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entitled 'Tax Policy: Economic Benefits of Income Exclusion for U.S. 
Citizens Working Abroad Are Uncertain' which was released on May 20, 
2014. 

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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

May 2014: 

Tax Policy: 

Economic Benefits of Income Exclusion for U.S. Citizens Working Abroad 
Are Uncertain: 

GAO-14-387: 

GAO Highlights: 

Highlights of GAO-14-387, a report to congressional requesters. 

Why GAO Did This Study: 

Since 1926, special tax benefits have been available for U.S. citizens
working abroad. Internal Revenue Code section 911—-which cost an
estimated $4.4 billion in 2013—-provides a tax exclusion for foreign
earned income, as well as an exclusion and deduction for foreign housing
costs. GAO was asked to assess section 911. 

This report (1) describes the number and types of taxpayers using the 
tax expenditure, and analyzes how the tax expenditure may interact 
with other provisions of the tax code, such as the foreign tax credit; 
(2) describes what is known about how the tax expenditure may affect 
business decisions about the employment of U.S. workers abroad, and 
U.S. exports; and (3) evaluates the potential advantages and 
disadvantages of modifying or removing the tax expenditure. 

To address these objectives, GAO analyzed 2011 IRS statistical data;
reviewed the tax code and relevant government and academic literature;
and interviewed government officials, experts, and stakeholders, 
including groups representing citizens working abroad and employers. 
As its criteria for good tax policy, this report uses GAO's tax 
expenditures evaluation guide, Tax Expenditures: Background and 
Evaluation Criteria and Questions, GAO-13-167SP. 

What GAO Found: 

For tax year 2011 (the most recent data available), an estimated 
445,000 tax returns claimed the foreign earned income exclusion 
(FEIE), which is 0.3 percent of all individual tax returns filed. 
About 17 percent of FEIE filers also claimed the foreign housing 
exclusion or deduction. Over half of FEIE filers reported working
for a foreign employer, and less than one-third reported working for a 
U.S. company; the balance reported working as self-employed or for 
other entities. Taxpayers were able to exclude from taxable income 
about $30 billion in foreign earned income and housing costs, with 
about 45 percent excluding all or most of their foreign earned income. 
The FEIE reduces the tax liability of U.S. taxpayers working abroad 
even if they paid no foreign income taxes to another country. 

U.S. taxpayers in higher tax countries can eliminate their U.S. tax 
liability using the foreign tax credit, which is intended to prevent 
double taxation when foreign income is taxed by both the United States 
and a foreign country. While tax costs could influence employment for 
some U.S. workers overseas, there is little evidence the tax 
expenditure affects exports. A few studies have asserted the tax 
expenditure benefits U.S. exports. For example, this would happen if 
the expenditure encouraged U.S. companies to hire more Americans
abroad by making it cheaper for them to do so, and if Americans 
working abroad promoted exports through the nature of their work and 
other activities. The extent to which the tax expenditure influences 
employment of U.S. workers abroad and U.S. exports depends on several 
factors, including the role of tax-related costs in hiring decisions 
and whether workers are involved in activities contributing to U.S. 
export promotion. Experts and stakeholders GAO interviewed expressed
differing views on the emphasis employers place on specific overseas 
hiring factors. While about half of those GAO interviewed said that 
employers make overseas hiring decisions based first on the candidates'
qualifications, or that the cost of prospective employees was not a 
primary consideration, about half also told us the added tax costs of 
employing U.S. citizens could influence some employment decisions. 
Most experts interviewed stated that the tax expenditure's effect on 
exports is likely small at most. 

In terms of good tax policy, there is room for debate regarding how 
potential revisions to the current tax expenditure may affect choices 
about where to work and who to hire. The current tax expenditure may 
have positive and negative effects on both the efficient allocation of 
labor resources and on equity. The magnitude of these effects is 
unknown, making it unclear whether the tax expenditure provides any 
net economic benefits. These uncertainties also make it difficult to 
draw definite conclusions about certain policy alternatives. Repealing
the tax expenditure would reduce the tax inducement for U.S. citizens 
to relocate to lower tax countries, but would also make U.S. citizens 
more costly for any employer to hire than citizens of most other 
countries, which do not tax foreign earned income. Removing the 
maximum limit ($99,200 for 2014) for the exclusion would eliminate the 
tax cost differential with other countries, but would allow high-
income individuals to avoid U.S. taxes on foreign earned income.
Targeted tax relief may be justified for extreme cost of living areas, 
and the design of any alternative would affect the complexity for 
taxpayers and the Internal Revenue Service (IRS), as well as the 
federal tax cost. 

What GAO Recommends: 

GAO made no recommendations in this report. IRS and Treasury provided
technical comments that were incorporated as appropriate. Commerce 
said it had no comments. 

View [hyperlink, http://www.gao.gov/products/GAO-14-387]. For more 
information, contact James R. McTigue, Jr. at (202) 512-9110 or 
mctiguej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Relatively Few Individual Taxpayers Claimed the Foreign Earned Income 
Exclusion, and Claiming It Is More Beneficial than the Foreign Tax 
Credit for Those in Lower Tax Countries: 

U.S. Tax Costs Could Influence Some U.S. Overseas Employment 
Decisions, though There Is Little Evidence the Tax Expenditure Affects 
Exports: 

The Tax Expenditure's Net Effects on Economic Efficiency and Equity 
Are Uncertain; Some Alternatives Could Better Target Benefits but 
Would Add Complexity: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Provisions That Interact with Section 911: 

Appendix III: Comparison of Tax Costs of U.S. and Non-U.S. Workers 
under the Foreign Earned Income Exclusion in Different Hypothetical 
Host Countries and at Different Income Levels: 

Appendix IV: Assessment of the Current Tax Expenditure and Four 
Alternatives: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Estimated Number of Forms 2555 with Foreign Earned Income 
Filed by Countries with the Most Filings, Tax Year 2011: 

Table 2: Comparison of Estimated Distribution of Returns for the FEIE 
and All Form 1040s, Tax Year 2011: 

Table 3: Comparison of Estimated Income of Returns for the FEIE and 
All Form 1040s, Tax Year 2011: 

Table 4: Comparison of Estimated Tax Rates for Returns Claiming FEIE 
to All Form 1040 Returns, Tax Year 2011: 

Table 5: Comparison of the FEIE and FTC by Hypothetical Country, Tax 
Year 2013: 

Table 6: Comparison of Tax Costs of U.S. and Non-U.S. Workers under 
the Foreign Earned Income Exclusion in a Hypothetical Host Country and 
at Different Income Levels: 

Table 7: Various Possible Options to Modify the Design of the Current 
Exclusion: 

Table 8: Selected Provisions Affecting Income Tax Treatments for 
Americans Working Abroad: 

Table 9: Foreign Earned Income Excluded Is Used to Determine Tax Rates 
and Applicability for Other Tax Provisions: 

Table 10: Provisions Which Provide Definitions Relevant in 
Interpreting Section 911: 

Table 11: Section 911 Definition Is Used in Defining Earned Income or 
Tax Home: 

Table 12: Comparison of Tax Costs of U.S. and Non-U.S. Workers in 
Three Hypothetical Locations, at $107,600 Foreign Income Level: 

Table 13: Comparison of Tax Costs of U.S. and Non-U.S. Workers in 
Three Hypothetical Locations, at $175,000 Foreign Income Level: 

Figures: 

Figure 1: Effect of Tax Legislation on the Amount of the Foreign 
Earned Income Exclusion (1986-2014): 

Figure 2: Tax Expenditure Revenue Loss Estimates (Fiscal Years 1986-
2014): 

Figure 3: Share of Exports in U.S. Gross Domestic Product, 1980-2013: 

Figure 4: Estimated Number of Forms 2555 with the Foreign Earned 
Income Exclusion, Housing Exclusion, and Housing Deduction, Tax Year 
2011: 

Figure 5: Estimated Number of Returns Claiming the Foreign Earned 
Income Exclusion (Tax Years 1990-2011): 

Figure 6: Estimated Number of Forms 2555 with Foreign Earned Income 
Filed by Geographic Region, Tax Year 2011: 

Figure 7: Various Factors Can Influence the Tax Expenditure's 
Relationship to U.S. Citizens Working Abroad and Exports: 

Abbreviations: 

AGI: adjusted gross income: 

CBO: Congressional Budget Office: 

Commerce: Department of Commerce: 

CRS: Congressional Research Service: 

FEIE: foreign earned income exclusion: 

FTC: foreign tax credit: 

IRC: Internal Revenue Code: 

IRS: Internal Revenue Service: 

JCT: Joint Committee on Taxation: 

OMB: Office of Management and Budget: 

SOI: Statistics of Income: 

Treasury: Department of the Treasury: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

May 20, 2014: 

The Honorable Jim McDermott: 
House of Representatives: 

The Honorable Michael Honda: 
House of Representatives: 

The Honorable Carolyn Maloney: 
House of Representatives: 

The United States taxes its citizens on their worldwide income, 
regardless of where they reside. Since 1926, certain special tax 
benefits have been available for U.S. citizens working abroad. Section 
911 of the Internal Revenue Code (IRC) permits a tax exclusion for 
foreign earned income, as well as an exclusion or deduction for 
foreign housing costs. Because section 911 reduces income tax 
liability through special tax provisions, both the Department of the 
Treasury (Treasury) and the Joint Committee on Taxation (JCT) identify 
section 911 as a tax expenditure. The costs and benefits of this tax 
expenditure have been the subject of policy and economic discussion. 
Some have defended the tax expenditure on the grounds that it enables 
U.S. workers overseas to better compete for jobs with non-U.S. foreign 
nationals (who typically pay no taxes on overseas earned income) and 
that it thereby encourages the overseas employment of Americans, who 
play an important role in promoting exports. However, others have 
highlighted that some of these claims lack evidence, or are based on 
outdated assumptions, given changes in the global economy over the 
past several decades. From a tax policy perspective, some have debated 
whether or not the tax expenditure provides economic and other 
benefits to the United States when compared to its costs. 

Our previous work has shown that, once enacted, tax expenditures--
special tax credits, deductions, exclusions, exemptions, deferrals, 
and preferential tax rates--and their relative contributions toward 
achieving federal missions and goals are often less visible than 
spending programs, which are subject to more systematic review. 
[Footnote 1] One reason for this is that in practice, tax expenditures 
often operate like entitlement programs not subject to annual 
appropriations. Since 1994, we have recommended greater scrutiny of 
tax expenditures, as periodic reviews could help determine how well 
specific tax expenditures work to achieve their goals and how their 
benefits and costs compare to those of spending programs with similar 
goals. In prior reports, we have described how program evaluations 
could be conducted to measure progress toward achieving a program's 
intended purpose.[Footnote 2] Even if a tax expenditure is meeting its 
intended purpose, broader questions can be asked about its effects 
beyond that purpose. Specifically, the long-standing criteria of 
economic efficiency, fairness, transparency, simplicity, and 
administrability can be used to evaluate whether a tax expenditure is 
good tax policy.[Footnote 3] 

You asked us to examine section 911--the foreign earned income 
exclusion (FEIE) as well as an exclusion or deduction for foreign 
housing costs. Specifically, this report (1) describes the number and 
types of taxpayers using the tax expenditure, and analyzes how the tax 
expenditure may interact with other provisions of the tax code, such 
as the foreign tax credit; (2) describes what is known about how the 
tax expenditure may affect business decisions about the employment of 
U.S. workers abroad, and U.S. exports; and (3) evaluates the potential 
advantages and disadvantages of modifying or removing the tax 
expenditure. 

To describe the number and types of taxpayers using section 911, we 
analyzed Internal Revenue Service (IRS) Statistics of Income Division 
(SOI) publications and obtained aggregated data tabulations for 
individual tax returns for tax year 2011 (the most recent year 
available). Our analysis of SOI statistical data is subject to 
sampling errors because the SOI data set is based on a sample of tax 
returns as filed and does not reflect IRS audit results or any net 
operating loss carrybacks from future years.[Footnote 4] To assess the 
reliability of the data we analyzed, we reviewed IRS documentation and 
interviewed agency officials familiar with the data. We determined 
that these data were sufficiently reliable for the purposes of this 
report. To determine how the tax expenditure may interact with other 
provisions of the tax code, we reviewed the Internal Revenue Code, IRS 
guidance, and tax advisor literature to analyze how the tax 
expenditure affects eligibility for other income tax provisions. 

To determine what is known about how the tax expenditure may affect 
business decisions about the employment of U.S. workers abroad, and 
U.S. exports, we reviewed related literature and available information 
on business practices used in employing U.S. citizens abroad, 
including government reports, academic literature, and surveys. We 
also interviewed Department of Commerce (Commerce) officials as well 
as nine experts and nine stakeholders.[Footnote 5] (We define 
stakeholders as individuals or groups who may offer a valuable 
perspective on how the tax expenditure may affect business decisions 
concerning the employment of U.S. workers abroad, and exports, but who 
may also have a vested interest in the issue.) We selected experts 
based on various factors, including their affiliation with leading 
higher education or research institutions and their publication or 
research experience associated with the FEIE or related topics, such 
as international taxation, international business strategy, trade, or 
U.S. labor. One consideration in the selection process was to talk 
with experts whose views varied from one to another. We selected a 
range of stakeholder organizations that represent the interests of 
relevant entities, such as U.S. citizens working overseas and U.S. 
businesses. Appendix I provides more information on the experts and 
stakeholders we interviewed. 

To evaluate options to modify or remove the tax expenditure, we 
reviewed a variety of sources, including studies by GAO, the 
Congressional Research Service (CRS), JCT, Treasury, IRS, the Taxpayer 
Advocate, and other government reports as well as academic literature 
on the tax expenditure and related options. We also interviewed the 
nine experts and nine stakeholders discussed above on the advantages 
and disadvantages of modifying the tax expenditure. We used the tax 
expenditure evaluation guide we developed to evaluate the performance 
of the FEIE and possible options for modifying or removing it. 
[Footnote 6] This report focuses on the guide's criteria for 
evaluating whether the tax expenditure is good tax policy and meets 
its purpose, namely, 

* Does the tax expenditure generate net economic benefits for society? 

* Is the tax expenditure fair and equitable? 

* Is the tax expenditure transparent, simple, and administrable? 

* How well does the tax expenditure achieve its purpose? 

The tax policy criteria may sometimes conflict with one another; in 
addition, some are subjective. As a result, there are likely to be 
trade-offs between the criteria when evaluating a particular tax 
expenditure. We also considered how the federal budget is affected by 
the tax expenditure and how the budget would be affected by options to 
modify or remove the tax expenditure. We analyzed Treasury's tax 
expenditure estimates from 1986 to 2014, and reviewed available JCT 
estimates and interviewed JCT staff about the revenue effects of 
modifying the tax expenditure. Detailed information on our scope and 
methodology can be found in appendix I. 

We conducted this performance audit from July 2013 to May 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

The United States requires its citizens and resident aliens, 
regardless of where they reside, to file U.S. tax returns and pay 
federal income taxes on their worldwide income.[Footnote 7] To prevent 
double taxation on foreign source income, U.S. citizens and resident 
aliens are allowed a credit or deduction against U.S. tax for foreign 
income taxes paid to other countries--the foreign tax credit (FTC). 
[Footnote 8] Under section 911 of the tax code, U.S. citizens who live 
and work abroad are also permitted an exclusion of foreign earned 
income and an exclusion or deduction of certain foreign housing costs. 
[Footnote 9] In contrast to U.S. policy, most other countries do not 
tax their citizens if they reside in a country other than their 
country of citizenship. 

Exclusion for Foreign Earned Income and Exclusion or Deduction for 
Foreign Housing Costs: 

The income that U.S. citizens and resident aliens may exclude under 
section 911 is generally limited to amounts earned for services 
performed abroad, including salaries and wages (except wages from the 
U.S. government[Footnote 10]). It does not include income derived from 
capital, such as interest, dividends, capital gains, or retirement 
distributions.[Footnote 11] To qualify for the FEIE, the U.S. citizen 
or resident alien's tax home[Footnote 12] must be in a foreign 
country[Footnote 13] and, if a U.S. citizen, must be a bona fide 
resident[Footnote 14] of a foreign country or countries for an 
uninterrupted period which includes an entire taxable year or, if a 
U.S. citizen or resident alien, must be physically present in a 
foreign country for at least 330 days over a 12-month period.[Footnote 
15] 

As shown in figure 1, tax legislation enacted since 1986 has changed 
the maximum amount of foreign earned income that can be excluded from 
federal income taxation. Since 2006, the exclusion amount has been 
indexed for inflation. For 2014, the amount is $99,200. 

Figure 1: Effect of Tax Legislation on the Amount of the Foreign 
Earned Income Exclusion (1986-2014): 

[Refer to PDF for image: line graph] 

Tax year: 1986; 
Foreign Earned Income Exclusion: $80,000. 

The Tax Reform Act of 1986 reduced the exclusion amount from $80,000 
in 1986 to $70,000 beginning in 1987. Pub. L. No. 99-514, § 1233, 100 
Stat. 2085, 2564. 

Tax year: 1987; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1988; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1989; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1990; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1991; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1992; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1993; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1994; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1995; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1996; 
Foreign Earned Income Exclusion: $70,000. 

Tax year: 1997; 
Foreign Earned Income Exclusion: $70,000. 

The Taxpayer Relief Act of 1997 increased the exclusion amount, in 
$2,000 increments annually over 1998 to 2002, to $80,000. Under this 
statute, starting in 2008 the $80,000 limit would have been adjusted 
for inflation. Pub. L. No. 105-34, § 1172(a), 111 Stat. 788, 988. 

Tax year: 1998; 
Foreign Earned Income Exclusion: $72,000. 

Tax year: 1999; 
Foreign Earned Income Exclusion: $74,000. 

Tax year: 2000; 
Foreign Earned Income Exclusion: $76,000. 

Tax year: 2001; 
Foreign Earned Income Exclusion: $78,000. 

Tax year: 2002; 
Foreign Earned Income Exclusion: $80,000. 

Tax year: 2003; 
Foreign Earned Income Exclusion: $80,000. 

Tax year: 2004; 
Foreign Earned Income Exclusion: $80,000. 

Tax year: 2005; 
Foreign Earned Income Exclusion: $80,000. 

The Tax Increase Prevention and Reconciliation Act of 2005 changed the 
date on which the limit is increased due to inflation from 2008 to 
2006. This act also modified the treatment of housing costs and 
taxation of income exceeding the exclusion. Pub. L .No. 109-222, § 
515, 120 Stat. 345, 367 (2006). 

Tax year: 2006; 
Foreign Earned Income Exclusion: $82,400. 

Tax year: 2007; 
Foreign Earned Income Exclusion: $85,700. 

Tax year: 2008; 
Foreign Earned Income Exclusion: $87,600. 

Tax year: 2009; 
Foreign Earned Income Exclusion: $91,400. 

Tax year: 2010; 
Foreign Earned Income Exclusion: $91,500. 

Tax year: 2011; 
Foreign Earned Income Exclusion: $92,900. 

Tax year: 2012; 
Foreign Earned Income Exclusion: $95,100. 

Tax year: 2013; 
Foreign Earned Income Exclusion: $97,600. 

Tax year: 2014; 
Foreign Earned Income Exclusion: $99,200. 

Source: GAO analysis of public laws. 

[End of figure] 

Taxpayers claiming the FEIE may also be eligible to claim an exclusion 
or deduction for foreign housing costs. Taxpayers may claim the 
exclusion if their employers paid their housing costs, or they may 
claim the deduction if their housing costs were paid from self-
employment earnings.[Footnote 16] Housing expenses must exceed a base 
amount of 16 percent of the maximum FEIE for the tax year, computed on 
a daily basis for the number of days in the qualifying period that 
falls within the tax year.[Footnote 17] For 2014, the base housing 
amount is $15,872 (16 percent of $99,200), or $43.48 per day. Since 
2006, foreign housing expenses in excess of the base that are eligible 
for the housing exclusion or deduction have been limited generally to 
30 percent of the maximum FEIE; however, the maximum has varied 
depending on the location of the home. Treasury was given the 
authority to raise the maximum housing exclusion to reflect actual 
housing costs in higher-cost foreign cities.[Footnote 18] 

The amendments to the FEIE in 2006 changed the taxation of income 
exceeding the exclusion by imposing a stacking rule. Amounts claimed 
under the exclusions for foreign earned income and foreign housing 
costs reduce taxable income, and a taxpayer does not owe U.S. income 
taxes on the amounts excluded. For taxpayers that have taxable income 
after claiming the FEIE and foreign housing exclusion, the applicable 
tax rate is determined by calculating taxable income without taking 
these exclusions into account.[Footnote 19] This stacking rule results 
in taxpayers who claim FEIE exclusions being subject to the same 
marginal tax rates as taxpayers with the same level of income who are 
not eligible for (or do not elect to claim) the exclusions.[Footnote 
20] 

IRS collects data on use of the FEIE on Form 2555, Foreign Earned 
Income, filed with the taxpayer's income tax return.[Footnote 21] 
Taxpayers who have income within the exclusion limit, are not self-
employed, and do not claim the foreign housing exclusion or deduction 
may file the 2555-EZ. IRS publishes some aggregate information on the 
FEIE in its annual statistical publication.[Footnote 22] Every 5 
years, IRS augments its sample and publishes a mandated study with 
additional detail about taxpayers claiming the FEIE.[Footnote 23] 
Prior special studies--the last study based on 2006 tax data was 
published in 2009[Footnote 24]--show that the FEIE has been claimed on 
an increasing number of tax returns. IRS plans to issue the 2011 tax 
year study during 2014. 

Treasury and JCT both calculate the estimated revenue losses for the 
tax expenditure assuming that all other parts of the tax code remain 
constant and taxpayer behavior is unchanged.[Footnote 25] Both tax 
expenditure estimates assume that taxpayers would be allowed to use 
the next best tax treatment and claim the FTC. Tax expenditure 
estimates do not incorporate any behavioral responses and thus do not 
represent the amount of revenue that would necessarily be gained if 
the tax expenditure was repealed.[Footnote 26] Figure 2 shows the 
revenue losses estimated by Treasury for the tax expenditure since 
1986.[Footnote 27] For 2014, Treasury estimated revenue losses of $4.3 
billion (about 0.4 percent of the sum of all tax expenditures), and 
JCT estimated revenue losses of $5 billion for the FEIE and $1 billion 
for the foreign housing costs.[Footnote 28] The revenue forgone 
through tax expenditures requires higher tax rates to raise any given 
amount of revenue, reduces resources available to fund other federal 
activities, increases the budget deficit, or reduces any budget 
surplus. 

Figure 2: Tax Expenditure Revenue Loss Estimates (Fiscal Years 1986-
2014): 

[Refer to PDF for image: line graph] 

Constant 2014 dollars: 

Fiscal year 1986: $2.8 billion; 
Fiscal year 1987: $2.4 billion; 
Fiscal year 1988: $2.1 billion; 
Fiscal year 1989: $1.9 billion; 
Fiscal year 1990: $2 billion; 
Fiscal year 1991: $2.6 billion; 
Fiscal year 1992: $1.4 billion; 
Fiscal year 1993: $0.8 billion; 
Fiscal year 1994: $2.8 billion; 
Fiscal year 1995: $2.4 billion; 
Fiscal year 1996: $2.1 billion; 
Fiscal year 1997: $2.5 billion; 
Fiscal year 1998: $2.7 billion; 
Fiscal year 1999: $3.1 billion; 
Fiscal year 2000: $3.3 billion; 
Fiscal year 2001: $3.2 billion; 
Fiscal year 2002: $3.5 billion; 
Fiscal year 2003: $3.3 billion; 
Fiscal year 2004: $3.3 billion; 
Fiscal year 2005: $3.2 billion; 
Fiscal year 2006: $2.9 billion; 
Fiscal year 2007: $2.9 billion; 
Fiscal year 2008: $5.5 billion; 
Fiscal year 2009: $5.7 billion; 
Fiscal year 2010: $7.3 billion; 
Fiscal year 2011: $5.8 billion; 
Fiscal year 2012: $5.6 billion; 
Fiscal year 2013: $4.5 billion; 
Fiscal year 2014: $4.3 billion. 

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal 
years 1986-2015. 

Note: Changes in economic conditions and estimation techniques can 
affect revenue loss estimates for tax expenditures, making them differ 
from year to year. Also, legislation affecting tax rates or the tax 
structure affects tax expenditure estimates. When statutory rates 
increase, a taxpayer's ability to avoid tax on a portion of income is 
worth more; consequently, tax expenditures are worth more. Likewise, 
when rates decrease, tax expenditures are worth relatively less. 

[End of figure] 

Employment Overseas and Exports: 

Historically, the tax expenditure has been defended on the grounds 
that it encourages the employment of U.S. workers abroad who play an 
important role in promoting U.S. exports.[Footnote 29] Companies use 
international assignments for various reasons, such as to fill 
managerial or technical gaps, or to transfer skills to local staff. 
U.S. and foreign-owned companies have reported growth in international 
assignments in the past few years, according to survey data concerning 
global relocation trends.[Footnote 30] According to the same survey 
data, international assignees are increasingly scattered globally, 
with a growing number of assignments in emerging markets such as 
Southeast Asia and Africa. 

According to data from Commerce's Bureau of Economic Analysis, U.S. 
exports have increased in the past few decades, growing at a rate of 
about 7 percent between 1980 and 2013.[Footnote 31] During that 
period, exports as a share of U.S. gross domestic product fluctuated, 
reaching the highest level in the last few years (see figure 3). 

Figure 3: Share of Exports in U.S. Gross Domestic Product, 1980-2013: 

[Refer to PDF for image: vertical bar graph] 

Years: 

1980: 9.81%; 
1981: 9.51%; 
1982: 8.47%; 
1983: 7.61%; 
1984: 7.48%; 
1985: 6.98%; 
1986: 6.99%; 
1987: 7.47%; 
1988: 8.46%; 
1989: 8.91%; 
1990: 9.23%; 
1991: 9.64%; 
1992: 9.68%; 
1993: 9.52%; 
1994: 9.86%; 
1995: 10.61%; 
1996: 10.71%; 
1997: 11.08%; 
1998: 10.48%; 
1999: 10.23%; 
2000: 10.63%; 
2001: 9.68%; 
2002: 9.15%; 
2003: 9.06%; 
2004: 9.64%; 
2005: 10.01%; 
2006: 10.67%; 
2007: 11.5%; 
2008: 12.52%; 
2009: 10.98%; 
2010: 12.32%; 
2011: 13.53%; 
2012: 13.52%; 
2013: 13.45%. 

Source: GAO analysis of Bureau of Economic Analysis data. 

[End of figure] 

While U.S. exports have grown, the value of imported intermediate 
goods used in their production has also increased. The nature of 
export production, particularly in the manufacturing sector, has 
changed in recent decades. For example, according to literature on 
global trade, factors such as more efficient global communication and 
transportation systems have made it easier for companies to allocate 
their production globally to take advantage of lower input prices, 
including labor cost. These factors also have facilitated the flow of 
intermediate production inputs across global supply chains, creating 
more integrated manufacturing. In turn, the foreign content of U.S. 
exports has increased from the 1990s to 2000s. 

In recent years the administration has emphasized export promotion as 
a high priority for the federal government. In 2010, President Obama 
launched the National Export Initiative via Executive Order. The 
initiative is aimed at doubling the dollar value of U.S. exports by 
the end of 2014.[Footnote 32] The Office of Management and Budget 
subsequently identified the National Export Initiative's goal of 
doubling U.S. exports as one of 14 interim crosscutting priority goals 
under the GPRA Modernization Act of 2010.[Footnote 33] We have 
reported that federal agencies that promote exports face coordination 
and management challenges, which could hinder their effectiveness in 
supporting the initiative's goal.[Footnote 34] Concurrent with the 
release of the President's fiscal year 2015 budget, the administration 
released new crosscutting goals which focus on new priorities. 
[Footnote 35] However, according to information on Performance.gov, 
the cross-agency effort to double exports will remain an 
administration priority, and efforts related to this goal will 
continue to be led by the Export Promotion Cabinet and the Trade 
Promotion Coordinating Committee. Export promotion also continues to 
be an agency goal for the Department of Commerce. 

Relatively Few Individual Taxpayers Claimed the Foreign Earned Income 
Exclusion, and Claiming It Is More Beneficial Than the Foreign Tax 
Credit for Those in Lower Tax Countries: 

A Relatively Small Number of Tax Returns Claimed the Foreign Earned 
Income Exclusion and over Half Reported Working for Foreign Employers: 

In tax year 2011 (the most current data available), the FEIE was 
claimed on an estimated 445,000 tax returns, which is 0.3 percent of 
about 145 million individual tax returns filed that year. We could not 
estimate the FEIE filers as a share of U.S. citizens abroad or the 
subset of citizens working abroad because reliable population figures 
are not available.[Footnote 36] An estimated 45 percent of returns 
claiming the FEIE were married filing jointly (where one or both 
spouses may have claimed the FEIE), and 36 percent were single filers. 
[Footnote 37] As shown in figure 4, an estimated 17 percent[Footnote 
38] of filers claiming the FEIE also claimed the foreign housing 
exclusion or foreign housing deduction. 

Figure 4: Estimated Number of Forms 2555 with the Foreign Earned 
Income Exclusion, Housing Exclusion, and Housing Deduction, Tax Year 
2011: 

[Refer to PDF for image: vertical bar graph] 

Tax expenditure part: Foreign Earned; 
Number of Forms 2555: 447,281. 

Tax expenditure part: Foreign Exclusion; 
Number of Forms 2555: 71,599. 

Tax expenditure part: Foreign Deduction; 
Number of Forms 2555: 5,574. 

Source: GAO analysis of IRS Statistics of Income 2011 data. 

[End of figure] 

Note: Taxpayers may file up to two Forms 2555. When comparing the 
number of tax returns claiming these amounts in IRS's Publication 1304 
to the number of Forms 2555 filed, the difference was less than one 
percent. Estimates for the number of returns with a FEIE, foreign 
housing exclusion, and foreign housing deduction, respectively, have 
95 percent confidence intervals that are within 14 percent of the 
estimate itself. 

The number of tax returns claiming the FEIE has increased since the 
early 1990s, as shown in figure 5. During this period, the total 
number of individual tax returns filed also increased. 

Figure 5: Estimated Number of Returns Claiming the Foreign Earned 
Income Exclusion (Tax Years 1990-2011): 

[Refer to PDF for image: line graph] 

Number of returns per tax year: 

1990: 204,053; 
1991: 222,057; 
1992: 252,629; 
1993: 243,928; 
1994: 257,240; 
1995: 266,129; 
1996: 279,004; 
1997: 297,534; 
1998: 308,284; 
1999: 314,486; 
2000: 358,391; 
2001: 292,006; 
2002: 316,931; 
2003: 306,393; 
2004: 295,313; 
2005: 303,940; 
2006: 329,264; 
2007: 343,077; 
2008: 371,885; 
2009: 396,405; 
2010: 415,519; 
2011: 445,276. 

Source: GAO analysis of IRS Statistics of Income data, tax years 1990-
2011. 

Note: Estimates for the number of returns claiming the foreign earned 
income exclusion (FEIE) by year, from 1992 to 2011, have 95 percent 
confidence intervals that are within 12 percent of the estimate 
itself. Estimates for the number of all Forms 1040 filed by year, from 
1992 to 2011, have 95 percent confidence intervals that are within 0.2 
percent of the estimate itself. The sampling errors for the estimates 
of the number of returns claiming the FEIE and the number of all 1040 
filers in 1990 and 1991 were not available. Given almost 20 subsequent 
years of such estimates with available sampling errors, we report the 
estimated number of filers overall and who claim the FEIE for these 2 
years without assessing the margins of error, but do not make any 
statistical comparisons for 1990 and 1991. 

[End of figure] 

Over half of Form 2555 filers in 2011 reported that their employer was 
a foreign entity (including foreign affiliates of U.S. companies). 
Less than one-third reported that their employer was a U.S. company, 
and the balance reported working as self-employed or for other 
entities. Taxpayers self-report the type of employer they work for, 
based on IRS guidance. IRS had not published information on the type 
of employer in its 5-year special studies, but data provided by IRS 
show that the employer pattern was generally consistent over the 2001, 
2006, and 2011 studies. 

In tax year 2011, about two-thirds of Form 2555 filers were in Asia 
(43 percent) and Europe (24 percent); see figure 6. Canada and the 
United Kingdom have relatively large numbers of Form 2555 filers; see 
table 1. 

Figure 6: Estimated Number of Forms 2555 with Foreign Earned Income 
Filed by Geographic Region, Tax Year 2011: 

[Refer to PDF for image: illustrated world map] 

Africa: 14,594; 
Asia: 194,953; 
Caribbean: 8,277; 
Europe: 106,515; 
Latin/South America: 14,812; 
North America: 52,636; 
Oceania: 14,451. 

Source: GAO analysis of IRS Statistics of Income 2011 data. 

Note: All other countries not counted in the region totals accounted 
for 42,311 tax returns. Estimates for the number of returns with 
foreign earned income filed with geographic regions Asia, Europe, and 
North America have 95 percent confidence intervals that are within 10 
percent of the estimate itself. All other regions and other countries 
have 95 percent confidence intervals that are within 20 percent except 
for the Caribbean, which is within 24.65 percent of the estimate 
itself. 

[End of figure] 

Table 1: Estimated Number of Forms 2555 with Foreign Earned Income 
Filed by Countries with the Most Filings, Tax Year 2011: 

Country: Canada; 
Region: North America; 
Number of Forms 2555: 45,740. 

Country: United Kingdom; 
Region: Europe; 
Number of Forms 2555: 30,861. 

Country: Japan; 
Region: Asia; 
Number of Forms 2555: 23,073. 

Country: Afghanistan; 
Region: Asia; 
Number of Forms 2555: 22,987. 

Country: China; 
Region: Asia; 
Number of Forms 2555: 22,362. 

Country: Germany; 
Region: Europe; 
Number of Forms 2555: 19,091. 

Country: Iraq; 
Region: Asia; 
Number of Forms 2555: 13,938. 

Country: South Korea; 
Region: Asia; 
Number of Forms 2555: 13,671. 

Country: Hong Kong; 
Region: Asia; 
Number of Forms 2555: 13,274. 

Country: United Arab Emirates; 
Region: Asia; 
Number of Forms 2555: 12,126. 

Source: GAO analysis of IRS Statistics of Income 2011 data. 

Note: While Canada and the United Kingdom have more estimated filings 
than the other countries (and Canada is higher than the United 
Kingdom), the number of forms filed are not necessarily statistically 
different among the remaining eight countries. 

[End of table] 

Some Filers Were Able to Exclude All Income, and Foreign Earned Income 
Exclusion Filers Had Higher Average Income and Lower U.S. Tax Rates 
than the Average Form 1040 Filer: 

In tax year 2011, taxpayers claimed about $30 billion for the FEIE, 
foreign housing exclusion, and foreign housing deduction.[Footnote 39] 
About 45 percent of FEIE 2555 filers had an adjusted gross income 
(AGI) of less than $10,000, as shown in table 2. This reflects that 
some taxpayers were able to exclude all or most of their foreign 
earned income in calculating their AGI. 

Table 2: Comparison of Estimated Distribution of Returns for the FEIE 
and All Form 1040s, Tax Year 2011: 

Adjusted gross income: No adjusted gross income; 
Distribution of returns claiming FEIE: 23.5; 
Distribution of all 1040 returns: 1.7. 

Adjusted gross income: $1 under $10,000; 
Distribution of returns claiming FEIE: 21.9; 
Distribution of all 1040 returns: 15.9. 

Adjusted gross income: $10,000 under $25,000; 
Distribution of returns claiming FEIE: 11.3; 
Distribution of all 1040 returns: 24.1. 

Adjusted gross income: $25,000 under $50,000; 
Distribution of returns claiming FEIE: 11.3; 
Distribution of all 1040 returns: 23.7. 

Adjusted gross income: $50,000 under $200,000; 
Distribution of returns claiming FEIE: 21.9; 
Distribution of all 1040 returns: 31.4. 

Adjusted gross income: $200,000 under $1,000,000; 
Distribution of returns claiming FEIE: 8.8; 
Distribution of all 1040 returns: 3.0. 

Adjusted gross income: $1,000,000 or more; 
Distribution of returns claiming FEIE: 1.2; 
Distribution of all 1040 returns: 0.2. 

Adjusted gross income: All returns; 
Distribution of returns claiming FEIE: 100.0; 
Distribution of all 1040 returns: 100.0. 

Source: GAO analysis of IRS Statistics of Income 2011 data. 

Note: Percentage estimates have 95 percent confidence intervals that 
are within 1 percentage point of the estimate itself. Totals for all 
returns may not add to 100 due to rounding. 

[End of table] 

Taxpayers claiming the FEIE had higher average income ($163,450) than 
the average Form 1040 filer ($58,706), as shown in table 3.[Footnote 
40] 

Table 3: Comparison of Estimated Income of Returns for the FEIE and 
All Form 1040s, Tax Year 2011: 

Adjusted gross income: Under $25,000; 
Average income of FEIE filers: $55,409; 
Average income of all 1040 filers: $9,011. 

Adjusted gross income: $25,000 under $50,000; 
Average income of FEIE filers: $109,239; 
Average income of all 1040 filers: $36,497. 

Adjusted gross income: $50,000 under $200,000; 
Average income of FEIE filers: $182,680; 
Average income of all 1040 filers: $92,604. 

Adjusted gross income: $200,000 under $1,000,000; 
Average income of FEIE filers: $505,453; 
Average income of all 1040 filers: $344,323. 

Adjusted gross income: $1,000,000 or more; 
Average income of FEIE filers: $2,932,212; 
Average income of all 1040 filers: $3,187,604. 

Adjusted gross income: All returns; 
Average income of FEIE filers: $163,450; 
Average income of all 1040 filers: $58,706. 

Source: GAO analysis of IRS Statistics of Income 2011 data. 

Note: The average income of FEIE filers with adjusted gross income of 
$25,000 under $50,000 has a 95 percent confidence interval that is 
within 11 percent of the estimate itself. 

[End of table] 

For the average U.S. tax rate (based on U.S. income tax amounts), 
taxpayers claiming the FEIE had lower average U.S. tax rates (6.8 
percent) than all Form 1040 filers (12.3 percent), as shown in table 
4. Table 4 also shows that while the average U.S. tax paid by FEIE 
filers is lower than the average tax paid by U.S. 1040 filers in all 
AGI categories, the average total tax paid--including both U.S. and 
foreign income taxes--by FEIE filers is lower than U.S. 1040 filers 
only among taxpayers with AGIs less than $50,000. In tax year 2011, 24 
percent of taxpayers filing Forms 2555 also filed for the FTC. 

Table 4: Comparison of Estimated Tax Rates for Returns Claiming FEIE 
to All Form 1040 Returns, Tax Year 2011: 

Adjusted gross income: Under $25,000; 
Average U.S. tax rate of FEIE filers: 0.2; 
Average U.S. tax rate of all 1040 filers: 2.3; 
Average total tax rate of FEIE filers: 0.3; 
Average total tax rate of all 1040 filers: 2.3. 

Adjusted gross income: $25,000 under $50,000; 
Average U.S. tax rate of FEIE filers: 2.1; 
Average U.S. tax rate of all 1040 filers: 5.1; 
Average total tax rate of FEIE filers: 3.0; 
Average total tax rate of all 1040 filers: 5.1. 

Adjusted gross income: $50,000 under $200,000; 
Average U.S. tax rate of FEIE filers: 6.7; 
Average U.S. tax rate of all 1040 filers: 10.4; 
Average total tax rate of FEIE filers: 10.4; 
Average total tax rate of all 1040 filers: 10.4. 

Adjusted gross income: $200,000 under $1,000,000; 
Average U.S. tax rate of FEIE filers: 9.4; 
Average U.S. tax rate of all 1040 filers: 20.5; 
Average total tax rate of FEIE filers: 22.1; 
Average total tax rate of all 1040 filers: 20.8. 

Adjusted gross income: $1,000,000 or more; 
Average U.S. tax rate of FEIE filers: 11.4; 
Average U.S. tax rate of all 1040 filers: 23.0; 
Average total tax rate of FEIE filers: 26.9; 
Average total tax rate of all 1040 filers: 23.9. 

Adjusted gross income: All returns; 
Average U.S. tax rate of FEIE filers: 6.8; 
Average U.S. tax rate of all 1040 filers: 12.3; 
Average total tax rate of FEIE filers: 14.6; 
Average total tax rate of all 1040 filers: 12.5. 

Source: GAO analysis of IRS Statistics of Income 2011 data. 

Note: The average U.S. tax rate is based on income tax amounts. The 
average total tax rate is based on income tax amounts plus the FTC. 
Worldwide income was used for income tax amounts for FEIE filers, and 
total income was used for all 1040 filers. Percentage estimates for 
tax rates have 95 percent confidence intervals within 10 percent of 
the estimate itself, except for estimates for the average U.S. tax 
rate of FEIE filers with AGI of $25,000 under $50,000, which has a 
confidence interval within 11 percent of the estimate itself. 

[End of table] 

The Foreign Earned Income Exclusion Is More Beneficial Than the 
Foreign Tax Credit for U.S. Taxpayers in Lower Tax Countries: 

Depending on their earned income and the tax rate of the foreign 
country where they live and work, U.S. taxpayers may choose to use the 
FEIE, the FTC, or a combination of both to reduce their U.S. tax 
liability.[Footnote 41] In low tax countries, the FEIE is more 
beneficial to taxpayers than the FTC. In high tax countries, the FTC 
may be more beneficial. This is illustrated in table 5 where we 
compare the U.S. income tax liability for a U.S. employee working in 
the United States to U.S. citizens working in three hypothetical 
countries with differing tax rates. In countries with no income tax 
(country A) a citizen using only the FEIE would owe no U.S. taxes on 
earned income up to the exclusion maximum. The same citizen using only 
the FTC would have the same U.S. tax liability and total taxes as the 
employee in the United States. In countries with lower tax rates than 
the United States (country B), a citizen using only the FEIE would owe 
no U.S. taxes. Using only the FTC, the same citizen would owe less 
U.S. taxes but the same total taxes as the employee in the United 
States. In countries with a higher tax rate than the United States 
(country C), the citizen has no U.S. income tax liability in either 
case.[Footnote 42] 

Table 5: Comparison of the FEIE and FTC by Hypothetical Country, Tax 
Year 2013: 

Country where U.S. taxpayer resides and earns income[A]: Earned income; 
United States: $107,600; 
Country A No income tax: $107,600; 
Country B Income tax lower than the United States: $107,600; 
Country C Income tax higher than the United States: $107,600. 

Country where U.S. taxpayer resides and earns income[A]: Less: 
Standard deduction $6,100 and one exemption $3,900; 
United States: ($10,000); 
Country A No income tax: ($10,000); 
Country B Income tax lower than the United States: ($10,000); 
Country C Income tax higher than the United States: ($10,000). 

Country where U.S. taxpayer resides and earns income[A]: U.S. taxable 
income without FEIE; 
United States: $97,600; 
Country A No income tax: $97,600; 
Country B Income tax lower than the United States: $97,600; 
Country C Income tax higher than the United States: $97,600. 

Using FEIE only: 

Country where U.S. taxpayer resides and earns income[A]: U.S. taxable 
income with FEIE; 
United States: $97,600; 
Country A No income tax: $0; 
Country B Income tax lower than the United States: $0; 
Country C Income tax higher than the United States: $0. 

Country where U.S. taxpayer resides and earns income[A]: Foreign 
income tax; 
United States: $0; 
Country A No income tax: $0; 
Country B Income tax lower than the United States: $10,670; 
Country C Income tax higher than the United States: $26,900. 

Country where U.S. taxpayer resides and earns income[A]: U.S. income 
tax; 
United States: $20,628; 
Country A No income tax: $0; 
Country B Income tax lower than the United States: $0; 
Country C Income tax higher than the United States: $0. 

Country where U.S. taxpayer resides and earns income[A]: Total 
worldwide income tax; 
United States: $20,628; 
Country A No income tax: $0; 
Country B Income tax lower than the United States: $10,760; 
Country C Income tax higher than the United States: $26,900. 

Country where U.S. taxpayer resides and earns income[A]: Effective 
foreign income tax rate; 
United States: 0%; 
Country A No income tax: 0%; 
Country B Income tax lower than the United States: 10%; 
Country C Income tax higher than the United States: 25%. 

Country where U.S. taxpayer resides and earns income[A]: Effective 
(residual) U.S. income tax rate; 
United States: 19%; 
Country A No income tax: 0%; 
Country B Income tax lower than the United States: 0%; 
Country C Income tax higher than the United States: 0%. 

Country where U.S. taxpayer resides and earns income[A]: Effective 
worldwide income tax rate; 
United States: 19%; 
Country A No income tax: 0%; 
Country B Income tax lower than the United States: 10%; 
Country C Income tax higher than the United States: 25%. 

Using FTC only: 

Country where U.S. taxpayer resides and earns income[A]: U.S. taxable 
income without FEIE; 
United States: $97,600; 
Country A No income tax: $97,600; 
Country B Income tax lower than the United States: $97,600; 
Country C Income tax higher than the United States: $97,600. 

Country where U.S. taxpayer resides and earns income[A]: Foreign 
income tax; 
United States: $0; 
Country A No income tax: $0; 
Country B Income tax lower than the United States: $10,760; 
Country C Income tax higher than the United States: $26,900. 

Country where U.S. taxpayer resides and earns income[A]: U.S. income 
tax after foreign tax credit; 
United States: $20,628; 
Country A No income tax: $20,628; 
Country B Income tax lower than the United States: $9,868; 
Country C Income tax higher than the United States: $0. 

Country where U.S. taxpayer resides and earns income[A]: Total 
worldwide income tax; 
United States: $20,628; 
Country A No income tax: $20,628; 
Country B Income tax lower than the United States: $20,628; 
Country C Income tax higher than the United States: $26,900. 

Country where U.S. taxpayer resides and earns income[A]: Effective 
foreign income tax rate; 
United States: 0%; 
Country A No income tax: 0%; 
Country B Income tax lower than the United States: 10%; 
Country C Income tax higher than the United States: 25%. 

Country where U.S. taxpayer resides and earns income[A]: Effective 
(residual) U.S. income tax rate; 
United States: 19%; 
Country A No income tax: 19%; 
Country B Income tax lower than the United States: 9%; 
Country C Income tax higher than the United States: 0%. 

Country where U.S. taxpayer resides and earns income[A]: Effective 
worldwide income tax rate; 
United States: 19%; 
Country A No income tax: 19%; 
Country B Income tax lower than the United States: 19%; 
Country C Income tax higher than the United States: 25%. 

Source: GAO. 

Notes: For each example, we computed the effective income tax rates by 
dividing the corresponding income taxes by earned income. Some U.S. 
citizens may face no or lower tax rates in a foreign country as a 
result of tax treaty benefits or special arrangements for workers of 
international organizations and nonprofits. 

[A] This comparison includes certain assumptions, including that each 
employee (1) holds the same qualifications, (2) receives the same 
income, (3) has a single tax filing status, (4) would pay the same tax 
rates as local citizens of the hypothetical country, and (5) does not 
claim the foreign housing exclusion or deduction. 

[End of table] 

As illustrated above, some U.S. citizens working abroad have no 
foreign income tax liability because they live and work in countries 
that do not have income taxes. Other U.S. citizens working abroad may 
also face no or reduced foreign taxes. Some tax treaties may reduce 
tax liabilities for U.S. citizens abroad. For example, U.S. students, 
teachers, and trainees may be exempt from a treaty country's income 
tax. Workers of international organizations and nonprofits also may be 
exempt in some treaty countries. Some countries have introduced 
special tax incentives broadly targeted to attract or retain high-
skilled workers--such as scientists, researchers and engineers--to 
locate in otherwise high-tax jurisdictions.[Footnote 43] U.S. citizens 
in these situations benefit from the exclusion similar to taxpayers in 
lower tax countries and may have no or reduced foreign taxes to claim 
under the foreign tax credit method. 

Excluded Income Counts in Determining Eligibility for Tax Benefits 
with Income Limits: 

U.S. citizens and resident aliens living outside the United States 
generally are allowed the same deductions and tax credits as citizens 
and residents living in the United States. For example, taxpayers 
living abroad who itemize can claim deductions for mortgage interest 
and real estate property taxes paid for owner-occupied homes. However, 
taxpayers claiming the FEIE are not eligible for the earned income tax 
credit.[Footnote 44] To prevent double dipping, a taxpayer cannot 
deduct, exclude, or claim a credit for any item that can be allocated 
to or charged against the foreign earned income excluded.[Footnote 45] 
For example, if a taxpayer in 2013 had $90,000 of foreign earned 
income, took the FEIE, and had $7,000 of moving expenses, the taxpayer 
could not claim any deductions allocable to her foreign earned income 
(including the moving expenses on her tax return) because she excluded 
all of her foreign earned income. However, if the taxpayer made more 
in foreign earned income than the FEIE limit, then she would be 
eligible to deduct the portion of the moving expenses allocable to the 
foreign earned income in excess of the FEIE limit. 

In determining applicable tax rates and eligibility for some tax 
provisions, excluded foreign earned income is added back in when 
calculating a modified adjusted gross income for certain tax credits 
and deductions that phase out (gradually limited until eliminated) at 
higher levels of income. For example, the excluded income is counted 
in determining eligibility for tax benefits which help pay for higher 
education, such as the American opportunity tax credit, lifetime 
learning credit, and student loan interest deduction. (Appendix II 
lists tax code provisions that interact with section 911.) When 
excluded amounts are added back in to calculate income eligibility for 
tax benefits and to determine marginal tax rates for included income, 
then taxpayers claiming the exclusion are in the same tax position as 
those taking the FTC on total foreign earned income. 

U.S. Tax Costs Could Influence Some U.S. Overseas Employment 
Decisions, though There Is Little Evidence the Tax Expenditure Affects 
Exports: 

The FEIE's effects on hiring U.S. workers abroad and on exports can 
depend on various factors. Experts and stakeholders we interviewed 
expressed varying views on the emphasis employers place on certain 
overseas hiring factors, such as tax costs. Most experts we 
interviewed told us there was little evidence to indicate the tax 
expenditure could have more than a limited effect on exports. 

The Tax Expenditure's Effects on Hiring of U.S. Workers Abroad and 
Exports Depends on Various Factors: 

A few studies that we reviewed for this report asserted that the tax 
expenditure leads to more Americans working abroad, which in turn 
increases U.S. exports.[Footnote 46] For example, this could happen if 
the tax expenditure encouraged U.S. companies to hire more Americans 
abroad by making it cheaper to do so, and if Americans abroad promoted 
exports through the nature of their work and other activities. 
However, because the tax expenditure applies to workers employed by 
any type of employer, it could also increase the number of Americans 
working abroad for employers other than U.S. companies and their 
affiliates or subsidiaries. Those workers could affect U.S. exports 
adversely by working for foreign competitors or by facilitating 
imports. 

However, the extent to which the tax expenditure influences employment 
of U.S. workers abroad and U.S. exports can depend on a number of 
factors, which can vary across different settings, according to 
articles we reviewed and the experts and stakeholders we interviewed 
(see figure 7). 

Figure 7: Various Factors Can Influence the Tax Expenditure's 
Relationship to U.S. Citizens Working Abroad and Exports: 

[Refer to PDF for image: illustration] 

Tax expenditure: 
Relationships can be influenced by the extent to which overseas 
employers: 
* Prioritize tax-related costs of job candidates, compared to other 
hiring considerations; 
* Prefer U.S. instead of non-U.S. workers. 

U.S. citizens working abroad: 

Exports: 
Relationships can be influenced by the extent to which U.S. citizens 
working overseas: 
* Are engaged in export-promoting activities, such as marketing or 
producing U.S. goods; 
* Are more likely to purchase goods or materials from U.S. suppliers. 

Source: GAO. 

[End of figure] 

For example, the extent to which the tax expenditure may encourage 
companies to hire U.S. citizens abroad can be influenced by the degree 
to which companies prioritize costs, including tax-related costs, 
compared to other factors, when making hiring decisions. This 
relationship can also be influenced by companies' preference for U.S. 
workers, compared to non-U.S. employees, when staffing certain 
positions abroad, or by the foreign tax rates in different foreign 
countries where certain jobs are located. Similarly, the tax 
expenditure's relationship to U.S. exports can be influenced by the 
extent to which Americans working abroad are employed by U.S. 
companies or by foreign entities. As noted earlier, many U.S. workers 
abroad do not work for U.S. companies, and may affect U.S. exports 
adversely. 

The relationship can also be influenced by the extent to which U.S. 
workers abroad have jobs directly relating to export promotion, such 
as selling products or making sourcing decisions, or the extent to 
which they are more or less likely to purchase goods or materials from 
U.S. suppliers compared to foreign competitors. Finally, broader 
factors such as changes in overseas assignment patterns and 
information technology advances can affect the tax expenditure's 
relationship to the hiring of Americans abroad and exports. For 
example, information technology improvements that make it easier to 
communicate and access information remotely can influence the extent 
to which companies assign employees overseas, or the nature of these 
assignments. 

Tax-Related Costs Could Influence Employment for Some U.S. Citizens 
Abroad in Certain Locations: 

U.S. Workers Abroad Can Incur a Higher Overall Tax Liability Than Non-
U.S. Workers in Some Cases: 

U.S. overseas workers' tax costs can vary across locations, and in 
some cases can exceed the tax liabilities of non-U.S. workers. An 
employee on an employer-sponsored international assignment may receive 
allowances and reimbursements for housing and other expenses. These 
allowances can vary across locations, depending on local housing and 
other costs of living. The increased compensation causes the 
employee's income to be higher than when working in the United States, 
and can move the employee into a higher tax bracket. For illustrative 
purposes, table 6 compares the tax liability of a U.S. worker with 
that of a non-U.S. worker, at different income levels and with 
application of the FEIE, in a hypothetical country (which is not the 
home country of a non-U.S. worker) that has a lower effective tax rate 
than the United States. The example assumes the non-U.S. worker is not 
taxed by his or her home country on foreign-earned income; as we noted 
previously, the citizens of most other countries are not taxed by 
their country of citizenship if they reside in another 
country.[Footnote 47] As table 6 shows, the FEIE can eliminate the 
U.S. income tax liability for some taxpayers residing overseas with 
foreign earned income. At higher income levels, taxpayers could incur 
a U.S. tax liability after applying the FEIE, which could result in an 
overall tax liability greater than that of non-U.S. workers who have 
the same earned income but are not taxed on income earned abroad. 

Table 6: Comparison of Tax Costs of U.S. and Non-U.S. Workers under 
the Foreign Earned Income Exclusion in a Hypothetical Host Country and 
at Different Income Levels: 

Nationality of employee[A]: Earned income[B]; 
U.S.: $107,600; 
Non-U.S.: $107,600; 
U.S.: $175,000; 
Non-U.S.: $175,000. 

Nationality of employee[A]: Less FEIE; 
U.S.: $97,600; 
Non-U.S.: N/A; 
U.S.: $97,600; 
Non-U.S.: N/A. 

Nationality of employee[A]: Less: standard deduction $6,100 and one 
exemption $3,900; 
U.S.: $10,000; 
Non-U.S.: $10,000; 
U.S.: $10,000; 
Non-U.S.: $10,000. 

Nationality of employee[A]: Host country effective tax rate; 
U.S.: 10%; 
Non-U.S.: 10%; 
U.S.: 10%; 
Non-U.S.: 10%. 

Nationality of employee[A]: Host country income tax; 
U.S.: $10,760; 
Non-U.S.: $10,760; 
U.S.: $17,500; 
Non-U.S.: $17,500. 

Nationality of employee[A]: U.S. effective tax rate[C]; 
U.S.: 19%; 
Non-U.S.: N/A; 
U.S.: 23%; 
Non-U.S.: N/A. 

Nationality of employee[A]: U.S. income tax after FEIE; 
U.S.: $0; 
Non-U.S.: N/A; 
U.S.: $18,865; 
Non-U.S.: N/A. 

Nationality of employee[A]: U.S. income tax after Foreign Tax Credit; 
U.S.: N/A; 
Non-U.S.: N/A; 
U.S.: $9,105[D]; 
Non-U.S.: N/A. 

Nationality of employee[A]: Total income after tax; 
U.S.: $107,600; 
Non-U.S.: $107,600; 
U.S.: $148,395; 
Non-U.S.: $157,500. 

Nationality of employee[A]: Difference between U.S. worker after-tax 
income and that of a non-U.S. worker; 
U.S.: $0; 
Non-U.S.: N/A; 
U.S.: -$9,105; 
Non-U.S.: N/A. 

Source: GAO analysis. 

Notes: This comparison includes certain assumptions, including that 
each employee (1) holds the same qualifications, (2) receives the same 
income, and (3) has a single tax filing status. The example also 
assumes the non-U.S. employee is not taxed by his or home country on 
foreign-earned income. 

[A] The comparison focuses on home country tax rates for U.S. citizens 
and non-U.S. foreign nationals. U.S. citizens and non-U.S. foreign 
nationals would generally face the same local taxes as local citizens 
of the hypothetical host country. 

[B] Housing costs are not explicitly included in the example. 
Differences in housing costs can be offset by applicable housing 
exclusions or deductions. However, in some cases the differences in 
housing costs can affect overall tax liability. 

[C] The U.S. effective tax rate listed is that which applies to the 
earned income level provided in the example, without application of 
the tax expenditure. 

[D] A U.S. citizen in this circumstance could also claim the foreign 
tax credit with respect to income that was not excluded using the 
foreign earned income exclusion. 

[End of table] 

The additional U.S. tax liability illustrated in table 6 could result 
in different actual after-tax income for U.S. employees, depending on 
whether and how companies adjust compensation. For example, some 
companies may increase compensation to fully or partially offset the 
U.S. employee's additional tax costs in order to attract U.S. citizens 
to work abroad. A company's willingness to do so could be shaped by 
the value it places on U.S. workers--its demand for U.S. overseas 
labor--relative to non-U.S. workers. A U.S. employee's willingness to 
work abroad--to supply U.S. overseas labor--could be influenced by how 
his or her after-tax income in the foreign country would compare to 
his or her after-tax income in the United States. According to survey 
data, most U.S. and foreign-owned companies use a tax equalization 
policy for their overseas assignees.[Footnote 48] Under such a policy, 
employers pay their employees to cover higher taxes on working 
overseas than the employee would have been paid if they worked in the 
United States. 

Experts and Stakeholders Have Varying Views on the Emphasis Employers 
Place on Certain Overseas Hiring Factors: 

Experts and stakeholders expressed differing views on the emphasis or 
value employers place on certain overseas hiring factors. In 
particular, about half of the experts and stakeholders we interviewed 
said that employers make hiring decisions concerning overseas 
assignments based first on the candidates' job skills or 
qualifications, or that the cost of prospective employees was not a 
primary consideration. Specifically, 

* One expert told us that in most cases involving senior-level 
employees, companies will first try to find the right person for the 
position, and then address cost and compensation issues. 

* One stakeholder told us his firm's experience indicated costs were 
just one of several key hiring criteria used by most large companies, 
and that taxes were just one element of cost considerations, alongside 
costs for education, housing, and other expenses that could be 
associated with a given employee. 

Nonetheless, about half of the experts and stakeholders we interviewed 
told us the additional tax costs of employing U.S. citizens could in 
some cases influence employment decisions; of these, two stakeholders 
told us tax costs were a predominant reason why some companies were 
hiring fewer Americans overseas. Specifically, 

* One expert stated that skill-wise, the broadening of the global 
education base has made non-U.S. workers more competitive with U.S. 
workers in recent decades, creating more opportunities for companies 
to select less costly (yet equally skilled) foreign nationals over 
Americans. 

* Related to that point, one stakeholder noted that certain large 
multinational firms have identified pools of qualified job candidates 
from different countries around the world; when compelled by cost 
considerations, they will hire from this pool. 

Experts and stakeholders also noted that companies' preference for, 
and the value of, U.S. employees could vary across different 
situations. While about half of the stakeholders we interviewed said 
that U.S. citizens overseas have value for companies, compared to non-
U.S. employees, about half of the experts we interviewed said such a 
value may be limited to certain types of jobs or companies and may not 
exist in certain contexts. Specifically, 

* About half of the stakeholders we interviewed asserted there is a 
value in having Americans abroad, or that Americans are better able to 
facilitate U.S. companies' business transactions with foreign entities 
abroad than are non-U.S. employees. 

* Several experts and a stakeholder stated that U.S. employees may 
have particular value for certain positions or for certain U.S. 
companies. For example, new companies without established trade 
partners or companies with American identities or interests, such as 
military contractors or companies in the entertainment industry, may 
have greater demand for U.S. employees. 

* About half of the experts and several stakeholders said that in some 
cases U.S. workers had little or no comparative value relative to 
equally capable non-U.S. employees, such as for global companies, or 
that some companies may prefer hiring local citizens for certain 
positions. 

Most Experts Interviewed See Little Evidence the Tax Expenditure 
Affects Exports: 

Most experts we interviewed and Commerce officials stated there was 
little evidence to indicate the tax expenditure could have more than a 
limited effect on exports. As noted previously, a few studies have 
asserted that the tax expenditure affects U.S. exports through effects 
on the number of Americans working abroad. Some articles have also 
asserted that exports in turn lead to increases in U.S. employment and 
to reductions in the trade deficit, justifying the tax expenditure. 
Moreover, stakeholders we interviewed offered examples of ways 
Americans abroad can promote exports, including by facilitating trade, 
purchasing source materials from U.S. suppliers, and advertising U.S. 
products. However, most experts we interviewed stated that it is 
difficult to determine the tax expenditure's effect on exports, or 
that there is little evidence to suggest any effect would be 
significant. Moreover, none of the experts we interviewed said they 
believed the tax expenditure was likely to have a significant effect 
on exports. Specifically, 

* One expert stated most arguments asserting the tax expenditure's 
positive effect on exports were theoretical in nature and lacked 
evidence. 

* Two experts stated it may be impossible to obtain data to establish 
such an effect. 

* One expert stated that the relationship between U.S. employees 
abroad and exports has diminished in the past several decades, due in 
part to advances in information technology, which have made access to 
information relating to export suppliers much more widely accessible 
globally. 

Commerce officials were not aware of any data on the relationship 
between the tax expenditure and exports.[Footnote 49] One Commerce 
official stated that he believed the tax expenditure's effect on 
exports, if any, was small. Another Commerce official told us he was 
not aware of the tax expenditure being discussed during development of 
the National Export Initiative launched in 2010. In addition, the tax 
expenditure was not identified as a potential contributor towards the 
administration's crosscutting goal of doubling U.S. exports over 5 
years.[Footnote 50] 

The few empirical analyses that have asserted a relationship between 
the tax expenditure and exports have weaknesses.[Footnote 51] A 1980 
study concluded that repealing the tax expenditure would lead to a 
decline in exports.[Footnote 52] A 2005 analysis, which relied on the 
model results from the 1980 study to estimate the effects of the tax 
expenditure on the number of Americans employed abroad and on U.S. 
exports, drew a similar conclusion.[Footnote 53] However, the model 
from the 1980 study has several limitations. For example, the model 
drew on export data from 1974, when more recent data might more 
accurately reflect the current relationship between the tax 
expenditure and exports. In addition, the model incorporated 
assumptions relating to the activities of Americans employed abroad in 
relationship to U.S. exports that may not be applicable today. For 
instance, while the tax expenditure is not limited to individuals 
working in positions that promote U.S. exports, the model assumed 
Americans abroad are engaged in such activities. The model also 
assumed non-U.S. workers were not close substitutes for American 
workers, though several experts we interviewed indicated that for 
certain overseas positions, U.S. employees have no comparative 
advantage, in relation to non-U.S. employees. 

Moreover, even if the tax expenditure had a positive effect on 
exports, its effect on overall U.S. employment could depend on the 
current employment rate. As we noted in a recent report, 
Commerce[Footnote 54] and trade policy researchers have asserted that 
in a high unemployment economy--which the United States has 
experienced for several years--additional exports may result in 
additional jobs; in contrast, in a low unemployment economy, 
additional exports may result in jobs shifting from one firm to 
another without increasing total employment.[Footnote 55] 

The Tax Expenditure's Net Effects on Economic Efficiency and Equity 
Are Uncertain; Some Alternatives Could Better Target Benefits but 
Would Add Complexity: 

Using criteria from our tax expenditure evaluation guide, we evaluated 
whether the tax expenditure[Footnote 56] 

* generates net economic benefits for society; 

* is fair and equitable; 

* is simple, transparent, and administrable; and: 

* is achieving its purpose. 

The tax expenditure affects a variety of resource allocation 
decisions; it also affects equity in several different ways. Some of 
these effects are positive, while others are negative, and the 
magnitudes of all these effects are unknown. As a result, the tax 
expenditure's overall effect is uncertain. For a more detailed 
explanation of our assessment of these questions, see appendix IV. 

Does the Tax Expenditure Generate Net Economic Benefits for Society? 

A tax system reduces economic efficiency to the extent that it affects 
the relative prices of goods, services, or factors of production and 
thereby induces individuals or businesses to alter economic decisions. 
[Footnote 57] No tax system can avoid affecting some relative prices 
to some extent; however, it is important to minimize these price 
effects unless they are intended to achieve some other beneficial 
social purpose. We found that the tax expenditure had effects on the 
following. 

Choices about where to work and who to hire: The tax expenditure 
potentially influences the choice of some U.S. citizens between 
working abroad or in the United States, because it lowers the total 
tax that these individuals would pay on foreign earned income. These 
tax reductions make working abroad in lower-tax countries more 
attractive to U.S. citizens than doing so otherwise would be, and as a 
result could interfere with the efficient allocation of U.S. labor 
between locations.[Footnote 58] 

The tax expenditure also potentially influences employers' choices as 
to whether they should fill positions abroad with U.S. citizens or 
with citizens of countries that do not tax earned income on a 
worldwide basis. The reduction in efficiency can occur when the 
employer hires a less productive worker for a lower pretax salary than 
the U.S. citizen would demand, due to the foreign worker paying no tax 
to his home country. The tax expenditure counteracts these effects, 
but we found no evidence in the economic literature that would 
indicate how the magnitude of the counteracting effects compares to 
the negative efficiency effects we discussed earlier. Consequently, we 
are not able to say whether the tax expenditure improves or reduces 
overall economic efficiency. 

Differences in costs of living: Tax relief may be justified for U.S. 
citizens working in countries where the costs of living are 
significantly higher than the United States' highest-cost locations. 
[Footnote 59] If these taxpayers' wages are sufficiently greater than 
they would earn at home (reflecting higher costs of living abroad), 
they may be pushed into higher tax brackets. This increase in the tax 
bracket is another way that the tax system could reduce efficiency by 
affecting location and hiring decisions. Tax relief targeted to the 
effects of this bracket change would remove an efficiency-reducing 
influence on U.S. citizens' employment decisions at a lower revenue 
cost than the more broad tax relief provided by the tax expenditure. 
This same efficiency problem arises domestically with respect to cost-
of-living differences within the United States. Given that the U.S. 
tax system does not address this problem domestically, those who have 
proposed a means of addressing cost-of-living differences between the 
United States and foreign locations note that it may only be justified 
if the differences are much greater internationally than domestically. 

Is the Tax Expenditure Fair and Equitable? 

We assessed the tax expenditure against three criteria--horizontal 
equity, vertical equity, and the benefits received principle--all of 
which require some subjective judgments. Determining who benefits from 
the tax expenditure, and how those benefits affect equity, can be more 
complicated than simply identifying which taxpayers claim the tax 
expenditure.[Footnote 60] Given that the ultimate distribution of 
benefits from the FEIE is unknown, it is difficult to draw conclusions 
about its net effect on the equity of the tax system.[Footnote 61] 

Horizontal equity: Individuals with equal incomes and who are the same 
in terms of other characteristics deemed relevant to the ability to 
pay tax (such as number of dependents) should pay the same tax. 
Conclusions about the tax expenditure's effect on horizontal equity 
depend, in part, on judgments about appropriate comparison groups. For 
U.S. policymakers, one relevant comparison is the treatment of U.S. 
citizens working abroad, relative to similar U.S. citizens working in 
the United States. The FEIE violates this principle between these two 
groups unless those working abroad are deemed to be sufficiently 
different from their domestic counterparts due to either the 
potentially extreme cost-of-living differences or the differences in 
U.S. government services they receive. 

Vertical equity: Similar to horizontal equity, individuals with higher 
income--or who have other characteristics that increase their ability 
to pay--should pay more tax than those with less ability to pay. The 
tax expenditure decreases vertical equity to the extent that 
individuals who benefit from the exclusion tend to have higher incomes 
than those living in the United States, unless the ultimate tax 
benefit falls entirely on employers. In comparison to an unlimited 
exclusion, the current design of the tax expenditure--specifically the 
dollar limit and the stacking rule[Footnote 62]--moderates this 
negative effect. 

Benefits received principle: An individual's tax payments should bear 
some relationship to the government benefits that individual receives. 
Some experts we interviewed noted that U.S. citizens working abroad 
for the long term receive significantly smaller benefits from U.S. 
government services than those living in the United States, and that 
this difference may justify some tax relief for the former. However, 
other experts said that U.S. citizens living and working abroad 
benefit from federal services--such as national defense, foreign 
affairs, income maintenance, and basic research--that produce social 
or humanitarian benefits that are not directly apportioned to specific 
individuals. For example, citizens abroad benefit from years of public 
investment in their education, the cost of which is typically 
recaptured over their lifetimes. Regardless of the benefits they 
receive, U.S. citizens overseas must file a U.S. tax return and pay 
taxes owed unless they renounce their citizenship.[Footnote 63] 

Is the Tax Expenditure Simple, Transparent, and Administrable? 

There is widespread agreement that the U.S. worldwide tax system is 
complex and adds burden for taxpayers and IRS. The tax expenditure 
adds complexity with its eligibility rules and interactions with the 
FTC and other tax provisions.[Footnote 64] 

Transparency: Taxpayers may not fully understand their obligations 
under the tax expenditure. According to IRS, there is a common 
misconception that potentially excludable foreign earned income does 
not have to be reported on a U.S. tax return. IRS said that this 
misconception contributes to the tax gap, which is the difference 
between taxes owed and those paid on time. However, data do not 
indicate the portion of the U.S. tax gap--most recently estimated by 
IRS at a net $385 billion as of 2006--that is attributable to 
international taxpayers who fail to file U.S. tax returns, underreport 
their foreign income, or fail to pay U.S. taxes owed. IRS has 
undertaken research to study the needs of international taxpayers in 
helping them comply with their U.S. tax liabilities.[Footnote 65] 

Simplicity: According to some experts interviewed, the tax expenditure 
may simplify the tax compliance burdens of U.S. citizens abroad who 
would otherwise have to claim the FTC to avoid double taxation on 
foreign earned income. According to stakeholders and some experts we 
interviewed, the FTC can be more complex. However, this effect is 
uncertain for several reasons, including that we did not find 
evaluative studies that compare the compliance burden of the tax 
expenditure with the FTC. 

Administrability: IRS faces challenges in administering the tax 
expenditure, because IRS does not have the same level of information 
reporting to detect noncompliance on foreign source income as it does 
for U.S. source income. IRS special compliance projects have found 
substantial noncompliance among high-risk taxpayers who are 
miscalculating or are ineligible to claim benefits from the tax 
expenditure. The Treasury Inspector General for Tax Administration has 
reported on the challenges in administering the bona fide residence 
and physical presence tests.[Footnote 66] 

How Well Does the Tax Expenditure Achieve Its Purposes? 

As discussed earlier, the tax expenditure's effect on foreign trade, 
employment, and competitiveness is uncertain. There is little evidence 
to indicate that the tax expenditure could have more than a limited 
effect on exports. Thus, it is not clear that special tax relief for 
the relatively small population of U.S. citizens living and working 
abroad positively benefits the overall well-being of the United States. 

Some Alternatives to the Tax Expenditure Would Increase Efficiency and 
Equity, While the Effect of Others Would Depend on Details of the 
Reform: 

An assessment of the tax expenditure against criteria for good tax 
policy leaves room for debate regarding potential alternatives to 
improve the efficiency and equity, as well as to reduce complexity for 
taxpayers and IRS. Alternatives to the current tax expenditure range 
from eliminating it entirely--as proposed in several deficit reduction 
and tax reform proposals--to removing the maximum limit for the 
exclusion. We also considered alternatives to target tax relief to 
high cost areas and address the benefits received principle.[Footnote 
67] 

Alternative: Eliminating the Tax Expenditure: 

The net effect on economic efficiency of eliminating the tax 
expenditure and taxing all foreign earned income is uncertain. This 
alternative would largely remove the influence of taxes on location 
decisions by U.S. citizens to work abroad, which would increase 
efficiency; however, at the same time, it would decrease efficiency by 
increasing the effect of the differential tax treatment by the United 
States and other countries on businesses' decisions regarding whom to 
hire for positions abroad. The effect of the alternative on equity is 
also uncertain. Elimination could be viewed as improving equity if two 
conditions are met: (1) there are few or no foreign locations where 
living costs are significantly higher than in the highest-cost 
locations within the United States, and (2) the additional federal 
taxes (in excess of the amounts offset by foreign tax credits) are 
broadly commensurate with the benefits that U.S. citizens working 
abroad receive from the U.S. government. If either of these conditions 
is not met, then some form of tax relief may be justified on equity 
grounds. 

The effect on compliance burden will vary with the circumstances of 
the taxpayers. To the extent that the FTC form is more complicated 
than the FEIE form, eliminating the exclusion could increase the 
compliance burdens of some taxpayers who currently use the exclusion 
rather than the FTC. However, it would not significantly affect the 
compliance burden of taxpayers with earned income exceeding the 
exclusion limit or investment income of those who already use the FTC. 
IRS officials said that repealing the tax expenditure would simplify 
challenges associated with the FEIE bona fide residence and physical 
presence tests that do not apply to the FTC. Citizens working abroad 
in lower tax countries would face higher taxes. Those facing higher 
taxes or compliance costs may choose not to comply, and noncompliance 
could undercut the expected revenue gain from repeal.[Footnote 68] 

Alternative: Targeting Tax Relief for Extreme Cost of Living 
Differences: 

Economic efficiency and equity could be improved by modifying the 
current tax expenditure design or replacing it with an alternative tax 
relief that adjusts for foreign costs of living that significantly 
exceed those in the highest-cost U.S. locations. One approach would be 
to make Treasury responsible for annually determining the amount by 
which costs of living in foreign locations may exceed those in the 
highest-cost U.S. locations and for publishing adjustment factors for 
determining tax liabilities.[Footnote 69] Whether a system of cost-of-
living adjustments would be more burdensome for Treasury or taxpayers 
than the current tax expenditure, which already has some adjustments 
for higher housing expenses, depends on the degree of accuracy and 
completeness desired in the adjustments.[Footnote 70] The federal 
revenue change would depend on the cost of tax reductions targeted to 
citizens working in higher-cost foreign areas, instead of the current 
preferential treatment for all citizens working abroad, and--depending 
on policy priorities and preferences--the redesign could aim for the 
same or a lower overall cost to the federal government. 

Alternative: Targeting Tax Relief Based on Benefits Received and 
Obligations as Citizens: 

It would be difficult to design an alternative to the tax expenditure 
that better targeted tax relief based on benefits received. The tax 
expenditure itself is not designed specifically to address the 
benefits received principle, and the federal income tax in general is 
not based on the benefits received principle. Indeed, it would be very 
difficult to incorporate the principle in a tax that funds such a 
broad array of functions, many of which provide broad social benefits. 
Moreover, the values of these benefits are not easily allocable to 
specific individuals. Any attempt to determine a fair reduction in 
federal tax obligations of U.S. citizens living abroad--relative to 
similar citizens living in the United States--would involve a 
considerable amount of value judgment. Depending on policy priorities 
and preferences, any redesign targeted for reduced benefits received 
by citizens working overseas could aim for the same or a lower overall 
cost to the federal government. A revision deemed to result in a more 
equitable distribution of the tax burden would not necessarily have 
negative consequences for economic efficiency. The effects of the 
revision on simplicity and administrability would largely depend on 
the extent to which it is designed to account for the characteristics 
of individual taxpayers. One possible change in the current tax 
expenditure design would be to increase the time abroad required for 
eligibility. This would target tax relief to those abroad for longer 
periods.[Footnote 71] 

Alternative: Uncapping the Exclusion: 

Removing the maximum limit on the exclusion--that is, uncapping the 
tax expenditure--and excluding all foreign earned income from taxation 
would have multiple counteracting effects on employment decisions. 
These effects would be opposite to those that would result from 
eliminating the tax expenditure. In this case, inefficiency due to tax 
effects on location decisions would increase while inefficiency due to 
the tax effects on hiring would decrease. Once again, because the 
relative magnitudes of the counteracting effects are indeterminable, 
the net effect on overall economic efficiency would be uncertain. The 
effect on equity will depend on value judgments. Uncapping the tax 
expenditure could be viewed as reducing both horizontal and vertical 
equity because it would reduce the federal tax liabilities of some 
high-income U.S. citizens working in countries with effective rates of 
income tax below that of the United States, regardless of the cost of 
living differences. On the other hand, it would increase equity if 
U.S. citizens working abroad are viewed as receiving no benefits for 
which they should pay federal taxes. To the extent that the exclusion 
is easier to use than the FTC, uncapping the exclusion could simplify 
compliance burdens for citizens abroad with only earned income, 
although they would still have to file a U.S. tax return to claim the 
tax benefit. However, uncapping the exclusion could compound the 
challenge that IRS has in administering the tax expenditure, given the 
misconception that those with excluded income do not have to file and 
report income to IRS. According to some experts we interviewed, 
uncapping the exclusion could create incentives for higher-income 
professionals to move abroad to deliver their services and to shift 
some investment income to be paid as earned income. It would also 
reduce federal tax revenue, and any perceived unfairness could erode 
voluntary compliance for domestic taxpayers. Experiences of other 
countries that do not tax foreign earned income may be useful in 
adopting tax rules and compliance practices to prevent or limit income 
shifting to lower tax countries.[Footnote 72] 

Uncapping the exclusion and not taxing any foreign earned income would 
be consistent with broader proposals to change the current U.S. 
worldwide system of taxation into a territorial or source based income 
tax system. One proposal to move from "citizen-based" to "resident-
based" taxation would exclude all foreign income for individuals 
living abroad; this could make the tax expenditure unnecessary. 
[Footnote 73] Such an approach would impose a departure tax for 
citizens working abroad who reside in a foreign country for a minimum 
period of time.[Footnote 74] Some proposals have implications not only 
for U.S. individual income tax filing, but also for information 
reporting about foreign financial accounts and assets that are beyond 
the scope of this report.[Footnote 75] The larger debate about broader 
changes to the U.S. international tax system focuses chiefly on the 
taxation of corporate income, and such reforms may have implications 
for the tax treatment of the wage income of U.S. citizens working 
abroad; however, they are beyond the scope of this report. 

Concluding Observations: 

The design of the tax expenditure has shifted over time as 
policymakers have sought to balance the costs of special tax relief to 
cover higher costs of living overseas with benefits for individuals 
seeking employment overseas and potentially, benefits for U.S. 
exports. Currently, the federal government is forgoing billions in 
federal tax revenue for a small but growing population of U.S. 
citizens working abroad that claim section 911 tax benefits. Yet, 
there is little evidence that the tax expenditure has a significant 
effect on export promotion. 

It is clear that the current tax expenditure, or any option to 
increase the exclusion limit, does not target precisely the two 
potential conditions that might justify continuing tax relief for some 
U.S. citizens living and working abroad. First, potentially negative 
effects on efficiency and equity could arise if the cost of living in 
foreign locations significantly exceeds that of the highest-cost 
locations in the United States. Determining whether extreme cost of 
living differences justify special tax relief, and how to tailor the 
alternative relief is--to some extent--an empirical question. Second, 
a possible inequity could arise if U.S. citizens working abroad 
receive a reduced level of U.S. government benefits compared to what 
they would receive if they were living in the United States. 
Considering special tax relief based on benefits received by citizens 
abroad requires broader value judgments about the extent to which U.S. 
citizens should contribute to government services from which they may 
receive no direct private benefit. In addition, any alternative to 
better target special tax relief must balance added complexity for 
taxpayers and IRS, as well as revenue implications for the federal 
government. 

Eliminating any special tax relief could reduce the employment of U.S. 
citizens in some international job markets and might lead to a small 
reduction in U.S. businesses' foreign activities. However, there is no 
clear evidence that such effects would have negative consequences for 
the overall well being of the U.S. population. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Secretary of the Treasury, 
Commissioner of Internal Revenue, and the Secretary of Commerce for 
comment. Treasury and IRS provided technical comments, which we 
incorporated as appropriate. Commerce said it had no comments. 

We are sending copies of this report to the Secretary of the Treasury, 
Commissioner of Internal Revenue, and Secretary of Commerce and other 
interested parties. This report will also be available at no charge on 
GAO's website at [hyperlink, http://www.gao.gov]. 

If you have any questions on this report, please contact me at (202) 
512-9110 or mctiguej@gao.gov. Contact points for our offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Key contributors to this report are listed in 
appendix V. 

Signed by: 

James R. McTigue, Jr. 
Director, Tax Issues Strategic Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

You asked us to examine section 911--the foreign earned income 
exclusion (FEIE) as well as an exclusion or deduction for foreign 
housing costs. Specifically, this report (1) describes the number and 
types of taxpayers using the tax expenditure, and analyzes how the tax 
expenditure may interact with other provisions of the tax code, such 
as the foreign tax credit; (2) describes what is known about how the 
tax expenditure may affect business decisions about the employment of 
U.S. workers abroad, and U.S. exports; and (3) evaluates the potential 
advantages and disadvantages of modifying or removing the tax 
expenditure. 

To describe the number and types of taxpayers using the FEIE, we 
reviewed Internal Revenue Service (IRS) forms and publications. We did 
not try to count the population of U.S. citizens working abroad. We 
also analyzed data from the IRS's Statistics of Income (SOI) 
Individual Income Tax Returns 2011 publication, and from data obtained 
from SOI on Form 2555, Foreign Earned Income and Form 2555-EZ, Foreign 
Earned Income Exclusion, for tax year 2011(the most recent year 
available). These SOI samples were based on returns as filed, and did 
not reflect IRS audit results or any net operating loss carrybacks 
from future years. Each Form 2555/EZ is treated as a separate return 
which, in the case of joint returns, may be composed of more than one 
taxpayer. The SOI data in this report is based on SOI's probability 
sample of unaudited individual income tax returns--Forms 1040, 1040A, 
and 1040EZ (including electronic returns) filed by U.S. citizens and 
residents[Footnote 76]--and thus is subject to some imprecision owing 
to sampling variability. Using SOI's summaries of sampling weights and 
coefficient of variations, we estimated sampling errors for our 
estimates. However, SOI did not provide coefficient of variations for 
all of the data we obtained. As a result, when possible, estimates 
were obtained using the coefficients of variations of other items. 
Some data could not be reported and some had to be aggregated. Unless 
otherwise noted, all percentage estimates based on the SOI have 95 
percent confidence intervals. Caution should be used when comparing 
estimates because not all differences between estimates are 
statistically significant. 

SOI is a data set widely used for research purposes. SOI data are not 
available to the public except in aggregate form via published tables. 
These data tables are publicly available either in printed form or on 
the IRS website [hyperlink, http://www.irs.gov]. IRS performs a number 
of quality control steps to verify the internal consistency of SOI 
sample data. For example, it performs computerized tests to verify the 
relationships between values on the returns selected as part of the 
SOI sample, and manually edits data items to correct for problems, 
such as missing items. To assess the reliability of the data we 
analyzed, we reviewed IRS documentation and interviewed agency 
officials familiar with the data. We concluded that the data were 
sufficiently reliable for the purposes of this report. 

To determine how the tax expenditure may interact with other 
provisions of the tax code, we reviewed the Internal Revenue Code 
(IRC) for references to section 911. We also reviewed section 911 for 
references to other provisions of the U.S. Code, including the IRC. 
Although we identified provisions that reference section 911, not all 
provisions may have been identified. We did not attempt to identify 
provisions that refer to other provisions which refer to section 911. 
Through interviews and review of IRS and other materials, we 
identified some provisions of law that, while not referencing section 
911 or referenced in section 911, may interact in some way with 
section 911; however, not all such provisions may have been 
identified. As procedural requirements, information reporting about 
foreign financial accounts and offshore assets--such as under the 
Foreign Account Tax Compliance Act or the Report of Foreign Bank and 
Financial Accounts--affects U.S. citizens living and working abroad 
but is beyond the scope of this report, which is examining section 
911. To analyze how the tax expenditure affects eligibility for other 
tax provisions, we reviewed IRS publications, guidance, and tax 
advisor literature. We did not try to quantify the number and types of 
taxpayers using the tax expenditure that are specifically affected by 
the interactions. 

To determine what is known about how the tax expenditure may affect 
business decisions about the employment of U.S. workers abroad, and 
U.S. exports, we reviewed related literature and available 
information, including government reports, academic literature, and 
surveys. In particular, we identified literature by conducting 
searches of academic literature databases, such as ProQuest, Econlit, 
and ABI/INFORM; searches of our prior work and work from the 
Congressional Budget Office (CBO), Congressional Research Service 
(CRS), Joint Committee on Taxation (JCT), Department of Treasury 
(Treasury), and Internal Revenue Service (IRS); or searches of 
bibliographies from literature already identified, such as the tax 
expenditure compendium prepared by the Congressional Research Service. 
[Footnote 77] Although there is an extensive literature on the United 
States' taxation of worldwide income, much of that literature is 
focused on the taxation of corporations.[Footnote 78] The literature 
related to the FEIE is more limited in volume. Prior GAO and CRS in-
depth reports are more than 30 years old.[Footnote 79] Other studies 
and articles were derived from or sponsored by industry groups or 
other organizations that may benefit from adjustments to laws and 
regulations governing the FEIE. Subsequently, we interviewed a 
selection of agency officials, experts, and stakeholder organizations 
and entities, and asked all interviewees for their suggestions on 
available literature and data concerning the FEIE to supplement our 
own literature review. (We define stakeholders as individuals or 
groups who may offer a valuable perspective on how the tax expenditure 
may affect business decisions concerning the employment of U.S. 
workers abroad, and exports, but who may also have a vested interest 
in the issue.) We interviewed Department of Commerce officials. We 
also identified a pool of 33 experts, whom we selected based on 
various factors including their affiliation with leading higher 
education or research institutions and their publication or research 
experience associated with the FEIE or related topics. These experts 
included economists, attorneys, and business professors, among others. 
One consideration in the selection process was to talk with experts 
with different areas of expertise among the issues of international 
taxation, international business strategy, trade, or U.S. labor. 
Another consideration was to talk with experts whose overall views on 
the FEIE varied from one another. While we were able to include some 
experts with a range of views based on their published work, most that 
we identified had not published articles specifically on the FEIE. 
Therefore, we did not know their overall opinions of FEIE in advance 
of our interview. We interviewed nine of these experts who we 
determined provided the range of background and experiences that we 
were seeking. However, the views and opinions of the experts we 
interviewed may not represent those of all the experts in this area. 
We interviewed the following experts: 

* Reuven Avi-Yonah, Professor of Law, University of Michigan: 

* Jamie Bonache, Professor of Organization Studies, Carlos III 
University of Madrid: 

* Kimberly Clausing, Professor of Economics, Reed College: 

* Gary Hufbauer, Senior Fellow, Peterson Institute for International 
Economics: 

* Michael Kirsch, Professor of Law, University of Notre Dame: 

* Daniel Mitchell, Senior Fellow, Cato Institute: 

* John Mutti, Professor of Economics, Grinnell College: 

* Maury Peiperl, Professor of Leadership and Strategic Change, IMD 
Business School: 

* Eric Toder, Institute Fellow, Urban Institute: 

In addition, we interviewed representatives from nine stakeholder 
organizations that represent the interests of relevant entities, such 
as U.S. citizens working overseas and U.S. businesses. These 
organizations represent businesses in different geographical regions, 
and of different sizes. This sample of stakeholder perspectives covers 
a range of views, but is not generalizable to all stakeholders. In 
particular, we interviewed representatives from the following 
organizations: 

* American Citizens Abroad, Inc. 

* Association of Americans Resident Overseas: 

* Business Roundtable: 

* Middle East Council of American Chambers of Commerce: 

* National Foreign Trade Council: 

* National Small Business Association: 

* KPMG LLP: 

* PricewaterhouseCoopers LLP: 

* U.S. Chamber of Commerce, Asia: 

We used our review of the literature and available information 
described above to inform our development of sets of questions and 
discussion topics for the interviewees. Our discussion topics and 
questions for experts and stakeholders covered different areas such as 
the tax expenditure's costs, benefits, and other characteristics; its 
relationship to U.S. workers and companies; and its relationship to 
exports. We analyzed all expert and stakeholder responses, and 
generally reported on areas where interviewees provided information 
that was most relevant to our final reporting objectives. In our 
reporting of expert and stakeholder views, we refer to "most" experts 
or stakeholders as representing 7 or more; "about half" as 
representing 4 to 6; and "several" or "some" as representing 2 or 3. 
While we are presenting approximate proportions of all experts and 
stakeholders, not every expert and stakeholders directly addressed 
each issue. 

To identify and analyze alternative policy options, we reviewed the 
same literature described above to determine what is known about the 
advantages and disadvantages of modifying the foreign earned income 
exclusion. We also obtained the views of the nine experts and nine 
stakeholders we interviewed on the advantages and disadvantages of 
modifying the tax expenditure. 

Our discussion topics and questions for experts and stakeholders 
covered a range of possible options for modifying the tax expenditure, 
as shown in table 7. We focused our analysis on the most common 
options discussed in the literature and by those we interviewed--
eliminating the tax expenditure with taxing all foreign earned income 
and uncapping the exclusion with no taxation of foreign earned income. 
We also examined options that could address two arguments that may 
justify providing some tax relief: (1) targeting extreme costs of 
living to improve efficiency, and (2) adjusting taxes to reflect lower 
benefits to improve equity. 

Table 7: Various Possible Options to Modify the Design of the Current 
Exclusion: 

Repeal the FEIE, foreign housing exclusion, or both, and tax all 
foreign earned income. 

Reduce the maximum exclusion, housing cost amount, or both. 

Increase the maximum exclusion, housing cost amount, or both. 

Restrict eligibility, for example, by lengthening the required time of 
the bona fide residence test and the physical presence test for U.S. 
citizens and U.S. resident aliens living in a foreign country or by 
targeting employees who work in specific industries. 

Expand eligibility, for example, by shortening the required time of 
the bona fide residence test and the physical presence test for U.S. 
citizens and U.S. resident aliens living in a foreign country or by 
extending eligibility to maritime and aviation workers who do not meet 
the current physical presence test. 

Change the way the exclusion and housing cost limits are computed. The 
foreign earned income exclusion is currently indexed for inflation 
using the Consumer Price Index, and housing cost limits are computed 
by geography. One possibility would be to change how the tax 
expenditure is indexed for the cost of living. 

Change the interactions with other tax provisions. Currently, claiming 
the tax expenditure affects taxpayer eligibility for other tax 
provisions with income thresholds, such as individual retirement 
accounts and the earned income tax credit. Since 2006, a stacking rule 
or provision requires that marginal tax rates apply to earnings beyond 
the limits of the tax expenditure, as if the tax expenditure had not 
been claimed. One way to change the interaction and stacking order 
would be to convert the exclusion to a credit. 

Replace the exclusion with an overseas employment tax credit targeted 
to employees of selected industries. For example, Canadians can claim 
an overseas employment tax credit if they are a resident or deemed 
resident of Canada at any time in the year and have income from 
certain kinds of work--such as oil and gas exploration, construction, 
engineering, and work under contract with the United Nations, among 
others--performed in another country. 

Uncap the exclusion and exclude all foreign earned income from 
taxation. 

Impose an exit fee on U.S. citizens and U.S. resident aliens living in 
a foreign country. Usually part of broader tax reform, this option 
would exclude all foreign income for eligible individuals living 
overseas. 

Source: GAO analysis. 

[End of table] 

We used the tax expenditure evaluation guide we developed to evaluate 
the performance of the foreign earned income exclusion and possible 
options.[Footnote 80] This report focuses on the guide's criteria for 
evaluating whether the tax expenditure is good tax policy and meets 
its purpose, namely, 

* Does the tax expenditure generate net economic benefits for society? 

* Is the tax expenditure fair and equitable? 

* Is the tax expenditure simple, transparent, and administrable? 

* How well does the tax expenditure achieve its purpose? 

The tax policy criteria may sometimes conflict with one another and 
some are subjective. As a result, there are likely trade-offs between 
the criteria when evaluating a particular tax expenditure. We also 
considered the consequences for the federal budget of the tax 
expenditure and possible options. We analyzed Treasury's tax 
expenditure estimates from 1986 to 2014, and reviewed available JCT 
estimates and interviewed JCT staff about the revenue effects of 
modifying the tax expenditure. 

[End of section] 

Appendix II: Provisions That Interact with Section 911: 

There are different types of tax provisions that interact with section 
911. Some tax provisions apply to Americans working abroad. Other tax 
provisions use the Foreign Earned Income Exclusion (FEIE) to determine 
the taxpayer's tax rate and the applicability for other tax 
provisions. There are also tax provisions that provide definitions, 
some of which are relevant in interpreting section 911. The tables 
below describe provisions that interact with section 911. 

Table 8 lists select tax provisions and tax treaties which affect 
income tax treatment for U.S. taxpayers with income from foreign 
sources. 

Table 9 lists other tax provisions which specifically reference 
section 911. In general, these provisions require calculating the 
taxpayer's income for a specific purpose, such as for determining 
eligibility for a credit or deduction, and require some or all of the 
exclusions or deductions allowed under section 911 to be included in 
the calculation. Most of the provisions listed in table 9 would not be 
affected by amendments to section 911, as changing the allowable 
exclusion or deduction under section 911 would not affect the net 
resulting calculation of income for purposes of most of these 
provisions. 

Table 10 lists provisions, including two non-tax statutes which 
provide definitions or other context relevant for interpreting section 
911. 

Table 11 lists tax provisions which incorporate by reference a 
definition established in section 911, such as "earned income" and 
"tax home." 

Table 8: Selected Provisions Affecting Income Tax Treatments for 
Americans Working Abroad: 

Description of provision: Foreign tax credit; 26 U.S.C § 901; 
The foreign tax credit is intended to relieve double taxation when 
foreign income is taxed by both the United States and the foreign 
country. Only foreign income taxes (including war taxes and excess 
profits taxes) paid or accrued to any foreign country or any 
possession of the United States can be claimed for the foreign tax 
credit. If the foreign tax rate is higher than the U.S. rate, there 
will be no U.S. tax on the foreign income. If the foreign tax rate is 
lower than the U.S. rate, U.S. tax on the foreign income will be 
limited to the difference between the rates. Taxpayers can choose to 
claim the foreign tax credit on IRS Form 1116 or as an itemized 
deduction on the Form 1040 schedule A; 
Interaction with section 911: Taxpayers who choose to claim the 
foreign earned income exclusion cannot take a foreign tax credit or 
deduction for foreign taxes on the income excluded. There is no double 
taxation because the excluded income is not subject to U.S income tax. 

Description of provision: Exemption for certain federal employee 
allowances; 26 U.S.C § 912; 
Special allowances--cost of living, housing, travel, and education--
for federal civilian employees who work abroad are excluded for 
federal income taxes. Federal employees are generally exempt from 
foreign taxes; 
Interaction with section 911: Federal employees are not eligible for 
the foreign earned income or housing exclusion. 

Description of provision: Tax treaties[A]; 
The United States has tax treaties with other countries that allow 
residents of those countries, including U.S. citizens and residents, 
to enjoy certain benefits, such as reduced rates of withholding and 
exemption from tax on certain items of income. Tax treaties may 
provide benefits to Americans working abroad, specifically: 
* compensation from short-term business trips may be excluded from 
taxation in the foreign country, and; 
* pay for teachers, professors, students, trainees, and apprentices 
may be excluded from taxation in the foreign country; 
Interaction with section 911: Treaty benefits may also be available 
for U.S. citizens working abroad with U.S. tax home who do not meet 
the residency requirements for the foreign earned income and housing 
exclusion. 

Description of provision: Expatriation tax; 26 U.S.C § 877 and 877A; 
Expatriation tax provisions apply to U.S. citizens who have 
relinquished their citizenship and to long-term residents who have 
ceased to be lawful permanent residents. The rules that apply are 
based on the date of expatriation, as described in IRS Publication 
519--U.S. Tax Guide for Aliens; 
Interaction with section 911: An expatriate who is considered a 
"covered expatriate" and whose expatriation date is after June 16, 
2008 is generally subject to tax--on the net unrealized gain in his or 
her property as if the property had been sold for its fair market 
value on the day before the expatriation date. An expatriate may avoid 
being considered a "covered expatriate" if the section 911 exclusion 
reduces the expatriate's U.S. income tax liability below a certain 
threshold for the five years prior to expatriation. 

Source: GAO analysis of the United States Code. 

[A] Taxpayers using the foreign tax credit for income taxes can claim 
only taxes paid. The qualified foreign tax is the amount figured using 
the lower treaty rate and not the amount actually paid, because the 
excess tax is refundable. 

[End of table] 

Table 9: Foreign Earned Income Excluded Is Used to Determine Tax Rates 
and Applicability for Other Tax Provisions: 

Other provision and citation to reference in provision to section 911: 
Requirement to file a U.S. income tax return; 26 U.S.C § 6012(c); 
Description of provision: Income, filing status, and age generally 
determine whether a taxpayer must file an income tax return. For 2013, 
a single taxpayer under age 65 with worldwide income of $10,000 must 
file a U.S. tax return; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining whether a taxpayer's income is high enough to trigger the 
requirement to file a tax return. 

Other provision and citation to reference in provision to section 911: 
Figuring tax on income not excluded; 26 U.S.C § 1[A]; 
Description of provision: Worldwide income of U.S. citizens or 
resident aliens is generally subject to U.S. income tax regardless of 
where they are living. The marginal rate of tax increases for higher 
amounts of income; 
Interaction with section 911: Taxpayers claiming the foreign earned 
income exclusion, the housing exclusion, or both, must compute the tax 
on their nonexcluded income using the tax rates that would have 
applied had they not claimed the exclusions. 

Other provision and citation to reference in provision to section 911: 
Alternative minimum tax[A]; 26 U.S.C § 5581; 
Description of provision: The alternative minimum tax is a separate 
income tax calculation intended to ensure that higher-income taxpayers 
pay at least a minimum tax. Individuals with high levels of 
exemptions, deductions, and credits relative to income may be subject 
to the alternative minimum tax; 
Interaction with section 911: Taxpayers claiming the foreign earned 
income exclusion, the housing exclusion, or both, must compute the 
alternative minimum tax on their nonexcluded income using the tax 
rates that would have applied had they not claimed the exclusions. 

Other provision and citation to reference in provision to section 911: 
Earned income credit[B]; 26 U.S.C § 32(c)(1)(C); 
Description of provision: The earned income tax credit is a refundable 
credit available to low income workers. Qualifying working taxpayers 
may receive a refund greater than the amount of income tax they paid 
for the year; 
Interaction with section 911: Taxpayers that claim the foreign earned 
income exclusion cannot also claim the earned income credit. 

Other provision and citation to reference in provision to section 911: 
Child tax credit; 26 U.S.C. §24(b)(1); 
Description of provision: The child tax credit is a credit that can 
reduce tax by as much as $1,000 for each qualifying child under age 
17. The additional child tax credit is refundable for taxpayers that 
owe no taxes. The amount of the credit is phased-out at higher levels 
of income; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Adoption Credit; 26 U.S.C. §23(b)(2)(B); 
Description of provision: A tax credit of up to $12,970 is allowed for 
qualified expenses paid to adopt an eligible child, including a child 
with special needs. The amount of the credit is phased-out at higher 
levels of income; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts, or both, that can be excluded under section 911 are 
included in determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Adoption Exclusion; 26 U.S.C. §137(b)(3); 
Description of provision: A taxpayer may be able to exclude from 
income amounts paid or expenses incurred by their employer for 
qualified adoption expenses in connection with adopting a child. The 
maximum amount of the exclusion is phased-out at higher levels of 
income; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Hope Scholarship Credit, Lifetime Learning Credit, and American 
Opportunity Credit; 26 U.S.C. § 25A(d)(3); 
Description of provision: These tax credits are available to taxpayers 
who pay expenses for higher (postsecondary) education expenses. For 
2009 to 2017, a special type of Hope Scholarship Credit (with higher 
minimums and called the American Opportunities Credit) is available. 
The maximum amount of the credits is phased-out at higher levels of 
income; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Student Loan Interest Deduction; 26 U.S.C. § 221(b)(2)(C); 
Description of provision: Generally, personal interest, other than 
certain mortgage interest, is not deductible. This special deduction 
is allowed for paying interest on a student loan (also known as an 
education loan) used for higher education. The maximum allowable 
deduction is phased-out at higher income levels; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Tuition and Fees Deduction; 26 U.S.C. § 222(b)(2)(C); 
Description of provision: This deduction is allowed for qualified 
higher education expenses paid during the year for the taxpayer, 
spouse, or dependents. The maximum allowable deduction for taxpayers 
decreases at higher levels of income; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
calculating the level of income used to determine the maximum 
deduction. 

Other provision and citation to reference in provision to section 911: 
Coverdell Education Savings Account (ESA); 26 U.S.C. § 530(c)(2); 
Description of provision: A Coverdell ESA is a tax-preferred account 
created or organized in the United States only for the purpose of 
paying qualified education expenses. The total annual contribution 
limit starts at $2,000 per beneficiary (through age 17 unless he or 
she is a special needs beneficiary) and is phased-out at higher levels 
of income. Distributions used to pay qualified education expenses are 
tax-exempt; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Interest from U.S. savings bonds used to pay higher education expenses; 
26 U.S.C. § 135(c)(4); 
Description of provision: All or part of the interest received on the 
redemption of qualified U.S. savings bonds used to pay qualified 
higher educational expenses during the same year is excluded from 
income. The maximum allowable exclusion is phased-out at higher income 
levels; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Deduction phase-out for individual retirement account contributions; 
26 U.S.C. § 219(g)(3); 
Description of provision: If individuals or their spouses actively 
participate in certain other retirement arrangements during a year, 
their deductions for contributions to traditional IRAs are subject to 
a phase-out range based on income; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Saver's credit; 26 U.S.C. § 25B(e); 
Description of provision: The amount of the saver's credit is equal to 
the applicable percentage of the individual's qualified retirement 
savings contributions. The maximum possible credit is $1,000. The 
higher the income of the taxpayer, the lower the applicable percentage 
is; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of applicable percentage. 

Other provision and citation to reference in provision to section 911: 
Contribution phase-out for Roth individual retirement account 
contributions; 26 U.S.C. § 408A(c)(3)(B)(i); 
Description of provision: Taxpayers may make contributions to Roth 
individual retirement accounts up to an annual contribution limit. 
There is no deduction for contributions, but earnings of the account 
are not taxed when earned and are excluded from income when 
distributed. Otherwise allowable contributions are subject to a phase-
out range based on income; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the phase-out. 

Other provision and citation to reference in provision to section 911: 
Annuities; 26 U.S.C. § 72(f); 
Description of provision: Annuity payments may be fully or partially 
taxable depending in part on the tax treatment of the initial 
contributions. When an employer contributes to an employee's annuity, 
these contributions do not count towards the amount of the exclusion 
unless they were included in the employee's income when made; 
Interaction with section 911: If contributions to an annuity by an 
employer would not be includible in the income of the employee at the 
time they were made because of section 911, the contributions are not 
counted towards the exclusion. 

Other provision and citation to reference in provision to section 911: 
Refundable credit for coverage under a qualified health plan; 
26 U.S.C. § 36B(d)(2)(B); 
Description of provision: In general, taxpayers with household income 
between 100 and 400 percent of the national poverty line are allowed a 
refundable tax credit for coverage under a qualified health plan; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining household income. 

Other provision and citation to reference in provision to section 911: 
Unearned Income Medicare Contribution; 26 U.S.C. § 1411(d)(1); 
Description of provision: Individuals with adjusted gross income--as 
modified under this section--above certain threshold amounts and with 
net investment income owe a tax equal to the lesser of 3.8 percent of 
that net investment income or 3.8 percent of the excess of the 
individual's modified adjusted gross income over the applicable 
threshold amount; 
Interaction with section 911: Foreign earned income excluded under 
section 911(a)(1) (if any) is included in determining the amount of 
income that is compared against the applicable threshold amount in 
applying this section, but only to the extent the excluded income 
exceeds the amount of any deductions (taken into account in computing 
adjusted gross income) or exclusions disallowed under section 
911(d)(6) with respect to the amounts excluded from gross income under 
911(a)(1). 

Other provision and citation to reference in provision to section 911: 
Penalty under the requirement to maintain minimum essential coverage; 
26 U.S.C. § 5000A(c)(4)(C); 
Description of provision: Individuals who do not maintain minimum 
essential healthcare insurance coverage are subject to a penalty. The 
penalty amount is the greater of a flat dollar amount or a percentage 
of income. Individuals with income below certain thresholds are not 
subject the penalty; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the penalty and thresholds. 

Other provision and citation to reference in provision to section 911: 
Self-Employed Health Insurance Deduction; 26 U.S.C. § 162(l); 
Description of provision: In general, self-employed individuals are 
allowed to deduct the cost of health insurance. The deduction cannot 
exceed the taxpayer's earned income derived from the trade or business 
in which the taxpayer is self-employed; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining the amount of earned income for purpose of the allowable 
deduction for self-employed health insurance. 

Other provision and citation to reference in provision to section 911: 
Social security and tier 1 railroad retirement benefits; 26 U.S.C § 
86(b)(2); 
Description of provision: A percentage of social security and certain 
railroad retirement benefits paid to individuals with incomes above 
certain thresholds is considered income and is taxed accordingly. 
Above one set of income thresholds, 85 percent of the benefits are 
considered income. Above a lower set of thresholds, 50 percent of the 
benefits are considered income. Individuals with income below an even 
lower set of thresholds are not taxed on these benefits; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining income for purposes of the thresholds. 

Other provision and citation to reference in provision to section 911: 
Includible compensation for purposes of taxation of employee annuities; 
26 USC § 403(b)(3); 
Description of provision: Annuity contracts purchased by a tax exempt 
non-profit or public school for certain employees are excluded from 
the income of the employee until a distribution is made. The amounts 
an employer can contribute to the employee's annuity are limited, in 
part, by the amount of compensation received by the employee from the 
employer; 
Interaction with section 911: Foreign earned income and foreign 
housing amounts that can be excluded under section 911 are included in 
determining the amount of compensation received by the employee from 
the employer. 

Other provision and citation to reference in provision to section 911: 
Limitation on benefits under qualified defined benefit plans; 
26 USC § 415(b)(3); 
Description of provision: Trusts which form part of a defined benefit 
pension plan of an employer and meet certain requirements are 
considered qualified trusts and provide certain tax benefits. A trust 
is not a qualified trust if it is a defined benefit plan and provides 
benefits in excess of a certain limitation. Benefits exceed the 
limitation if, on an annual basis, they are greater than the lesser of 
$160,000 (subject to cost-of-living adjustments) or 100 percent of the 
participant's average compensation for high 3 years; 
Interaction with section 911: For a self-employed individual, foreign 
earned income and foreign housing amounts that can be excluded under 
section 911 are included in determining average compensation for high 
3 years. 

Other provision and citation to reference in provision to section 911: 
Qualified individual present in foreign country or countries, 
applicability of exclusion from gross income provided by this section 
for self-employment tax purposes; 26 U.S.C § 1402(a)(8), (11); 
Description of provision: Self-employed individuals owe a tax on their 
self-employment income, consisting of an old-age, survivors, and 
disability insurance tax and a hospital insurance tax. In general, an 
individual's self-employment income is the net earnings from self-
employment subject to certain limitations; 
Interaction with section 911: Foreign earned income that can be 
excluded under section 911(a)(1) is included in determining net 
earnings from self-employment. Additionally, net earnings from self-
employment for ministers are determined without regard to section 911. 

Source: GAO analysis of the United States Code. 

[A] These provisions do not include a reference to section 911. 
Subsection (f)(1) of section 911 sets forth these interactions. 

[B] Unlike the other entries in this table, amendments to section 911 
could potentially affect the earned income credit. For instance, if 
the foreign earned income exclusion was eliminated, some taxpayers who 
had been taking the foreign earned income exclusion might be newly 
eligible for the earned income credit. 

[End of table] 

Table 10: Provisions Which Provide Definitions Relevant in 
Interpreting Section 911: 

Other provision and citation: Social security and tier 1 railroad 
retirement benefits; 26 U.S.C § 86(f)(4); 
Description of other provision: A percentage of social security and 
certain railroad retirement benefits paid to individuals with incomes 
above certain thresholds is considered income and is taxed 
accordingly. In addition, this provision provides that for purposes of 
section 911, any social security benefit shall be treated as an amount 
received as a pension or annuity; 
Interaction with section 911: Under section 911, amounts received by 
an individual as a pension or annuity are not considered foreign 
earned income. 

Other provision and citation: Taxability of beneficiary of employees' 
trust; 26 U.S.C § 402(b); 
Description of other provision: Under section 402(b) benefits under a 
non-tax exempt employees' trust may be included in the gross income of 
the employees before they are actually distributed. The provision 
specifies the amount and timing of this income; 
Interaction with section 911: Under section 911, amounts included in 
gross income because of section 402(b) are not considered foreign 
earned income. 

Other provision and citation: Taxation of employee annuities; 
26 U.S.C § 403(c); 
Description of other provision: In general, if an employer purchases 
an annuity contract for an employee and that annuity meets certain 
requirements, the employee will be taxed on amounts distributed from 
the annuity to the employee in the year the distributions are made. 
Under section 403(c), premiums paid by an employer for an annuity 
contract which fails to meet these requirements are to be included in 
the gross income of an employee and are governed by different timing 
rules; 
Interaction with section 911: Under section 911, amounts included in 
gross income because of section 403(c) are not considered foreign 
earned income. 

Other provision and citation: Trade or business expenses; 
26 U.S.C § 162(a)(2); 
Description of other provision: Taxpayers are allowed to deduct 
ordinary and necessary business expenses including traveling expenses 
while away from home in the pursuit of a trade or business. In 
interpreting "while away from home", the courts have developed a body 
of case law defining a taxpayer's "tax home". In general, a person's 
tax home for determining deductible traveling expenses is the vicinity 
of his or her principle place of business and not where his or her 
personal residence is located; 
Interaction with section 911: For purposes of section 911, an 
individual's "tax home" is the home from which travel is a deductible 
business expense under section 162, with the caveat that an 
individual's tax home is not considered to be in a foreign country for 
purposes of section 911 for any period for which his or her abode is 
within the United States. To be eligible for an exclusion under 
section 911, a taxpayer's tax home must be in a foreign country, among 
other requirements. 

Other provision and citation: Cost of living adjustment; 
26 U.S.C § 1(f)(3); 
Description of other provision: The IRC requires certain dollar 
amounts to be adjusted annually for inflation according to a statutory 
formula based on the difference between the consumer price index in a 
given year and the consumer price index for a reference year. This 
formula is set forth in section 1(f)(3); 
Interaction with section 911: For taxable years beginning after 2005, 
the maximum foreign earned income exclusion amount is adjusted for 
inflation according to the calculation set forth in section 1(f)(3) 
with 2004 as the reference year. 

Other provision and citation: Mortgage Interest; 26 U.S.C § 163; 
Description of other provision: In general, under section 163, 
individuals can deduct business or investment interest, but not 
personal interest unless it is qualified residence interest on a home 
mortgage loan; 
Interaction with section 911: Housing expenses for purposes of section 
911 do not include interest deductible under section 163. 

Other provision and citation: Property Tax; 26 U.S.C § 164; 
Description of other provision: In general, individuals can deduct 
certain taxes, including state, local, and foreign real property 
taxes, state and local personal property taxes, and state, local, and 
foreign income taxes; 
Interaction with section 911: Housing expenses for purposes of section 
911 do not include taxes deductible under section 164. 

Other provision and citation: Deduction of taxes, interest, and 
business depreciation by cooperative housing corporation tenant-
stockholder; 26 U.S.C § 216(a); 
Description of other provision: Under section 216(a) a tenant-
stockholder can deduct amounts paid or accrued to a cooperative 
housing corporation to the extent such payments represent the tenant-
shareholder's proportional share of deductible real estate taxes or 
deductible interest; 
Interaction with section 911: Housing expenses for purposes of section 
911 do not include amounts deductible under section 216(a). 

Other provision and citation: Gain from dispositions of certain 
depreciable realty; 26 USC § 1250; 
Description of other provision: In general, taxpayers can deduct 
depreciation on certain real property that is more than the 
depreciation figured using the straight line method. This excess 
depreciation is referred to as additional depreciation. Gain on the 
disposition of real property with the additional depreciation is 
treated as ordinary income to the extent of the additional 
depreciation and is taxed at a maximum 25 percent rate; 
Interaction with section 911: When determining the amount of tax owed, 
unrecaptured section 1250 gains are determined after increasing the 
amount by any capital gain excess. 

Other provision and citation: Wages defined for income tax withholding 
provisions in relation to exclusion from gross income under this 
section; 26 U.S.C § 3401(a)(8); 
Description of other provision: Generally, for income tax withholding 
purposes, wages mean all remuneration for services performed by an 
employee for an employer; 
Interaction with section 911: For income tax withholding purposes, 
wages do not include services for an employer if, at the time of the 
payment of such remuneration, it is reasonable to believe that such 
remuneration will be excluded from gross income under section 911. 

Other provision and citation: Place where persons claiming benefits of 
this section file returns; 26 U.S.C § 6091; 
Description of other provision: In general, individuals file tax 
returns in the internal revenue district of their legal residence of 
principle place of business or at a service center serving that 
internal revenue district as the Secretary by regulation may designate; 
Interaction with section 911: Persons claiming exclusions or 
deductions under section 911 file tax returns where designated by 
regulations, which direct taxpayers to file in accordance with the 
applicable Forms and Instructions. 

Other provision and citation: Trading With the Enemy Act; 
50 U.S.C. App. §§ 1-44; 
Description of other provision: Restricts trade with countries hostile 
to the United States. The act also authorizes the use of economic 
sanctions against foreign nations, citizens and nationals of foreign 
countries, or other persons aiding a foreign country; 
Interaction with section 911: If travel or any transaction in 
connection with such travel with respect to any foreign country is 
regulated under the Trading with the Enemy Act, then income from that 
country is not considered foreign earned income, and, therefore, not 
excludable. Further expenses for housing in that country or for a 
spouse or dependents in another country while the taxpayer is in the 
regulated country are not considered housing expenses, and, therefore 
are not excludable or deductible. Individuals in a regulated country 
are not considered bona fide residents of that country or present in 
that country. 

Other provision and citation: International Emergency Economic Powers 
Act (50 U.S.C. 1701 et seq.); 
Description of other provision: Authorizes the President to regulate 
commerce after declaring a national emergency in response to any 
unusual and extraordinary threat to the United States which has a 
foreign source. It gives the President broad authority over financial 
transactions and property in which any foreign country, any citizen or 
national of a foreign country, or any other person aiding the foreign 
country, has any interest, provided that the president first declares 
a national emergency under the act; 
Interaction with section 911: If travel or any transaction in 
connection with such travel with respect to any foreign country is 
regulated under the International Emergency Economic Powers Act, then 
income from that country is not considered foreign earned income, and, 
therefore, is not excludable. Further expenses for housing in that 
country or for a spouse or dependents in another country while the 
taxpayer is in the regulated country are not considered housing 
expenses, and, therefore are not excludable or deductible. Individuals 
in a regulated country are not considered bona fide residents of that 
country or present in that country. 

Source: GAO analysis of the United States Code. 

[End of table] 

Table 11: Section 911 Definition Is Used in Defining Earned Income or 
Tax Home: 

Description of provision: Certain unearned income of children taxed as 
if parent's income; 26 U.S.C § 1(g)(2)(A)(ii)(ll), (4)(A)(i); 
Wording of provision: For certain children, unearned income over 
$2,000 is taxed at the parent's rate if the parent's rate is higher 
than the child's. This applies to certain children who did not have 
earned income that exceeded half of their support; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Alternative minimum tax treatment of 
unearned income of minor children; 26 U.S.C. § 59(j)(1)(A); 
Wording of provision: For children for whose income is taxed at their 
parent's rate, the allowable exemption under the alternative minimum 
tax cannot exceed the sum of the child's earned income and a set 
amount; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Treatment of community income property; 
26 U.S.C § 66 (d)(1); 
Wording of provision: A married couple may earn community income as 
defined under the community property laws of a U.S. state or 
possession or a foreign country. If the spouses live apart at all 
times during the calendar year, do not file a joint return, have 
earned income which is community income, and do not transfer any 
portion of that earned income between themselves, then the community 
income is treated in accordance with section 879(a); 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Accident and health plans; 26 U.S.C § 
105(h)(3)(B)(v); 
Wording of provision: In general, employees can exclude certain health 
benefits offered by their employers from their income. However, 
certain highly compensated employees may not exclude the value of 
health benefits in certain cases. If health benefits are provided 
under a self-insured medical expense reimbursement plan which 
discriminates in favor of highly compensated individuals, a portion of 
those benefits may not be excludable. When determining whether a plan 
is discriminatory, certain classes of employees need not be 
considered, including employees who have not completed three years of 
service, employees under the age of 25, part-time and seasonal 
employees, and nonresident alien employees who received no U.S.-source 
earned income from the employer; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Qualified pension, profit-sharing, and stock 
bonus plans minimum coverage requirements; 26 U.S.C. § 410(b)(3)(C); 
Wording of provision: Employers may establish qualified pension, 
profit-sharing or stock bonus plans (such as 401(k) plans) with 
certain tax advantages. A plan is not a qualified plan unless it meets 
certain requirements, including minimum coverage requirements. When 
determining whether a trust meets the minimum coverage requirements, 
certain classes of employees can be excluded, including nonresident 
alien employees who received no U.S.-source earned income from the 
employer; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Qualified pension, profit-sharing, and stock 
bonus plans definitions and special rules; 26 U.S.C. § 414(q)(8); 
Wording of provision: Employers may establish qualified pension, 
profit-sharing or stock bonus plans (such as 401(k) plans) with 
certain tax advantages. A plan is not a qualified plan unless it meets 
certain requirements, including minimum coverage requirements. If an 
employer is operating separate lines of business during a year, the 
employer may apply the minimum coverage requirements to each separate 
line of business. Nonresident alien employees who received no U.S.-
source income from the employers are not considered employees for 
purposes of determining who highly compensated employees are and for 
determining whether the employer is engaged in a separate line of 
business; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Exempt organizations; 26 U.S.C § 
505(b)(2)(E); 
Wording of provision: Organizations organized and operated for certain 
purposes are tax exempt. Tax exempt organizations include voluntary 
employee beneficiary associations providing certain benefits and 
trusts to provide group legal services. If these types of exempt 
organizations are part of a plan, they must meet certain additional 
requirements to maintain their tax exempt status, including that the 
plan of which they are a part be nondiscriminatory. When determining 
whether a plan is discriminatory, certain classes of employees need 
not be considered, including employees who have not completed three 
years of service, employees under the age of 21, less than half-time 
and seasonal employees, and nonresident alien employees who received 
no U.S.-source earned income from the employer; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Group-term life insurance provided by an 
employer; 26 U.S.C § 79(d)(3)(B)(iv); 
Wording of provision: Employer provided group-term life insurance for 
employees is excludable from the income of the employees up to a 
certain amount. This exclusion is not available for certain key 
employees if the plan is discriminatory. When determining whether a 
plan is discriminatory, certain classes of employees need not be 
considered, including employees who have not completed three years of 
service, part-time and seasonal employees, and nonresident alien 
employees who received no U.S.-source earned income from the employer; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Passive activity losses and credits; 
26 U.S.C § 469(e)(3); 
Wording of provision: In general, taxpayers may not take losses from 
passive activities in excess of aggregate income from passive 
activities or certain credits from passive activities in excess of 
regular tax liability allocable to all passive activities. When 
calculating income or loss from a passive activity, earned income is 
not taken into account; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2)(A), but not 
subsection 911(d)(2)(B). 

Description of provision: Community income of nonresident alien 
individuals; 26 U.S.C § 879(a)(1); 
Wording of provision: A married couple may earn community income as 
defined under the community property laws of a U.S. state or 
possession or a foreign country. If one or both spouses of a married 
couple are nonresident aliens, any community income that is earned 
income (other than trade or business income and a partner's 
distributive share of partnership income) is treated as income of the 
spouse who rendered the personal service; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Tax on group health plans which fail to 
satisfy continuation coverage requirements; 26 U.S.C. § 4980B(g)(1)(C); 
Wording of provision: Group health plans which fail to meet certain 
continuation coverage requirements with respect to any qualified 
beneficiary are subject to a tax. A nonresident alien who received no 
U.S.-source earned income is not considered a qualified beneficiary 
when determining whether this requirement tax is imposed; 
Interaction with section 911: This provision adopts by reference the 
definition of earned income in section 911(d)(2). 

Description of provision: Source rules for personal property sales; 
26 U.S.C § 865(g)(1)(A)(i)(l); 
Wording of provision: In general, income from the sale of personal 
property by a U.S. resident is sourced to the United States and the 
sale of personal property by a nonresident is sourced outside the 
United States. For purposes of this provision, an individual is a U.S. 
resident if he or she is a U.S. citizen or alien resident and who does 
not have a tax home in a foreign country or is a nonresident alien 
with a tax home in the United States; 
Interaction with section 911: This provision adopts by reference the 
definition of tax home in section 911(d)(3). 

Description of provision: Residence and source rules involving 
possessions; 26 U.S.C. § 937(a)(2); 
Wording of provision: In general, to be a bona fide resident of Guam, 
American Samoa, the Northern Mariana Islands, Puerto Rico, or the U.S. 
Virgin Islands, an individual must meet two requirements. First, the 
individual must be present for at least 183 days during the taxable 
year in that possession. Second, the individual must not have a tax 
home outside the possession where they were present for 183 days and 
not have a closer connection to the United States or a foreign country 
than to the possession; 
Interaction with section 911: This provision adopts by reference the 
definition of tax home in the first sentence of section 911(d)(3), but 
without regard to the second sentence of section 911(d)(3). 

Description of provision: Treatment of certain foreign currency 
transactions; 26 U.S.C § 988(a)(3)(B)(i)(l); 
Wording of provision: In general, the source of ordinary income or 
loss from foreign currency transaction is determined, in part, by the 
residency of the taxpayer on whose books the relevant asset, 
liability, or item of income is properly reflected. For purposes of 
this provision, an individual's residency is the country in which the 
individual's tax home is located; 
Interaction with section 911: This provision adopts by reference the 
definition of tax home in section 911(d)(3). 

Description of provision: Penalty under the requirement to maintain 
minimum essential coverage; 26 U.S.C. § 5000A(f)(4)(A); 
Wording of provision: Individuals who do not maintain minimum 
essential healthcare insurance coverage are subject to a penalty. An 
individual is considered to have minimum essential coverage for any 
month in which the individual's tax home is in a foreign country and 
who is a bona fide resident of a foreign country or countries for the 
entire year or is present in a foreign country or countries during at 
least 330 full days during that year; 
Interaction with section 911: This provision adopts by reference 
section 911(d)(1) which provides that a qualified individual is an 
individual who is a bona fide resident of a foreign country or 
countries for the entire year or is present in a foreign country or 
countries during at least 330 full days during that year. 

Description of provision: Resident alien and nonresident alien defined; 
26 U.S.C § 7701(b)(3)(B)(ii); 
Wording of provision: In general, an alien individual is considered a 
resident alien of the United States if he or she meets certain 
requirements, including the substantial presence test. An individual 
will not be considered to meet the substantial presence test if he or 
she is present in the United States on fewer than 183 days during the 
current year, has a tax home in a foreign country (as defined in 
section 911(d)(3) without regard to the second sentence thereof), and 
has a closer connection to that foreign country than the United States; 
Interaction with section 911: This provision adopts by reference the 
definition of tax home in the first sentence of section 911(d)(3), but 
without regard to the second sentence of section 911(d)(3). 

Source: GAO analysis of the United States Code. 

[End of table] 

[End of section] 

Appendix III: Comparison of Tax Costs of U.S. and Non-U.S. Workers 
under the Foreign Earned Income Exclusion in Different Hypothetical 
Host Countries and at Different Income Levels: 

U.S. overseas workers' tax costs can vary across locations, and exceed 
the tax liabilities of non-U.S. workers. The foreign earned income 
exclusion (FEIE) can eliminate the U.S. income tax liability for some 
taxpayers residing overseas with foreign earned income. However, 
taxpayers with foreign earned income higher than the FEIE limit can, 
after applying the FEIE, incur a U.S. tax liability, in addition to 
the taxes they may owe to the foreign host nation. Tables 12 and 13 
compare the tax liabilities of U.S. and non-U.S. workers in three 
hypothetical locations with varying effective tax rates. For each of 
the three locations, or host countries, both the U.S. and non-U.S. 
workers are assumed to be in a country other than their home country. 
The example in table 12 uses a level of foreign earned income 
sufficiently low that application of the FEIE eliminates the U.S. 
worker's U.S. tax liability. Table 13 uses a higher level of foreign 
earned income, illustrating that after applying the FEIE, the U.S. 
worker can incur a U.S. tax liability in addition to the taxes he or 
she may owe to the foreign host nation. In addition to comparing the 
tax liabilities of U.S. and non-U.S. workers in different locations, 
tables 12 and 13 also compare the U.S. worker's after-tax income 
abroad against what it would be were the worker employed in the United 
States. The tables also illustrate the U.S. worker's after tax income 
in three locations without use of the FEIE. 

The examples included in the tables include certain assumptions, 
including that each employee (1) holds the same qualifications, (2) 
receives the same income, and (3) has a single tax filing status. The 
examples also assume the non-U.S. employee is not taxed by his or her 
home country on foreign-earned income, as the citizens of most other 
countries are not taxed by their country of citizenship if they reside 
in another country. The comparison focuses on home country tax rates 
for U.S. citizens and non-U.S. foreign nationals. U.S. citizens and 
non-U.S. foreign nationals would generally face the same local taxes 
as local citizens of the hypothetical host country. The U.S. effective 
tax rate listed is that which applies to the earned income level 
provided in the example, without application of the tax expenditure. 
Housing costs are not explicitly included in the example. Differences 
in housing costs can be offset by applicable housing exclusions or 
deductions. However, in some cases the differences in housing costs 
can affect overall tax liability. Finally, the example for table 13 
assumes that the U.S. citizen working in country B would claim the 
foreign tax credit for any income not excluded through the FEIE, 
while, for both tables, the U.S citizen working in country C could 
claim the foreign tax credit instead of the tax expenditure since 
doing so would eliminate his or her U.S. tax obligation. 

Table 12: Comparison of Tax Costs of U.S. and Non-U.S. Workers in 
Three Hypothetical Locations, at $107,600 Foreign Income Level: 

Country of employment: Effective tax rate; 
United States: 19%; 
Country A: 0%; 
Country B: 10%; 
Country C: 25%. 

Earned income; 
United States: $107,600; 
Country A: 
U.S. Citizen: $107,600; 
Non-U.S. Foreign National: $107,600; 
Country B: 
U.S. Citizen: $107,600; 
Non-U.S. Foreign National: $107,600; 
Country C: 
U.S. Citizen: $107,600; 
Non-U.S. Foreign National: $107,600. 

Less standard deduction $6,100 and one exemption $3,900; 
United States: ($10,000); 
Country A: 
U.S. Citizen: ($10,000); 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: ($10,000); 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: ($10,000); 
Non-U.S. Foreign National: N/A. 

Less FEIE; 
United States: N/A; 
Country A: 
U.S. Citizen: ($97,600); 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: ($97,600); 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: N/A; 
Non-U.S. Foreign National: N/A. 

Host country taxable income; 
United States: N/A; 
Country A: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: $0; 
Country B: 
U.S. Citizen: $107,600; 
Non-U.S. Foreign National: $107,600; 
Country C: 
U.S. Citizen: $107,600; 
Non-U.S. Foreign National: $107,600. 

Host country income tax; 
United States: N/A; 
Country A: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: $0; 
Country B: [Empty]; 
U.S. Citizen: $10,760; 
Non-U.S. Foreign National: $10,760; 
Country C: 
U.S. Citizen: $26,900; 
Non-U.S. Foreign National: $26,900. 

U.S. and total tax when FEIE is available: 

U.S. taxable income; 
United States: $97,600; 
Country A: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $97,600; 
Non-U.S. Foreign National: N/A. 

U.S. income tax after foreign tax credit; 
United States: $20,628; 
Country A: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A. 

Total income after tax; 
United States: 
U.S. Citizen: $86,972; 
Country A: 
U.S. Citizen: $107,600; 
Non-U.S. Foreign National: $107,600; 
Country B: 
U.S. Citizen: $96,840; 
Non-U.S. Foreign National: $96,840; 
Country C: 
U.S. Citizen: $80,700; 
Non-U.S. Foreign National: $80,700. 

Difference between U.S. citizen after-tax income abroad and in the 
U.S.; 
United States:
U.S. Citizen: N/A; 
Country A: 
U.S. Citizen: $20,628; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $9,868; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: ($6,272); 
Non-U.S. Foreign National: N/A. 

Difference between U.S. citizen after-tax income and that of a non-
U.S. citizen; 
United States: N/A; 
Country A: $0; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A. 

U.S. and total tax if FEIE if was not available: 

Country of employment: U.S. taxable income; 
United States: $97,600; 
Country A: 
U.S. Citizen: $97,600; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $97,600; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $97,600; 
Non-U.S. Foreign National: N/A. 

Country of employment: U.S. income tax after foreign tax credit; 
United States: $20,628; 
Country A: 
U.S. Citizen: $20,628; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $9,868; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A. 

Country of employment: Total income after tax; 
United States: $86,972; 
Country A: 
U.S. Citizen: $86,972; 
Non-U.S. Foreign National: $107,600; 
Country B: 
U.S. Citizen: $86,972; 
Non-U.S. Foreign National: $96,840; 
Country C: 
U.S. Citizen: $80,700; 
Non-U.S. Foreign National: $80,700. 

Country of employment: Difference between U.S. citizen after-tax 
income abroad and in the U.S.; 
United States: N/A; 
Country A: 
U.S. Citizen: $0; 
0%: Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: ($6,272); 
Non-U.S. Foreign National: N/A. 

Country of employment: Difference between U.S. citizen after-tax 
income and that of a non-U.S. citizen; 
United States: N/A; 
Country A: 
U.S. Citizen: ($20,628); 
Non-U.S. Foreign National: N/A; 
Country B: [Empty]; 
U.S. Citizen: ($9,868); 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $0; 
25%: Non-U.S. Foreign National: N/A. 

Source: GAO analysis. 

[End of table] 

Table 13: Comparison of Tax Costs of U.S. and Non-U.S. Workers in 
Three Hypothetical Locations, at $175,000 Foreign Income Level: 

Country of employment: Effective tax rate; 
United States: 23%; 
Country A: 0%; 
Country B: 10%; 
Country C: 25%. 

Earned income; 
United States: $175,000; 
Country A: 
U.S. Citizen: $175,000; 
Non-U.S. Foreign National: $175,000; 
Country B: 
U.S. Citizen: $175,000; 
Non-U.S. Foreign National: $175,000; 
Country C: 
U.S. Citizen: $175,000; 
Non-U.S. Foreign National: $175,000. 

Less standard deduction $6,100 and one exemption $3,900; 
United States: ($10,000); 
Country A: 
U.S. Citizen: ($10,000); 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: ($10,000); 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: ($10,000); 
Non-U.S. Foreign National: N/A. 

Less FEIE; 
United States: N/A; 
Country A: 
U.S. Citizen: ($97,600); 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: ($97,600); 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: N/A; 
Non-U.S. Foreign National: N/A. 

Host country taxable income; 
United States: N/A; 
Country A: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: $0; 
Country B: 
U.S. Citizen: $175,000; 
Non-U.S. Foreign National: $175,000; 
Country C: 
U.S. Citizen: $175,000; 
Non-U.S. Foreign National: $175,000. 

Host country income tax; 
United States: N/A; 
Country A: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: $0; 
Country B: 
U.S. Citizen: $17,500; 
Non-U.S. Foreign National: $17,500; 
Country C: 
U.S. Citizen: $43,750; 
Non-U.S. Foreign National: $43,750. 

U.S. and total tax when FEIE is available: 

U.S. taxable income; 
United States: $165,000; 
Country A: 
U.S. Citizen: $67,400; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $67,400; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $165,000; 
Non-U.S. Foreign National: N/A. 

Foreign Earned Income excluded; 
United States: N/A; 
Country A: 
U.S. Citizen: $97,600; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $97,600; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: NA; 
Non-U.S. Foreign National: N/A. 

U.S. income tax (no FEIE or foreign tax credit); 
United States: $39,493; 
Country A: 
U.S. Citizen: $39,493; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $39,493; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $39,493; 
Non-U.S. Foreign National: N/A. 

U.S. tax on excluded income; 
United States: N/A; 
Country A: 
U.S. Citizen: $20,628; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $20,628; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: N/A; 
Non-U.S. Foreign National: N/A. 

U.S. income tax after FEIE; 
United States: $39,493; 
Country A: 
U.S. Citizen: $18,865; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $18,865; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $39,493; 
Non-U.S. Foreign National: N/A. 

Foreign tax allocable to excluded income; 
United States: N/A; 
Country A: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $9,760; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: N/A; 
Non-U.S. Foreign National: N/A. 

U.S. income tax after foreign tax credit; 
United States: $39,493; 
Country A: 
U.S. Citizen: $18,865; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $9,105; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A. 

Total income after tax; 
United States: $135,507; 
Country A: 
U.S. Citizen: $156,135; 
Non-U.S. Foreign National: $175,000; 
Country B: 
U.S. Citizen: $148,395; 
Non-U.S. Foreign National: $157,500; 
Country C: 
U.S. Citizen: $131,250; 
Non-U.S. Foreign National: $131,250. 

Difference between U.S. citizen after-tax income abroad and in the 
U.S.; 
United States: N/A; 
Country A: 
U.S. Citizen: $20,628; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $12,888; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: ($4,257); 
Non-U.S. Foreign National: N/A. 

Difference between U.S. citizen after-tax income and that of a non-
U.S. citizen; 
United States: N/A; 
Country A: 
U.S. Citizen: ($18,865); 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: ($9,105); 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A. 

U.S. and total tax if FEIE if was not available: 

U.S. taxable income; 
United States: $165,000; 
Country A: 
U.S. Citizen: $165,000; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $165,000; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $165,000; 
Non-U.S. Foreign National: N/A. 

U.S. income tax after foreign tax credit; 
United States: $39,493; 
Country A: 
U.S. Citizen: $39,493; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $21,993; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A. 

Total income after tax; 
United States: $135,507; 
Country A: 
U.S. Citizen: $135,507; 
Non-U.S. Foreign National: $175,000; 
Country B: 
U.S. Citizen: $135,507; 
Non-U.S. Foreign National: $157,500; 
Country C: 
U.S. Citizen: $131,250; 
Non-U.S. Foreign National: $131,250. 

Difference between U.S. citizen after-tax income abroad and in the 
U.S.; 
United States: N/A; 
Country A: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: ($4,257); 
Non-U.S. Foreign National: N/A. 

Difference between U.S. citizen after-tax income and that of a non-
U.S. citizen; 
United States: N/A; 
Country A: 
U.S. Citizen: ($39,493); 
Non-U.S. Foreign National: N/A; 
Country B: 
U.S. Citizen: ($21,993); 
Non-U.S. Foreign National: N/A; 
Country C: 
U.S. Citizen: $0; 
Non-U.S. Foreign National: N/A. 

Source: GAO analysis. 

[End of table] 

[End of section] 

Appendix IV: Assessment of the Current Tax Expenditure and Four 
Alternatives: 

Using criteria from our tax expenditure evaluation guide, we evaluated 
whether the tax expenditure[Footnote 81] 

* generates net economic benefits for society; 

* is fair and equitable; 

* is simple, transparent, and administrable; and: 

* is achieving its purpose. 

The tax expenditure affects a variety of resource allocation 
decisions; it also affects equity in several different ways. Some of 
these effects are positive, while others are negative, and the 
magnitudes of all these effects are unknown. As a result, the tax 
expenditure's overall effect is uncertain. 

Does the Tax Expenditure Generate Net Economic Benefits for Society? 

A tax system reduces economic efficiency to the extent that it affects 
the relative prices of goods, services, or factors of production, and 
thereby induces individuals or businesses to alter economic decisions. 
[Footnote 82] No tax system can avoid affecting some relative prices 
to some extent; however, it is important to minimize these price 
effects unless they are intended to achieve some other beneficial 
social purpose. We found that the tax expenditure had effects on the 
following. 

Choices about where to work and who to hire: The tax expenditure 
potentially influences the choice of some U.S. citizens between 
working abroad or in the United States, because it lowers the total 
tax that these individuals would pay on foreign earned income. These 
tax reductions make working abroad in lower-tax countries more 
attractive to U.S. citizens than doing so otherwise would be and as a 
result, could interfere with the efficient allocation of U.S. labor 
between locations.[Footnote 83] 

The tax expenditure also potentially influences employers' choices as 
to whether they should fill positions abroad with U.S. citizens or 
with citizens of countries that do not tax earned income on a 
worldwide basis. The reduction in efficiency can occur when the 
employer hires a less productive worker for a lower pretax salary than 
the U.S. citizen would demand, due to the foreign worker paying no tax 
to his home country. The tax expenditure counteracts these effects, 
but we found no evidence in the economic literature that would 
indicate how the magnitude of the counteracting effects compares to 
the negative efficiency effects we discussed earlier. Consequently, we 
are not able to say whether the tax expenditure improves or reduces 
overall economic efficiency. 

Differences in costs of living: Tax relief may be justified for U.S. 
citizens working in countries where the costs of living are 
significantly higher than the United States' highest-cost 
locations.[Footnote 84] If these taxpayers' wages are sufficiently 
greater than they would earn at home (reflecting higher costs of 
living abroad), they may be pushed into higher tax brackets. This 
increase in the tax bracket is another way that the tax system could 
reduce efficiency by affecting location and hiring decisions. Tax 
relief targeted to the effects of this bracket change would remove an 
efficiency-reducing influence on U.S. citizens' employment decisions 
at a lower revenue cost than the more broad tax relief provided by the 
tax expenditure. This same efficiency problem arises domestically with 
respect to cost-of-living differences within the United States. Given 
that the U.S. tax system does not address this problem domestically, 
those who have proposed a means of addressing cost-of-living 
differences between the United States and foreign locations note that 
it may only be justified if the differences are much greater 
internationally than domestically. 

Is the Tax Expenditure Fair and Equitable? 

Equity is a subjective criterion. There are differing views on what an 
equitable tax system should look like, which can affect judgments on 
the fairness of a particular tax expenditure. Determining who benefits 
from the tax expenditure, and how those benefits affect equity, can be 
more complicated than simply identifying which taxpayers claim the tax 
expenditure. Three principles can inform judgments about the fairness 
of the tax expenditure: 

Horizontal equity: Individuals with equal incomes and who are the same 
in terms of other characteristics deemed relevant to the ability to 
pay tax (such as number of dependents) should pay the same tax. 

Vertical equity: Similar to horizontal equity, individuals with higher 
income or who have other characteristics that increase their ability 
to pay should pay more tax than those with less ability to pay. 
Identifying the characteristics that are relevant to an individual's 
ability to pay can involve value judgments. For that reason, among 
others, different observers may diverge in their assessments of how 
well a particular tax policy meets either of these equity criteria. 
[Footnote 85] 

Benefits received principle: An individual's tax payments should bear 
some relationship to the government benefits that individual receives. 
Once again, observers can differ in their judgments regarding the 
degree to which tax payments and benefits should be related, 
particularly because this criterion often conflicts with the other two 
equity criteria. 

In order to apply any of these equity principles, it is necessary to 
identify individuals who benefit from the exclusion. This 
identification is complicated by the fact that the individual or 
business that is legally obligated to pay a tax--or that receives a 
tax benefit--is not always the one (or, at least, not the only one) 
that bears the ultimate burden of the tax or receives the ultimate 
benefit. The ultimate burden or benefit is known as the incidence of 
the tax policy, and it depends on how various individuals and 
businesses respond to the policy. For example, in the case of the tax 
expenditure, even though individual employees claim the exclusion on 
their own tax returns, the resulting reduction in their total taxes 
may make them willing to work abroad for a lower pretax income than 
they would have accepted without the tax expenditure. As a result, the 
foreign employers may share in at least some of the benefit by being 
able to pay lower salaries than would otherwise have been needed to 
hire U.S. citizens. 

Determining the actual incidence of the tax expenditure would be 
difficult because it would require information on how two factors--the 
amount of labor that U.S. citizens are willing to supply to employers 
abroad and how those employers' demand for that particular type of 
labor--respond to changes in pretax and post-tax rates of 
compensation. We know of no study that has attempted to estimate such 
responsiveness. Given this uncertainty relating to the tax 
expenditure's incidence, it is difficult to draw conclusions about its 
effect on the equity of the tax system. 

Conclusions about the tax expenditure's effect on horizontal equity 
depend, in part, on judgments about appropriate comparison groups. For 
U.S. policymakers, one relevant comparison is the treatment of U.S. 
citizens working abroad relative to similar U.S. citizens working in 
the United States. Unless all of the benefit from the tax expenditure 
is passed on to employers or unless those working abroad are deemed to 
be sufficiently different from their domestic counterparts due to 
either the potentially extreme cost-of-living differences discussed 
above or the differences in U.S. government services they receive, the 
tax expenditure violates the principle of horizontal equity between 
these two groups of individuals. 

The tax expenditure decreases vertical equity to the extent that 
individuals who claim the exclusion tend to have higher incomes than 
those living in the United States, unless the incidence of the tax 
benefit falls entirely on employers. In comparison to an unlimited 
exclusion, the current design of the tax expenditure--specifically the 
dollar limit and the stacking rule[Footnote 86]--moderates this 
negative effect. 

In terms of the benefits principle, some of the experts we interviewed 
noted that U.S. citizens working abroad for the long term receive 
significantly smaller benefits from U.S. government services than 
those living in the United States, and that this difference may 
justify some tax relief for the former. Other experts noted that a 
large portion of federal revenues pay for services--such as national 
defense, foreign affairs, income maintenance, and basic research--that 
produce social or humanitarian benefits that are not directly 
apportioned to specific individuals. U.S. citizens living abroad 
likely benefit from some of these services. Many of those citizens 
also benefited from years of public investment, for example, in their 
education, the cost of which is typically recaptured from citizens 
over their lifetimes. Moreover, some observers note that the choice to 
retain U.S. citizenship while living abroad provides some insurance 
with respect to being able to return and live within the United States 
whenever one wants. They maintain that citizens abroad should be 
willing to pay some tax for this insurance. Currently, U.S. citizens 
overseas must file a U.S. tax return and pay taxes owed unless they 
renounce their citizenship.[Footnote 87] The National Taxpayer 
Advocate has reported that the numbers of those giving up their U.S. 
citizenship are growing.[Footnote 88] 

Citizens living abroad benefit from services provided by their host-
countries' governments to which they pay taxes. Given that credits for 
foreign income taxes paid reduce the amount of tax that these citizens 
pay to the U.S federal government, any attempt to quantify 
discrepancies between federal benefits received and federal taxes paid 
should account for the foreign tax credit.[Footnote 89] 

The tax expenditure results in more comparable treatment between U.S. 
citizens working in a low-tax foreign country and foreign workers in 
that country that have similar characteristics; however, it is not 
clear that comparisons between these two groups would be of equal 
interest to U.S. policymakers as the domestic taxpayer comparison. If 
this second comparison is considered relevant, the equity assessment 
would not be limited to a review of differences in the tax policies of 
various countries; it would also consider differences in the benefits 
that each government provides to citizens working abroad. 

Is the Tax Expenditure Simple, Transparent, and Administrable? 

There is widespread agreement that the U.S. worldwide tax system is 
complex and adds burden for taxpayers and IRS. The tax expenditure 
adds complexity with its eligibility rules and interactions with the 
foreign tax credit (FTC) and other tax provisions. 

Transparency: Taxpayers may not fully understand their obligations 
under the tax expenditure. According to IRS, there is a common 
misconception that potentially excludable foreign earned income does 
not have to be reported on a U.S. tax return. IRS said that this 
misconception contributes to the tax gap, which is the difference 
between taxes owed and those paid on time.[Footnote 90] However, data 
do not indicate the portion of the U.S. tax gap--most recently 
estimated by IRS at a net $385 billion as of 2006--that is 
attributable to international taxpayers who fail to file U.S. tax 
returns, underreport their foreign income, or fail to pay U.S. taxes 
owed. The National Taxpayer Advocate has called attention to the need 
to improve access and service for taxpayers located outside of the 
United States. IRS has undertaken research to study the needs of 
international taxpayers in helping them comply with their U.S. tax 
liabilities.[Footnote 91] 

Simplicity: According to some experts interviewed, the tax expenditure 
may simplify the tax compliance burdens of U.S. citizens abroad who 
would otherwise have to claim the FTC to avoid double taxation on 
foreign earned income. According to stakeholders and some experts we 
interviewed, the FTC can be more complex. However, this effect is 
uncertain for several reasons. First, we did not find evaluative 
studies that compare the compliance burden of the tax expenditure with 
the FTC. Second, taxpayers who claim the tax expenditure may bear the 
burden associated with claiming the FTC for capital income not covered 
by the tax expenditure. Additionally, taxpayers with only earned 
income may also do the FTC computations to determine which tax 
provision is the less costly option. Taxpayers with earned income 
exceeding the maximum exclusion face complexity in properly claiming 
both the tax expenditure and FTC.[Footnote 92] Furthermore, taxpayers 
who claim the tax expenditure need to calculate their modified 
adjusted gross income (AGI) to determine eligibility for other tax 
benefits. In addition, taxpayers claiming the exclusion face 
additional recordkeeping to demonstrate that they meet the bona fide 
residence or to track days for the physical presence test.[Footnote 
93] Although the net effect of the tax expenditure on compliance 
burden may be uncertain, some experts have suggested that the 
compliance burden could be simplified by replacing the tax expenditure 
with a modified FTC or simplified FTC form.[Footnote 94] 

Administrability: IRS faces challenges in administering the tax 
expenditure, because IRS does not have the same level of information 
reporting on foreign source income as it does for U.S. source income 
to detect noncompliance. Like U.S. citizens working in the United 
States, citizens abroad working for U.S. companies would be subject to 
U.S. employer wage reporting and tax withholding.[Footnote 95] 
However, IRS does not receive the same wage reports or tax withholding 
for U.S. citizens abroad working for foreign employers. Tax treaties 
and tax information exchange agreements with other nations can 
facilitate the exchange of taxpayer information. Additionally, recent 
information reporting requirements are an effort to improve 
transparency and provide tools for IRS to identify Americans abroad 
and address potential tax noncompliance.[Footnote 96] However, the 
National Taxpayer Advocate reports and stakeholders we interviewed 
raised concerns that these reporting requirements add burden for 
citizens overseas as well as the third parties submitting the 
information. 

IRS special compliance projects have found substantial noncompliance 
among high-risk taxpayers miscalculating or ineligible to claim 
benefits from the tax expenditure. Specifically, during 2009 through 
2011, about 3,000 noncompliant tax returns identified by IRS special 
compliance projects were found to have miscalculated the exclusion or 
were not eligible resulting in an additional $21 million, according to 
the Treasury Inspector General for Tax Administration.[Footnote 97] 
IRS said audits of exclusion claims are factually intensive and 
require information, for example, about a taxpayer's travel and 
domestic ties. The Treasury Inspector General for Tax Administration 
has reported on the challenges in administering the bona fide 
residence and physical presence tests.[Footnote 98] IRS began 
including international taxpayers in its National Research Program in 
2008 and plans to use the results to target enforcement on 
noncompliant taxpayers.[Footnote 99] 

How Well Does the Tax Expenditure Achieve Its Purposes? 

As discussed earlier, the tax expenditure's effect on hiring and 
employment decisions is uncertain. There is little evidence to 
indicate that the tax expenditure could have more than a limited 
effect on exports. Moreover, there is no evidence to indicate that 
this effect is positive or that it would exceed any effect that the 
tax expenditure has on imports. Thus, it is not clear if the special 
tax relief for the relatively small population of U.S citizens living 
and working abroad positively benefits the overall well-being of the 
United States. 

Some Alternatives to the Tax Expenditure Would Increase Efficiency and 
Equity, While the Effect of Others Would Depend on Details of the 
Reform: 

An assessment of the tax expenditure against criteria for good tax 
policy leaves room for debate regarding potential alternatives to 
improve the efficiency and equity as well as reduce complexity for 
taxpayers and IRS. Alternatives to the current tax expenditure range 
from eliminating it entirely--as proposed in several deficit reduction 
and tax reform proposals--to removing the maximum limit on the 
exclusion. We also considered alternatives to target tax relief to 
high cost areas and address the benefits received principle. [Footnote 
100] 

Alternative: Eliminating the Tax Expenditure: 

The net effect on economic efficiency of eliminating the tax 
expenditure and taxing all foreign earned income is uncertain. This 
alternative would largely remove the influence of taxes on location 
decisions by U.S. citizens to work abroad, which would increase 
efficiency; however, at the same time, it would decrease efficiency by 
increasing the effect of the differential tax treatment by the United 
States and other countries on businesses' decisions regarding whom to 
hire for positions abroad. The effect of the alternative on equity is 
also uncertain. Elimination could be viewed as improving equity if two 
conditions are met: (1) there are few or no foreign locations where 
living costs are significantly higher than in the highest-cost 
locations within the United States, and (2) the additional federal 
taxes (in excess of the amounts offset by foreign tax credits) are 
broadly commensurate with the benefits that U.S. citizens working 
abroad receive from the U.S. government. If either of these conditions 
is not met, then some form of tax relief may be justified on equity 
grounds. 

The effect on compliance burden will vary with the circumstances of 
the taxpayers. Eliminating the exclusion could increase the compliance 
burdens of some taxpayers who currently use the exclusion rather than 
the FTC to the extent that the FTC form is more complicated than the 
FEIE form. However, it would not significantly affect the compliance 
burden of taxpayers with earned income exceeding the exclusion limit 
or investment income who already use the FTC. IRS officials said that 
repealing the tax expenditure would simplify challenges associated 
with the FEIE bona fide residence and physical presence tests that do 
not apply to the FTC. Citizens working abroad in lower tax countries 
would face higher taxes. Those facing higher taxes or compliance costs 
may choose not to comply, and noncompliance could undercut the 
expected revenue gain from repeal.[Footnote 101] 

Alternative: Targeting Tax Relief for Extreme Cost of Living 
Differences: 

Economic efficiency and equity could be improved by modifying the 
current tax expenditure design or replacing it with an alternative tax 
relief that adjusts for foreign costs of living that significantly 
exceed those in the highest-cost U.S. locations. One approach would be 
to make Treasury responsible for annually determining the amount by 
which costs of living in foreign locations may exceed those in the 
highest-cost U.S. locations and for publishing adjustment factors for 
determining tax liabilities.[Footnote 102] Whether a system of cost-of-
living adjustments would be more burdensome for Treasury or taxpayers 
than the current tax expenditure, which already has some adjustment 
for higher housing expenses, depends on the degree of accuracy and 
completeness desired in the adjustments.[Footnote 103] The federal 
revenue change would depend on the cost of tax reductions targeted to 
citizens working in higher cost foreign areas in place of the current 
preferential treatment for all citizens working abroad, and--depending 
on policy priorities and preferences--the redesign could aim for the 
same or a lower overall cost to the federal government. 

Alternative: Targeting Tax Relief Based on Benefits Received and 
Obligations as Citizens: 

It would be difficult to design an alternative to the tax expenditure 
that better targeted tax relief based on benefits received. The tax 
expenditure itself is not designed specifically to address the 
benefits received principle, and the federal income tax in general is 
not based on the benefits received principle. Indeed, it would be very 
difficult to incorporate the principle in a tax that funds such a 
broad array of functions, many of which provide broad social benefits. 
Moreover, the values of these benefits are not easily allocable to 
specific individuals. Any attempt to determine a fair reduction in 
federal tax obligations of U.S. citizens living abroad relative to 
similar citizens living in the United States would involve a 
considerable amount of value judgment. Depending on policy priorities 
and preferences, any redesign targeted for reduced benefits received 
by citizens working overseas could aim for the same or a lower overall 
cost to the federal government. A revision deemed to result in a more 
equitable distribution of the tax burden would not necessarily have 
negative consequences for economic efficiency. The effects of the 
revision on simplicity and administrability would largely depend on 
the extent to which it is designed to account for the characteristics 
of individual taxpayers. One possible change in the current tax 
expenditure design would be to increase the time abroad required for 
eligibility. This would target tax relief to those abroad for longer 
periods.[Footnote 104] 

Alternative: Uncapping the Exclusion: 

Removing the maximum limit on the exclusion--that is, uncapping the 
tax expenditure--and excluding all foreign earned income from taxation 
would have multiple counteracting effects on employment decisions. 
These effects would be opposite to those that would result from 
eliminating the tax expenditure. In this case, inefficiency due to tax 
effects on location decisions would increase, while inefficiency due 
to the tax effects on hiring would decrease. Once again, because the 
relative magnitudes of the counteracting effects are indeterminable, 
the net effect on overall economic efficiency would be uncertain. The 
effect on equity will depend on value judgments. Uncapping the tax 
expenditure could be viewed as reducing both horizontal and vertical 
equity because it would reduce the federal tax liabilities of some 
high-income U.S. citizens working in countries with effective rates of 
income tax below that of the United States, regardless of the cost of 
living differences. On the other hand, it would increase equity if 
U.S. citizens working abroad are viewed as receiving no benefits for 
which they should pay federal taxes. To the extent that the exclusion 
is easier to use than the FTC, uncapping the exclusion could simplify 
compliance burdens for citizens abroad with only earned income, 
although they would still have to file a U.S. tax return to claim the 
tax benefit. However, uncapping the exclusion could compound the 
challenge that IRS has in administering the tax expenditure, given the 
misconception that those with excluded income do not have to file and 
report income to IRS. According to some experts we interviewed, 
uncapping the exclusion could create incentives for higher-income 
professionals to move abroad to deliver their services and to shift 
some investment income to be paid as earned income. It would also 
reduce federal tax revenue, and any perceived unfairness could erode 
voluntary compliance for domestic taxpayers. Experiences of other 
countries that do not tax foreign earned income may be useful in 
adopting tax rules and compliance practices to prevent or limit income 
shifting to lower tax countries.[Footnote 105] 

Uncapping the exclusion and not taxing any foreign earned income would 
be consistent with broader proposals to change the current U.S. 
worldwide system of taxation into a territorial or source-based income 
tax system. One proposal to move from "citizen-based" to "resident-
based" taxation would exclude all foreign income for individuals 
living abroad; this could make the tax expenditure unnecessary. 
[Footnote 106] Such an approach would impose a departure tax for 
citizens working abroad who reside in a foreign country for a minimum 
period of time.[Footnote 107] Some proposals have implications not 
only for U.S. individual income tax filing but also for information 
reporting about foreign financial accounts and assets that are beyond 
the scope of this report. The larger debate about broader changes to 
the U.S. international tax system focuses chiefly on the taxation of 
corporate income, but such reforms may have implications for the tax 
treatment of the wage income of U.S. citizens working abroad that are 
beyond the scope of this report.[Footnote 108] 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. McTigue, Jr., (202) 512-9110 or mctiguej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact name above, MaryLynn Sergent (Assistant 
Director), Laurie King (Analyst-in-Charge), Joe Carney, Kevin Daly, 
Martin De Alteriis, Kimberly Gianopoulos, Robert MacKay, Ed 
Nannenhorn, Andrew J. Stephens, Celia Thomas, Sonya Vartivarian, and 
James Wozny made key contributions to this report. Also contributing 
to this report were JoAnna Berry, Ming Chen, Etana Finkler, Robert 
Gebhart, Eric Gorman, and Robert Robinson. 

[End of section] 

Footnotes: 

[1] GAO, Government Performance and Accountability: Tax Expenditures 
Represent a Substantial Federal Commitment and Need to Be Reexamined, 
[hyperlink, http://www.gao.gov/products/GAO-05-690] (Washington, D.C.: 
Sept. 23, 2005), and Tax Policy: Tax Expenditures Deserve More 
Scrutiny, [hyperlink, http://www.gao.gov/products/GAO/GGD/AIMD-94-122] 
(Washington, D.C.: June 3, 1994). 

[2] See GAO, Corporate Tax Expenditures: Evaluations of Tax Deferrals 
and Graduated Tax Rates, [hyperlink, 
http://www.gao.gov/products/GAO-13-789] (Washington, D.C.: Sept. 16, 
2013); Tax Expenditures: Background and Evaluation Criteria and 
Questions, [hyperlink, http://www.gao.gov/products/GAO-13-167SP] 
(Washington, D.C.: Nov. 29, 2012); Designing Evaluations: 2012 
Revision, [hyperlink, http://www.gao.gov/products/GAO-12-208G] 
(Washington, D.C.: January 2012); and Executive Guide: Effectively 
Implementing the Government Performance and Results Act, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-96-118] (Washington, D.C.: June 
1996). 

[3] GAO, Understanding the Tax Reform Debate: Background, Criteria & 
Questions, [hyperlink, http://www.gao.gov/products/GAO-05-1009SP] 
(Washington, D.C.: September 2005). This report describes how the 
criteria can be used to evaluate tax policy. 

[4] Unless otherwise noted, all percentage estimates based on the SOI 
have 95 percent confidence intervals that are within 10 percentage 
points of the estimate itself, and all numerical estimates other than 
percentages have 95 percent confidence intervals that are within 10 
percent of the estimate itself. 

[5] In our reporting of expert and stakeholder views, we refer to 
"most" experts or stakeholders as representing 7 or more; "about half" 
as representing 4 to 6; and "several" or "some" as representing 2 or 3. 

[6] [hyperlink, http://www.gao.gov/products/GAO-13-167SP]. Our tax 
expenditure evaluation guide outlines a series of questions and 
criteria that can be used to evaluate tax expenditures. To develop the 
questions, we reviewed our prior work on tax expenditures, tax reform, 
results-oriented government, and program evaluation and interviewed 
experts in tax policy and program evaluation. [hyperlink, 
http://www.gao.gov/products/GAO-05-1009SP] summarizes the long-
standing criteria used to evaluate tax policy. 

[7] Permanent resident aliens are required to file U.S. tax returns on 
their worldwide income, generally using the same forms as U.S. 
citizens, regardless of where they reside. Nonresident aliens are 
required to file U.S. tax returns on their U.S. source income in some 
circumstances, using Forms 1040NR. (Forms 1040NR are counted and 
tracked separately.) 

[8] 26 U.S.C. § 901. Taken as a credit on Form 1116, Foreign Tax 
Credit, foreign income taxes reduce the U.S. tax liability dollar for 
dollar. Taken as a deduction on Form 1040, Schedule A, Itemized 
Deductions, foreign income taxes reduce the U.S. taxable income. 

[9] This report focuses on U.S. federal income taxation. Some states 
also tax foreign earned income. According to tax advisor materials, 
among the states that tax citizens overseas are California, New 
Mexico, South Carolina, and Virginia. 

[10] 26 U.S.C. 911(b)(1)(B)(ii). 

[11] 26 U.S.C. § 911(d)(2). 

[12] For purposes of the FEIE, "tax home" has the same meaning which 
it has for purposes of IRC section 162(a)(2) (relating to travel 
expenses away from home). Thus, an individual's tax home is considered 
to be located at his regular or principal (if more than one regular) 
place of business or, if the individual has no regular or principal 
place of business because of the nature of the business, then at his 
regular place of abode in a real and substantial sense. An individual 
shall not, however, be considered to have a tax home in a foreign 
country for any period for which the individual's abode is in the 
United States. Temporary presence of the individual in the United 
States does not necessarily mean that the individual's abode is in the 
United States during that time. Maintenance of a dwelling in the 
United States by an individual, whether or not that dwelling is used 
by the individual's spouse and dependents, does not necessarily mean 
that the individual's abode is in the United States. 26 C.F.R. § 1.911-
2(b). 

[13] The term "foreign country" includes any territory under the 
sovereignty of a government other than that of the United States. 26 
C.F.R. § 1.911-2(h). For this purpose, it does not include Antarctica 
or U.S. possessions such as Puerto Rico, Guam, the Commonwealth of the 
Northern Mariana Islands, the U.S. Virgin Islands, American Samoa, and 
Johnston Island. It also does not include international waters or the 
airspace above them. 

[14] For purposes of section 911, residence is determined by applying, 
to the extent feasible, the principles of section 871 of the tax code 
and regulations thereunder, which involve factors including the 
taxpayer's intention, establishment of a home in the foreign country 
for an indefinite time, and participation in the activities of the 
community. Bona fide residence in a foreign country or countries for 
an uninterrupted period may be established, even if temporary visits 
are made during the period to the United States or elsewhere on 
vacation or business. 26 C.F.R. § 1.911-2(c). An individual would not 
be considered a resident if a statement was submitted to the tax 
authorities of the foreign country indicating nonresidency and the 
foreign country did not subject the individual to foreign income 
taxation. 

[15] If an individual's tax home was in a foreign country and he or 
she was a bona fide resident of, or physically present in, a foreign 
country and had to leave because of war, civil unrest, or similar 
adverse conditions, the minimum time requirements specified under the 
bona fide residence and physical presence tests may be waived. If an 
individual has not met either the physical presence test or the bona 
fide residence test by the due date of his or her return, the 
individual can file his or her return timely without claiming the 
exclusion and then file an amended return after qualifying. 

[16] The sum of the FEIE and the housing exclusion or deduction is 
limited to total foreign earned income. 

[17] 26 U.S.C. § 911(c)(1)(B). Eligible housing expenses include rent, 
the fair rental value of housing provided in kind by the employer, 
utilities (other than telephone charges), real and personal property 
insurance, rental of furniture and accessories, repairs, and 
residential parking. Expenses must be reasonable and incurred during 
the period eligible for the exclusion. 26 C.F.R. § 1.911-4(a), (b). 

[18] Treasury updates the local maximums each year using publicly 
available information from the Living Quarters Allowances Tables 
prepared by the Department of States' Office of Allowances. See U.S. 
Department of State, Summary Of Allowances And Benefits For U.S.G. 
Civilians Under The Department Of State Standardized Regulations 
(DSSR), accessed January 24, 2014, [hyperlink, 
http://aoprals.state.gov/content.asp?content_id=134&menu_id=75]. IRS 
publishes these amounts in bulletins. See Internal Revenue Service, 
Determination of Housing Cost Amount Eligible for Exclusion or 
Deduction for 2013, Internal Revenue Bulletin 2013-21 (Washington 
D.C.: May 20, 2013). 

[19] 26 U.S.C. § 911(f). 

[20] For example, if a taxpayer excludes $80,000 of foreign earned 
income and has $20,000 in other taxable income, he will pay tax on the 
$20,000 at the tax rate applicable to a person with $100,000 in income 
rather than at the rate applicable to a person with $20,000 in income. 

[21] On a joint return, one or both spouses may have claimed the FEIE. 
When two spouses live apart and maintain separate households and both 
qualify to claim the FEIE, the foreign housing exclusion, or the 
foreign housing deduction, they must file two separate Forms 2555. 

[22] Internal Revenue Service, Individual Income Tax Returns 2011, 
Publication 1304 (Washington D.C.: August 2013). 

[23] Foreign Earned Income Act of 1978, Pub. L. 95-615, § 208. 92 
Stat. 3097, 3108, as amended by the Economic Recovery Tax Act of 1981, 
Pub. L. 97-34, §114, 95 Stat. 172, 195-196; and the Revenue 
Reconciliation Act of 1990, Pub. L. 101-508, §11833, 104 Stat. 1388, 
1388-560. See 26 U.S.C. § 911 note. 

[24] Scott Hollenbeck and Maureen Keenan Kahr, Individual Foreign-
Earned Income and Foreign Tax Credit, 2006, Statistics of Income (SOI) 
Bulletin (Washington D.C.: Internal Revenue Service, Spring 2009). 

[25] While, in general, the tax expenditure lists Treasury and JCT 
publish annually are similar, they differ somewhat in the number of 
tax expenditures reported, and the estimated revenue losses for 
particular expenditures. The organizations use different (1) income 
tax baselines, (2) de minimis amounts (which is the minimum revenue 
loss threshold for Treasury and JCT to report a tax expenditure), and 
(3) economic and technical assumptions. For more information on how 
Treasury and JCT estimate revenue loss, see appendix III in 
[hyperlink, http://www.gao.gov/products/GAO-05-690]. 

[26] Changes in taxpayer behavior are taken into account when Treasury 
and JCT prepare revenue estimates for proposed legislation. 

[27] Changes in economic conditions and estimation techniques can 
affect revenue loss estimates for tax expenditures, making them differ 
from year to year. Also, legislation affecting tax rates or the tax 
structure affects tax expenditure estimates. When statutory rates 
increase, a taxpayer's ability to avoid tax on a portion of income is 
worth more; consequently, tax expenditures are worth more. Likewise, 
when rates decrease, tax expenditures are worth relatively less. 

[28] Office of Management and Budget, Analytical Perspectives, Budget 
of the United States Government, Fiscal Year 2015 (Washington, D.C.: 
2014); and Joint Committee on Taxation, Estimates of Federal Tax 
Expenditures for Fiscal Years 2012-2017, JCS-1-13 (Washington, D.C.: 
Feb. 1, 2013). 

[29] See U.S. Congress, Senate Committee on the Budget, Tax 
Expenditures: Compendium of Background Material on Individual 
Provisions, S. Prt. 111-58 (Washington, D.C.: Congressional Research 
Service, December 2012). For more on the tax expenditure's history, 
see Michael S. Kirsch, "Taxing Citizens in a Global Economy," New York 
University Law Review, vol. 82, no. 2 (2007). 

[30] See Brookfield Global Relocation Services, Global Relocation 
Trends: 2013 Survey Report (Chicago, IL: Brookfield Consulting 
Services Group, 2013), and Cartus, 2012 Trends in Global Relocation, 
Global Mobility Policy and Practices Survey (Cartus Corporation: May 
2012). 

[31] Besides cross-border exports, U.S. companies can also sell to 
foreign countries through affiliate sales abroad. 

[32] Exec. Order No. 13534, 75 Fed. Reg. 12,433 (Mar. 11, 2010). 

[33] Pub. L. No. 111-352, 124 Stat. 3866 (2011) (updating the 
Government Performance and Results Act of 1993, Pub. L. No. 103-62, 
107 Stat. 285 (1993)). This act calls upon the Office of Management 
and Budget to develop long-term, outcome-oriented goals for a limited 
number of cross-cutting policy areas, and to provide information on 
how they will be achieved. Under the act, tax expenditures are to be 
included in identifying the range of federal agencies and activities 
that contribute to crosscutting goals. 31 U.S.C. § 1115(a)(2). 

[34] For more on our work on export promotion, see our export 
promotion Key Issue page, at [hyperlink, 
http://www.gao.gov/key_issues/export_promotion/issue_summary]. The Key 
Issue page highlights our relevant reports and multimedia content. 

[35] A new crosscutting goal focuses on increasing foreign direct 
investment in the United States. 

[36] The U.S. Census Bureau has typically counted overseas military 
and federal civilian employees and their dependents, but it has 
usually excluded private citizens residing abroad. As of January 2013, 
the U.S. Department of State estimated 6.8 million American citizens 
live abroad. 

[37] The balance filed as head of household, married filing 
separately, or surviving spouse. The percentage estimates have 95 
percent confidence intervals that are within 2 percentage points of 
the estimate itself. 

[38] Out of FEIE filers, percent estimates for filers claiming a 
housing exclusion or housing deduction have 95 percent confidence 
intervals that are within 16 percent (within 3 percentage points) of 
the estimate itself. 

[39] Most of the amount claimed was for the FEIE. For 2011, the 
maximum exclusion for foreign earned income was $92,900. 

[40] The 2011 results in tables 3 and 4 are similar to prior analysis 
of tax year 2006 Statistics of Income data. See Eric Toder, "Taxes on 
Foreign Earned Income," Tax Notes Today (Washington, D.C.: Tax Policy 
Center, July 16, 2013), accessed February 10, 2014. [hyperlink, 
http://www.urban.org/publications/1001689.html]. 

[41] Taxpayers who choose to claim the FEIE cannot double dip and 
claim the FTC for foreign taxes on the income excluded. 

[42] Taxpayers that cannot use the full amount of qualified foreign 
taxes paid or accrued in the tax year are allowed a 1-year carryback 
and then a 10-year carryover of the unused foreign taxes. 

[43] As of 2010, 16 countries had special tax incentives, such as 
deductions, exemptions, and reduced tax rates, for high-skilled 
workers. See Organisation for Economic Co-operation and Development, 
Taxation and Employment, OECD Tax Policy Studies, No. 21 (OECD 
Publishing, 2011) accessed July 25, 2013, [hyperlink, 
http://dx.doi.org/10.1787/9789264120808-en]. 

[44] 26 U.S.C § 32(c)(1)(C). 

[45] 26 U.S.C. § 911(d)(6). 

[46] For example, see PricewaterhouseCoopers (PwC), Economic Analysis 
of the Foreign Earned Income Exclusion (National Economic Consulting: 
November 7, 2005); and John H. Mutti, "The American Presence Abroad 
and U.S. Exports," Southern Economic Journal, vol. 47 (July 1980), pp. 
40-50. These studies, however, have several weaknesses, which are 
discussed later in this report. 

[47] Appendix III provides additional examples comparing the tax costs 
of U.S. and non-U.S. workers, at different income levels and different 
host country effective tax rates, and also compares the difference 
between U.S. worker's income tax liability in the United States and 
abroad. 

[48] See Brookfield Global Relocation Services, Global Relocation 
Trends: 2013 Survey Report (Chicago, IL: Brookfield Consulting 
Services Group, 2013); KPMG International Cooperative, Global 
Assignment Policies and Practices Survey (International Executive 
Services: July 2013); and Cartus, 2012 Trends in Global Relocation, 
Global Mobility Policy and Practices Survey (Cartus Corporation: May 
2012). 

[49] Commerce has studied the relationship between short-term business 
travel and exports, and found U.S. outbound international business 
travel has a positive effect on U.S. merchandise exports. See Maksim 
Belenkiy and David Riker, U.S. International Business Travel: Its 
Impact on U.S. Merchandise Exports, Manufacturing and Services 
Economics Brief (Washington, D.C.: Office of Competition and Economic 
Analysis, November 2012). 

[50] See Performance.gov, "Cross-Agency Priority Goal: Exports" 
accessed May 30, 2013 http: //goals.performance.gov/content/exports. 

[51] Our prior reports drew on surveys of U.S. companies with foreign 
operations. Those results were not representative of all employers at 
that time and given changes in the global economy, are outdated. See 
GAO, American Employment Abroad Discouraged By U.S. Income Tax Laws, 
ID-81-27 (Washington, D.C.: Feb. 27, 1981), and Tax Policy and 
Administration: Impact on Trade of Changes in Taxation of U.S. 
Citizens Employed Overseas, ID-78-13 (Washington, D.C.: Feb. 21, 1978). 

[52] Mutti, "American Presence Abroad." 

[53] PricewaterhouseCoopers (PwC), Economic Analysis. 

[54] John Tschetter, "Exports Support American Jobs: Updated Measure 
Will Quantify Progress As Global Economy Recovers," International 
Trade Research Report no. 1 (Washington, D.C.: Department of Commerce, 
International Trade Administration, Undated). 

[55] See GAO, Export-Import Bank: More Detailed Information about Its 
Jobs Calculation Methodology Could Improve Transparency, [hyperlink, 
http://www.gao.gov/products/GAO-13-446] (Washington, D.C.: May 23, 
2013). 

[56] Unless otherwise specified, the term "tax expenditure" here 
refers to the foreign earned income exclusion as well as the exclusion 
and deduction for excess foreign housing costs. 

[57] Resources are used most efficiently when they provide the 
greatest possible benefit or well-being. The concept of economic 
efficiency recognizes that when resources are not underemployed, 
decisions about their use involve tradeoffs. See [hyperlink, 
http://www.gao.gov/products/GAO-13-167SP] and [hyperlink, 
http://www.gao.gov/products/GAO-05-1009SP] for a more detailed 
discussion of economic efficiency. 

[58] If policymakers are concerned that tax rate differences across 
countries already cause inefficiencies that need to be addressed by 
U.S. tax policy, then the United States would also have to compensate 
U.S. citizens working in high-tax countries (to the extent that the 
taxes they pay there exceed what they would have paid in the United 
States). 

[59] See U.S. Congress, Senate Committee on the Budget, Tax 
Expenditures: Compendium of Background Material on Individual 
Provisions, S. Prt. 112-45 (Washington, D.C.: Congressional Research 
Service, December 2012) and Jane G. Gravelle and Donald W. Kiefer, 
U.S. Taxation of Citizens Working in Other Countries: An Economic 
Analysis (Washington, D.C.: Congressional Research Service, Apr. 20, 
1978). 

[60] The ultimate burden or benefit is known as the incidence of the 
tax policy and it depends on how various individuals and businesses 
respond to the policy. In the case of the tax expenditure, even though 
individual employees claim the exclusion on their own tax returns, the 
resulting reduction in their total taxes may make them willing to work 
abroad for a lower pretax income than they would have accepted without 
the tax expenditure. As a result, the employers may share in at least 
some of the benefit by being able to pay lower salaries than would 
otherwise have been needed to hire U.S. citizens. 

[61] Determining the actual incidence of the FEIE would be difficult 
because it would require information on how two factors--the amount of 
labor that U.S. citizens are willing to supply to employers abroad and 
how those employers' demand for that particular type of labor--respond 
to changes in pretax and post-tax rates of compensation. We know of no 
study that has attempted to estimate such responsiveness. 

[62] For taxpayers that have taxable income after claiming the FEIE 
and foreign housing exclusion, the applicable tax rate is determined 
by calculating taxable income without taking these exclusions into 
account. This stacking rule results in these taxpayers claiming the 
tax expenditure being subject to the same marginal tax rates as 
taxpayers with the same level of income who are not eligible for (or 
do not elect to claim) the tax expenditure. 

[63] Expatriation tax provisions apply to U.S. citizens who have 
relinquished their citizenship and long-term residents who ceased to 
be lawful permanent residents. The rules that apply are based on the 
date of expatriation, as described in IRS Publication 519--U.S. Tax 
Guide for Aliens (available at [hyperlink, 
http://www.irs.gov/publications/p519/ar01.html]). 

[64] Appendix IV contains additional detail on our assessment of 
transparency and simplicity for taxpayers and administrability for IRS. 

[65] Tiffanie N. Reker, David C. Cico, and Saima S. Mehmood, 2012 
Taxpayer Experience of Individuals Living Abroad: Service Awareness, 
Use, Preferences, and Filing Behaviors, Research Study Report 
(Internal Revenue Service, W&I Research & Analysis: June 21, 2012). 

[66] Treasury Inspector General for Tax Administration, Improvements 
Are Needed to Reduce Erroneous Foreign Earned Income Exclusion Claims, 
Reference Number 2010-40-091 (Washington, D.C.: Aug. 16, 2010). 

[67] To identify and analyze alternative policy options, we conducted 
an extensive literature search and interviewed a range of stakeholders 
and experts; see appendix I for more on our methodology and a list of 
the options discussed with those we interviewed. 

[68] The staff of the Joint Committee on Taxation estimate that 
repealing the exclusion would increase federal revenue by $6.2 billion 
in 2015 and $89 billion over 2014 through 2023; see Congressional 
Budget Office, Options for Reducing the Deficit: 2014 to 2023 
(Washington, D.C.: November 2013). Unlike a tax expenditure estimate, 
revenue estimates generally reflect changes in behavior by individuals 
and firms. 

[69] Such an approach is discussed in Gravelle and Kiefer (1978). 
Certain cost differences--such as those relating to education and 
certain types of taxes--present complications that may not be 
adequately addressed by comparing available cost-of-living indexes. 

[70] The Foreign Earned Income Act of 1978 replaced an income 
exclusion with a system of allowances for costs of living abroad, such 
as cost of living in general, housing, education, and home leave 
transportation. This system was replaced in 1981 with the income 
exclusion and separate housing exclusion. 

[71] Currently, the physical presence test is for at least 330 days 
over a 12-month period. In the 1950s, the FEIE physical presence test 
was for 510 days (17 months) out of 18 consecutive months. In 1962, 
the exclusion was tiered allowing a larger exclusion for those 
overseas for 3 years or more. 

[72] GAO, International Taxation: Study Countries That Exempt Foreign-
Source Income Face Compliance Risks and Burdens Similar to Those in 
the United States, [hyperlink, http://www.gao.gov/products/GAO-09-934] 
(Washington, D.C.: Sept. 15, 2009). 

[73] American Citizens Abroad (ACA), ACA Submission to the Senate 
Finance Committee on International Tax Reform (Washington, D.C.: Jan. 
15, 2014). ACA also supports increasing the current exclusion limit. 

[74] Under the ACA proposal, an individual would be deemed to have 
disposed of property at its fair market value on the day of departure 
and then reacquired the property for the same amount immediately 
thereafter. The person would include in U.S. income the capital gain 
or loss that resulted from the deemed disposition. Alternatively, the 
person could defer the tax without interest until his or her return to 
the United States. 

[75] Subtitle A of Title V of the Hiring Incentives to Restore 
Employment Act (HIRE Act), commonly known as the Foreign Account Tax 
Compliance Act, requires foreign financial institutions to report on 
certain foreign financial accounts and offshore assets, while the Bank 
Secrecy Act and implementing regulations require individuals to report 
on certain foreign financial accounts and imposes penalties on the 
failure to meet these reporting requirements. 26 U.S.C. §§ 1471-1474; 
31 U.S.C. § 5314; 31 C.F.R. §§ 1010.350, 1010.820. 

[76] [1] Forms 1040-NR are counted and tracked separately by IRS and 
are not part of the SOI sample. IRS officials told us that a small 
number of taxpayers claiming the FEIE incorrectly file a 1040NR. 

[77] U.S. Congress, Senate Committee on the Budget, Tax Expenditures: 
Compendium of Background Material on Individual Provisions, S. Prt. 
111-58 (Washington, D.C.: Congressional Research Service, December 
2012). 

[78] For an example of GAO work on the worldwide taxation of corporate 
income, see GAO, Corporate Tax Expenditures: Evaluations of Tax 
Deferrals and Graduated Tax Rates, [hyperlink, 
http://www.gao.gov/products/GAO-13-789] (Washington, D.C.: Sept. 16, 
2013). 

[79] See GAO, American Employment Abroad Discouraged By U.S. Income 
Tax Laws, ID-81-27 (Washington, D.C.: Feb. 27, 1981), Impact on Trade 
of Changes in Taxation of U.S. Citizens Employed Overseas, ID-78-13 
(Washington, D.C.: Feb. 21, 1978), and Jane G. Gravelle and Donald W. 
Kiefer, U.S. Taxation of Citizens Working in Other Countries: An 
Economic Analysis, CRS-78-91 (Washington: D.C.: Congressional Research 
Service, April 20, 1978). 

[80] GAO, Tax Expenditures: Background and Evaluation Criteria and 
Questions, [hyperlink, http://www.gao.gov/products/GAO-13-167SP] 
(Washington D.C.: Nov. 29, 2012). Our tax expenditure evaluation guide 
outlines a series of questions and criteria that can be used to 
evaluate tax expenditures. To develop the questions, we reviewed our 
prior work on tax expenditures, tax reform, results-oriented 
government, and program evaluation and interviewed experts in tax 
policy and program evaluation. GAO, Understanding the Tax Reform 
Debate: Background, Criteria, and Questions, [hyperlink, 
http://www.gao.gov/products/GAO-05-1009SP] (Washington D.C.: September 
2005) summarizes the long-standing criteria used to evaluate tax 
policy. 

[81] Unless otherwise specified, the term "tax expenditure" here 
refers to the foreign earned income exclusion as well as the exclusion 
and deduction for excess foreign housing costs. 

[82] Resources are used most efficiently when they provide the 
greatest possible benefit or well-being. The concept of economic 
efficiency recognizes that when resources are not underemployed, 
decisions about their use involve tradeoffs. See GAO, Tax 
Expenditures: Background and Evaluation Criteria and Questions, 
[hyperlink, http://www.gao.gov/products/GAO-13-167SP] (Washington, 
D.C.: Nov. 29, 2012) and Understanding the Tax Reform Debate: 
Background, Criteria & Questions, [hyperlink, 
http://www.gao.gov/products/GAO-05-1009SP] (Washington, D.C.: 
September 2005) for a more detailed discussion of economic efficiency. 

[83] If policymakers are concerned that tax rate differences across 
countries already cause inefficiencies that need to be addressed by 
U.S. tax policy, then the United States would also have to compensate 
U.S. citizens working in high-tax countries (to the extent that the 
taxes they pay there exceed what they would have paid in the United 
States). 

[84] See U.S. Congress, Senate Committee on the Budget, Tax 
Expenditures: Compendium of Background Material on Individual 
Provisions, S. Prt. 112-45 (Washington, D.C.: Congressional Research 
Service, December 2012) and Jane G. Gravelle and Donald W. Kiefer, 
U.S. Taxation of Citizens Working in Other Countries: An Economic 
Analysis (Washington, D.C.: Congressional Research Service, Apr. 20, 
1978). 

[85] Another value judgment relates to the progressivity of a tax--the 
degree to which taxes should increase as the ability to pay increases. 

[86] For taxpayers that have taxable income after claiming the FEIE 
and foreign housing exclusion, the applicable tax rate is determined 
by calculating taxable income without taking these exclusions into 
account. This stacking rule results in these taxpayers claiming the 
tax expenditure being subject to the same marginal tax rates as 
taxpayers with the same level of income who are not eligible for (or 
do not elect to claim) the tax expenditure. 

[87] Expatriation tax provisions apply to U.S. citizens who have 
relinquished their citizenship and long-term residents who ceased to 
be lawful permanent residents. The rules that apply are based on the 
date of expatriation, as described in IRS Publication 519--U.S. Tax 
Guide for Aliens (available at [hyperlink, 
http://www.irs.gov/publications/p519/ar01.html]). 

[88] Taxpayer Advocate Service, 2012 Annual Report to Congress, 
(Washington D.C.: Dec. 31, 2012). Based on analysis of IRS quarterly 
reports listing those giving up citizenship, the Taxpayer Advocate 
reported that expatriations increased substantially from 2008 to 2011. 
The latest IRS report available listed 1,001 citizens and long-term 
residents losing U.S. citizenship in the quarter ending March 31, 
2014. 79 Fed. Reg. 25,176 (May 2, 2014). 

[89] In the absence of the tax expenditure, some employers might raise 
the pretax salaries of its employees who are U.S. citizens to offset 
losses in services that the latter would incur by accepting a position 
abroad. As we noted in the discussion of incidence, the likelihood of 
this occurring is unknown. In such cases the tax expenditure does not 
provide any improvement in equity; it would simply reduce costs for 
those particular employers. 

[90] For more on GAO's work on the tax gap, see our Tax Gap Key Issue 
page, at [hyperlink, 
http://gao.gov/key_issues/tax_gap/issue_summary#t=1]. 

[91] Tiffanie N. Reker, David C. Cico, and Saima S. Mehmood, 2012 
Taxpayer Experience of Individuals Living Abroad: Service Awareness, 
Use, Preferences, and Filing Behaviors, Research Study Report 
(Internal Revenue Service, W&I Research & Analysis: June 21, 2012). 

[92] Foreign earned income excluded cannot be deducted, excluded a 
second time, or used to claim a credit, so taxpayers are required to 
compute the fraction of foreign taxes that are not allocable to the 
excluded income. 

[93] Treasury Inspector General for Tax Administration, Improvements 
Are Needed to Reduce Erroneous Foreign Earned Income Exclusion Claims, 
Reference Number 2010-40-091 (Washington, D.C.: Aug. 16, 2010). 

[94] Whereas the form 2555 for the exclusion has an EZ version, the 
foreign tax credit form 1116 does not have an EZ version. 

[95] Wages are subject to withholding to the extent that they exceed 
the amount of the exclusion. An exemption from withholding on excluded 
wages is available for citizens abroad but not resident aliens. 
Employers do not have to withhold U.S. taxes if they are required to 
withhold taxes for a foreign government. 

[96] Subtitle A of Title V of the Hiring Incentives to Restore 
Employment Act (HIRE Act), commonly known as the Foreign Account Tax 
Compliance Act, requires foreign financial institutions to report on 
certain foreign financial accounts and offshore assets, while the Bank 
Secrecy Act and implementing regulations require individuals to report 
on certain foreign financial accounts and imposes penalties on the 
failure to meet these reporting requirements. 26 U.S.C. §§ 1471-1474; 
31 U.S.C. § 5314; 31 C.F.R. §§ 1010.350, 1010.820. 

[97] Treasury Inspector General for Tax Administration, The Referral 
Process for Examinations of Tax Returns Claiming the Foreign Income 
Exclusion Needs to Be Improved, Reference Number 2013-30-112 
(Washington, D.C.: Sept. 27, 2013). 

[98] Treasury Inspector General for Tax Administration, Improvements 
Needed to Reduce Erroneous Claims. 

[99] The National Research Program uses audits of a stratified, random 
sample of tax returns to produce statistically valid estimates of 
noncompliance for the entire population of tax return filers. For tax 
years 2006 through 2010, IRS sampled each year about 450 international 
taxpayers in its National Research Program. IRS plans to use these 
results for workload planning. The relatively small sample is not 
representative for estimating the international component of the tax 
gap. 

[100] To identify and analyze alternative policy options, we conducted 
an extensive literature search and interviewed a range of stakeholders 
and experts; see appendix I for more on our methodology and a list of 
the options discussed with those we interviewed. 

[101] The staff of the Joint Committee on Taxation estimate that 
repealing the exclusion would increase federal revenue by $6.2 billion 
in 2015 and $89 billion over 2014 through 2023; see Congressional 
Budget Office, Options for Reducing the Deficit: 2014 to 2023 
(Washington, D.C.: November 2013). Unlike a tax expenditure estimate, 
revenue estimates generally reflect changes in behavior by individuals 
and firms. 

[102] Such an approach is discussed in Gravelle and Kiefer (1978). 
Certain cost differences--such as those relating to education and 
certain types of taxes--present complications that may not be 
adequately addressed by comparing available cost-of-living indexes. 

[103] The Foreign Earned Income Act of 1978 replaced an income 
exclusion with a system of allowances for costs of living abroad, such 
as cost of living in general, housing, education, and home leave 
transportation. This system was replaced in 1981 with the income 
exclusion and separate housing exclusion. 

[104] Currently, the physical presence test is for at least 330 days 
over a 12-month period. In the 1950s, the FEIE physical presence test 
was for 510 days (17 months) out of 18 consecutive months. In 1962, 
the exclusion was tiered, allowing a larger exclusion for those 
overseas for 3 years or more. 

[105] GAO, International Taxation: Study Countries That Exempt Foreign-
Source Income Face Compliance Risks and Burdens Similar to Those in 
the United States, [hyperlink, http://www.gao.gov/products/GAO-09-934] 
(Washington, D.C.: Sept. 15, 2009). 

[106] American Citizens Abroad, ACA Submission to the Senate Finance 
Committee on International Tax Reform, (Washington, D.C.: Jan. 15, 
2014). ACA also supports increasing the current exclusion limit. 

[107] Under the ACA proposal, an individual would be deemed to have 
disposed of property at its fair market value on the day of departure 
and then reacquired the property for the same amount immediately 
thereafter. The person would include in U.S. income the capital gain 
or loss that resulted from the deemed disposition. Alternatively, the 
person could defer the tax without interest until return to the United 
States. For other exit tax proposals, see Patrick W. Martin and Reuven 
Avi-Yonah, "Tax Simplification: The Need for Consistent Tax Treatment 
of All Individuals (Citizens, Lawful Permanent Residents and Non-
Citizens Regardless of Immigration Status) Residing Overseas, 
Including the Repeal of U.S. Citizenship Based Taxation," Procopio 
News Room 09.17.2013 (San Diego, CA: Procopio, September 2013), 
accessed March 10, 2014, [hyperlink, http://www.procopio.com/news/tax-
implification-the-need-for-consistent-tax-treatment-of-all-individuals-
citizens-lawful-permanent-residents-and-non-citizens-regardless-of-
immigration-status-residing-overseas-including-the-repeal-of-u.s.-
citizenship-based-taxation]; Bernard Schenider, "The End of Taxation 
without End: A New Tax Regime for U.S. Expatriates," Virginia Tax 
Review, Vol. 32 No. 1 (London, UK: Queen Mary University of London, 
Summer 2012); and Cynthia Blum and Paula N. Singer, "A Coherent Policy 
Proposal for U.S. Residence-Based Taxation of Individuals," Vanderbilt 
Journal of Transnational Law vol. 41, no. 3 (2008). 

[108] See Joint Committee on Taxation, Present Law and Issues in U.S. 
Taxation of Cross-Border Income, JCX-42-11 (Washington, D.C.: Sept. 6, 
2011). 

[End of section] 

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