II.   Individual Taxation

In general terms, Americans are taxed by their government in a uniform manner - whether they live in the USA or abroad. This is generally true no matter how long the individual has lived outside the USA or has ever even visited the USA in their life!

The best known exception, is the "foreign earned income exclusion" often thought of as the "$70,000" exclusion, actually $78,000 for 2001 and $80,000 for 2002 and later.

While the rules may not be different for those living in the USA and those living abroad, the effect can be very different. For example, charitable contributions can only be deducted for US registered organizations. Of course, for those living abroad, one's local favorite charity is unlikely to be registered with the IRS. More importantly, pensions with foreign employers are unlikely to be covered by any of the exclusions from taxable income (qualified plans) allowed for employees in the USA.

Only US citizens and residents whose tax home and abode is outside the USA receive an automatic extension to file tax returns through June 15. Others, have to file an extension by April 15.

The requirements for filing tax returns are the same as for those living in the USA. Thus, a single person under 65 will, in 2002, have to file a tax return if their gross income is over $7,700. This is before taking into account the foreign earned income exclusion or credits for foreign taxes.

Perhaps, the most dramatic differences are the regulations relating to businesses and the onerous reporting requirements for foreign incorporated businesses, where the US return for such companies has to be attached to the 1040.

There are also practical difficulties, such a the acquisition of principal residences, in countries where foreigners are not allowed to buy property, but can do so through corporations. This initially may seem that one cannot avail oneself of the new provisions relating to the sale of a principal residence (excluding a gain of up to $250,000 (married $500,000) every 2 years). However, there may be techniques for taking advantage of this important benefit. Additionally, under the mark-to-market rules, it may be possible to elect to have the property taxed at current values (thus taking advantage of the exclusion) and then in another 5 years to do the same, thus increasing the exclusion.

For the self-employed, note:

1. The election to deduct the cost of certain assets in the year of acquisition (Section 179) does not apply to assets used abroad.
2. Depreciation rates and methods may be different from foreign rates and it may be necessary to use straight line rather than accelerated methods. Of course the limitation on what is laughably called "luxury" automobiles still applies.
3. Leased property (especially automobiles) may be subject to different methods than those used for foreign purposes.
4. Foreign taxes are usually not deductible for State and Local purposes.
5. Meals and entertainment are usually 50% deductible for US purposes.
6. Record keeping requirements may be easier for US than foreign purposes. For example, certain limited record keeping requirements are allowed for expenses up to $75, receipts, invoices, or "canceled checks" are not required.
7. In lieu of actual travel expenses, self-employed individuals (and certain employees) may use the federal meal and incidental expense rate when traveling away from home.
8. From September 30, 2000 extraterritorial income is excluded from the definition of gross income.