Let’s Talk About Stacking For US Expats in Low-Tax Jurisdictions

Special rules govern the determination of the tax liability of individuals who exclude any amount from gross income under IRC § 911. These rules impose a “stacking” principle under which individuals who claim the foreign earned income exclusion (FEIE) and/or housing cost exclusion are subject to the same marginal tax rates as individuals with the same income level who are not eligible for (or do not elect to claim) the exclusions. Thus, the exclusions are no longer treated as coming “off the top” of an individual’s income, as was the case under pre-2006 law.


So, we question someone in a low past jurisdiction. So, if you leave, so one of the best benefits, of leaving the US and working abroad is section 9/11, the foreign and income exclusion, where you get to exclude a certain amount of your income, which moves with inflation. But let’s say for 2022, I think it is 112,000. So you get to exclude the first hundred and 12,000 of your earned income from US tax. It’s still reported on form 2555, but it’s not taxable in addition to which you get a housing deduction. So, the IRS is a huge table, cities across the world and they give you a deduction for your housing expenses. Obviously, it varies with how costly or how expensive it is in your jurisdiction. So for example, the deduction allowable for someone in la say a low-cost city like Lisbon, they’re gonna get a lower housing deduction as opposed to someone in a high-cost city like Singapore or Hong Kong. So, you know, so, but the foreign income exclusion plus housing deduction could be quite considerable. It could be a hundred 5,000, 60, or $170,000 that, again, it’s reported, but it’s not taxed by the Internal Revenue Service. And that’s a huge win for Americans abroad. Now, what sometimes is less well understood as the concept of Stacking and what do I mean by Stacking? So obviously, you know, many of our clients, they, they earn a, a lot more than the housing deduction plus foreign income exclusion. So easily more than $200,000. So therefore, while the first maybe $170,000 in income will be excluded by section nine 11, the earned income in excess of that would still be taxable. You would get to offset any foreign taxes base, you would get foreign tax credits. But if you have a low tax jurisdiction like Singapore or Hong Kong, you’d still probably need to pay the delta, the difference in the US because the US has those higher tax rates, and the marginal tax rate in the US is higher. So what sometimes confuses someone is that, well, they said, well, my first hundred and $70,000 has been excluded, so surely my additional a hundred thousand dollars, I should be looking at the tax table. Should I go back to zero? And should I, you know, get taxed at low rates and work my way up, the ladder to the higher tax rates? And unfortunately, no. And that’s where the concept of Stacking comes in.

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