TaxBrain.com Warns US Non-military Taxpayers Working Overseas
They Must Now Pay Taxes on Previously Excluded Income; Civilians Dodging Bullets in Iraq or Afghanistan Simply Isn't Enough for IRS.
November 28, 2006
Tracy, California — TaxBrain.com online income tax preparation company warns taxpayers working outside the United States that for the upcoming 2006 tax year, Congress has authorized the IRS to tax the foreign earned income exclusion.
According to Eric Hayes, TaxBrain.com Online Tax Specialist for the third largest independent online tax preparation service in the U.S., Until 2005, a US citizen not connected to any branch of the U.S. Government did not have to pay taxes on the first $80,000.00 earned. If a taxpayer earned more than $80,000, only that amount above $80,000 would be considered taxable income for a 2005 tax return.
“However, recent legislation approved by Congress allows the IRS to now tax the foreign earned income — even the excluded amount,” he continued.
The 2006 foreign earned income exclusion is increased to $82,400 — but there's a significant catch that raises the tax from $969 to $3,410!
Mr. Hayes explained to understand how the IRS taxes foreign earned income for 2006, let's examine how foreign earned income was excluded from taxable income in prior years. In 2005, if a taxpayer earned $97,000 abroad the foreign earned income exclusion would kick in and exclude $80,000. The remaining $17,000 would result in taxable income of $8,800 for an individual or $600 for a married couple ($17,000 less both the personal exemption and standard deduction totaling $8,800 — double that amount for married couples). The resulting tax on would be $959 for a single individual or $61 for a husband and wife.
“That all changes for 2006, ” he said. Congress now requires the IRS to insist that anyone claiming the foreign earned income exclusion on Form 2555 to calculate his or her tax differently than anyone else.
The mechanics behind taxing the foreign earned income works like this: figure the tax on the income being excluded from taxation, up to $82,400. Once your tax on the excluded amount is figured, you then add the income you are excluding from taxation to your taxable income. Once you add the excluded income to your taxable income you figure the tax on the combined figures. The difference between the tax on the foreign exclusion amount and the foreign exclusion amount added to your taxable income is the amount of tax you owe solely on the 'excluded foreign income'.
“A taxpayer claiming the exclusion in 2006 will therefore have a tax liability of $3,410! In a nutshell the 2006 foreign earned income exclusion isn't much of an exclusion at all,” Mr. Hayes stated.
“This seems to be a grossly unfair tax for civilians working overseas for US contractors in places like Iraq and Afghanistan on re-building projects. As if the flying bullets and shrapnel aren't enough, now even the IRS wants a piece of the action,” he concluded.
Printable IRS income tax forms are available here at IncomeTaxPro.Net.
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Source: TaxBrain.com
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