by Jane A. Bruno

author of
The Expat's Guide to U.S. Taxes (Hands on Help for Americans Overseas)

On August 5, 1997, President Clinton signed two historic pieces of legislation that promise to balance the budget and cut taxes for a large number of Americans. One area of tax relief that has received little publicity is enormously important to US expats. Still other provisions will impact millions of Americans that have children, own homes or have investments. Individual circumstances will determine if these particular changes will make a difference to expats, but knowledge is a wonderful thing, and in few situations is that more true than when it comes to taxes!

FOREIGN TAX PROVISIONS

Foreign Earned Income Exclusion Increased

This provision, which increases the amount of foreign income excludible under Section 911 of the Internal Revenue Code, was pushed by Congressman Bill Archer, Chairman of the House Ways and Means Committee. The way it works is that the $70,000 exclusion limit will be increased by $2,000 per year starting in 1998 until it reaches $80,000. The $80,000 limitation will be indexed for inflation beginning in 2008.

Simplifying Foreign Tax Credit Limitation for Individuals

This provision mainly applies to individuals with only a modest amount of investment income from foreign sources. In the past, they were required to file a Form 1116 to take a credit for foreign tax they paid on the foreign income. Under this provision, individuals with no more than $300 ($600 in the case of married persons filing jointly) of creditable foreign taxes will not have to file the Form 1116 in order to obtain the benefit of the foreign tax credit.

DOMESTIC TAX PROVISIONS

Child Credit

This provision allows a tax credit of $400 per child, for children 16 and under, beginning in 1998. The credit will rise to $500 per child in 1999. This credit will begin to phase out for individuals making $75,000 and couples making $110,000.

Capital Gains Tax Reduction

This provision is actually retroactive to May 7, 1997, and drops the capital gains rate from a maximum of 28% to 20% and from 15% to 10% for the lowest income bracket. The top rate of 20% will drop to 18% for assets bought beginning in 2001 and held for 5 years. Education Incentives

This is actually a tax credit of up to $1,500 per year per child in college for the first two years of college. The credit is calculated as 100% of the first $1,000 in expenses and 50% for the next $1,000. For the second two years of college, the credit would start at 20% of $5,000 and increase over time to 20% of $10,000.

Homeowner Tax Breaks

Under current law, homeowners selling their home can defer tax on their gain if they buy a replacement home of greater or equal value. There is also a one-time exclusion from tax of up to $125,000 in gain for people over age 55. Under the new law, married homeowners can make up to $500,000 of profit on the sale of a home without paying capital gains tax. The limit for single taxpayers is $250,000.

Estate Tax Law Changes

Under current law, estates that are valued in excess of $600,000 are heavily taxed. The new law would raise the exemption from $600,000 to $1 million over a period of 10 years. Family-owned businesses and farms would qualify for an exemption of $1.3 million starting next year.

Comment and Feedback:

This sketchy outline of the new legislation probably raises as many questions as it answers. As a tax attorney and consultant, I would welcome your questions and comments about how these changes may affect your personal tax situation. I can be contacted at: akljr@erols.com or FAX: (703) 525-3327

Jane A. Bruno is an attorney with a Master's in Tax Law from George Washington University. She has extensive experience with tax issues related to living overseas, having lived in several countries in Europe and Africa over the past 12 years. A former IRS employee, she has worked as a tax consultant/preparer in such diverse places as Germany, South Africa and the Commonwealth of Virgina. She recently published:

The Expat's Guide to U.S. Taxes (Hands on Help for Americans Overseas)
by Jane A. Bruno

This self-help book presents in simple and concise form the complicated U.S. tax laws that impact on Americans living overseas. It covers a wide range of topics, starting with the most common tax situations for Americans living overseas and ending with an appendix of tax forms and other important tax information. Numerous examples are used to clarify difficult points and tax saving tips are given where appropriate.