U.S. Taxation of American Citizens Employed Abroad

GAO interviewed and sent questionnaires to 63 major U.S. companies to report on how American employment abroad is discouraged by U.S. tax laws. The Foreign Earned Income Act was intended to create greater equity between people working abroad and at home and to provide an incentive to Americans working in foreign hardship areas. Foreign earned income of employees of the companies surveyed includes allowances received as compensation for unusual or higher overseas living costs. Equity under the Act was to be achieved through a series of deductions from income for these excess foreign living costs, that is, the general cost of living, housing, education, and home leave. The Act falls far short of meeting its objectives. The deductions for housing and the general cost of living are substantially smaller than the allowances employees receive as compensation for the added costs of working abroad. The Act does not even recognize certain excess foreign living costs, such as the tax on reimbursements for the added taxes incurred by working abroad. Taxable income often far exceeds what an individual would have incurred had he remained in the United States. Most U.S. firms reimburse expatriate employees for the additional tax burdens resulting from their overseas assignments. It is significantly more expensive for companies to reimburse American employees than to reimburse third country nationals. This cost differential was a major reason why companies have decreased the employment of Americans overseas. Tax return preparation for Americans working abroad is highly complex and requires costly professional assistance. A substantial part of housing allowances remain taxable. There are wide variances between the cost of living allowances provided by the U.S. companies and the related deductions specified by the Internal Revenue Service.