the United States or an agency thereof to an employee of the United States or an agency thereof,
(ii)included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or
(iii)received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed.
(2)Limitation on foreign earned income
(A)In general
The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate equal to the exclusion amount for the calendar year in which such taxable year begins.
JR Commentary: Making it clear that pension/annuity income would constitute foreign earned income. But, still excludes 402(b) income which is widely understood to include Australian Superannuation.
(D)Exclusion amount
(i)In general
The exclusion amount for any calendar year is $80,000.
(ii)Inflation adjustment
In the case of any taxable year beginning in a calendar year after 2005, the $80,000 amount in clause (i) shall be increased by an amount equal to the product of—
(I)such dollar amount, and
(II)the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2004” for “2016” in subparagraph (A)(ii) thereof.
If any increase determined under the preceding sentence is not a multiple of $100, such increase shall be rounded to the next lowest multiple of $100.
JR Commentary: This makes it clear that although the kinds of income included in the definition of “foreign earned income” have been expanded, the monetary limitation on the FEIE (approximately $120,000) has been retained.
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(d)Definitions and special rules
For purposes of this section—
(1)Qualified individual
The term “qualified individual” means an individual whose tax home is in a foreign country and who is—
(A)a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B)a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.
(2)Earned income
(A)In general
The term “earned income” means wages, salaries, or professional fees ‘‘wages, salaries, professional fees, pensions, scholarships, fellowship grants, distributions from retirement funds,
or payments received by the taxpayer with respect to disability, unemployment, family medical leave, or childcare’’, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.
JR Commentary: An expansion of the definition of earned income, but GILTI still applies!!!
(B)Taxpayer engaged in trade or business
In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income.
(3)Tax home
The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.
(4)Waiver of period of stay in foreign country
Notwithstanding paragraph (1), an individual who—
(A)is a bona fide resident of, or is present in, a foreign country for any period,
(B)leaves such foreign country after August 31, 1978—
(i)during any period during which the Secretary determines, after consultation with the Secretary of State or his delegate, that individuals were required to leave such foreign country because of war, civil unrest, or similar adverse conditions in such foreign country which precluded the normal conduct of business by such individuals, and
(ii)before meeting the requirements of such paragraph (1), and
(C)establishes to the satisfaction of the Secretary that such individual could reasonably have been expected to have met such requirements but for the conditions referred to in clause (i) of subparagraph (B),
shall be treated as a qualified individual with respect to the period described in subparagraph (A) during which he was a bona fide resident of, or was present in, the foreign country, and in applying subsections (b)(2)(A), (c)(1)(B)(ii), and (c)(2)(A)(ii) with respect to such individual, only the days within such period shall be taken into account.
(5)Test of bona fide residence
If—
(A)an individual who has earned income from sources within a foreign country submits a statement to the authorities of that country that he is not a resident of that country, and
(B)such individual is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earnings,
then such individual shall not be considered a bona fide resident of that country for purposes of paragraph (1)(A).
(6)Denial of double benefits
No deduction or exclusion from gross income under this subtitle or credit against the tax imposed by this chapter (including any credit or deduction for the amount of taxes paid or accrued to a foreign country or possession of the United States) shall be allowed to the extent such deduction, exclusion, or credit is properly allocable to or chargeable against amounts excluded from gross income under subsection (a).
(7)Aggregate benefit cannot exceed foreign earned income
The sum of the amount excluded under subsection (a) and the amount deducted under subsection (c)(4)(A) for the taxable year shall not exceed the individual’s foreign earned income for such year.
(8)Limitation on income earned in restricted country
(A)In general
If travel (or any transaction in connection with such travel) with respect to any foreign country is subject to the regulations described in subparagraph (B) during any period—
(i)the term “foreign earned income” shall not include any income from sources within such country attributable to services performed during such period,
(ii)the term “housing expenses” shall not include any expenses allocable to such period for housing in such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer is present in such country, and
(iii)an individual shall not be treated as a bona fide resident of, or as present in, a foreign country for any day during which such individual was present in such country during such period.
(B)Regulations
For purposes of this paragraph, regulations are described in this subparagraph if such regulations—
(i)have been adopted pursuant to the Trading With the Enemy Act (50 U.S.C. 4301 et seq.) or the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), and
(ii)include provisions generally prohibiting citizens and residents of the United States from engaging in transactions related to travel to, from, or within a foreign country.
(C)Exception
Subparagraph (A) shall not apply to any individual during any period in which such individual’s activities are not in violation of the regulations described in subparagraph (B).
(9)Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing rules—
(A)for cases where a husband and wife each have earned income from sources outside the United States, and
(B)for married individuals filing separate returns.
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(e)Election
(1)In general
An election under subsection (a) shall apply to the taxable year for which made and to all subsequent taxable years unless revoked under paragraph (2).
(2)Revocation
A taxpayer may revoke an election made under paragraph (1) for any taxable year after the taxable year for which such election was made. Except with the consent of the Secretary, any taxpayer who makes such a revocation for any taxable year may not make another election under this section for any subsequent taxable year before the 6th taxable year after the taxable year for which such revocation was made.
JR Commentary: Eliminating a technical burden