Senate Republicans are looking to kill an IRS provision that allows Americans working abroad to exempt $80,000 in income from their federal taxes. Why do expats get such a sweetheart deal in the first place?
It's a carrot for those who might otherwise blanch at the idea of working in Gabon or other far-flung lands. The current Foreign Earned Income Exclusion statute has been part of the tax code since 1954, when it was introduced to help American businesses in their efforts to expand overseas. (The amount of the exemption has changed over the years, peaking at $95,000 in the early 1990s.) In another perk, the cost of housing can usually be excluded, too, a real boon to those living in employer-provided apartments. A U.S. citizen or resident alien is eligible for the exclusion if his tax home is located abroad, and he is either judged by the IRS to be a "bona fide resident" of another country or can show that he spent 330 days there over a consecutive 12-month period.
The law doesn't necessarily benefit bankers, lawyers, and other jet-setters. Such white-collar types are often posted to cities like Paris and London, and must pay high European tax rates. An American financier living in Britain, for example, may have to fork over upward of 40 percent to the Exchequer for the privilege of residency; because foreign income taxes are deductible, that may put his taxable U.S. income below the $80,000 threshold, negating the need to pay the IRS, but that's cold comfort.
Energy-company employees, who are often dispatched to the Third World on exploration gigs, have been the law's real winners. Countries in the Middle East and Central Asia, for example, often levy little or no tax on expats, so these workers take home virtually all of their pay. Housing costs in oil-rich nations tend toward the astronomical—a safe, air-conditioned townhouse in Lagos can run a couple grand per month—and it's all deductible, even if ExxonMobil's picking up the tab. It's often just enough of a financial inducement to convince a native Louisianan that a few years in Azerbaijan won't be so bad.
Explainer thanks Robert Nassau of SyracuseUniversity.