American Taxpayer Relief Act of 2012: Tax Implications for U.S. Taxpayers Living Abroad

Although the American Taxpayer Relief Act of 2012 (“Fiscal Cliff Legislation”) passed last week does not contain any sweeping changes targeted at U.S. taxpayers living abroad, a number of provisions are relevant to such U.S. taxpayers - in particular, the sections dealing with income tax rates, itemized deductions (including the deduction permitted for foreign taxes not claimed as a credit against U.S. tax), personal exemptions, limits on itemized deductions, the alternative minimum tax and payroll taxes. Below is a brief summary of some of the more pertinent sections. We note that additional tax legislation is likely forthcoming in 2013, which may have retroactive effect, and that we also expect the Treasury Department to issue final regulations pursuant to the Foreign Account Tax Compliance Act FATCA) in the coming months.

Tax Rates on Ordinary Income -

For most taxpayers, ordinary income tax rates remain the same as they were under the Bush tax rates - that is, the 10%, 15%, 25%, 28%, 33% and (to a somewhat more limited extent) 35% rates remain in place. The Fiscal Cliff Legislation creates a new high income bracket, however. For taxable income exceeding $450,000 for married individuals filing jointly, taxable income exceeding $425,000 for heads of households, and taxable income exceeding $400,000 for unmarried individuals, the tax rate on ordinary income is 39.6%. Those threshold amounts are indexed for inflation for years 2014 and later. As with current law, there is an exemption for approximately $100,000 of foreign “earned” income.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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