Economic Analysis of the Foreign Earned Income Exclusion, PricewaterhouseCoopers, Summary


Section 911 is a provision of the U.S. tax Code designed to offset the competitive disadvantage U.S. taxpayers face working abroad. Repeal of Section 911 is estimated to reduce the number of Americans working abroad, causing an $ 8.1 billion loss in U.S. manufactured exports that support 77,115 U.S. domestic jobs. By contrast, removing the $ 80,000 cap on the foreign earned income exclusion is estimated to increase U.S. manufactured exports by $ 14.4 billion supporting 137,319 U.S. domestic jobs.


Unlike any other major industrial country, the United States taxes citizens and resident aliens who live abroad on their worldwide income.1 Limited relief is provided under Section 911 of the Internal Revenue Code, which permits an exclusion of certain foreign employment related income. The principal rationale for the exclusion historically has been to make the tax treatment of Americans working abroad less uncompetitive relative to foreign nationals and, thereby, to promote exports of U.S. goods and services.

Limits of the exclusion. Under Section 911, a U.S. citizen or resident alien who maintains a tax home outside the United States and who meets a residence test during this period may exclude from gross income up to of $ 80,000 per year of foreign earned income (referred to as the “general exclusion”) plus a “housing cost amount”. Deductions allocated to excluded income are disallowed. Examples of deductions that may be disallowed as a result of this rule include: moving expenses, employee business expenses, state income taxes, and foreign taxes claimed as a deduction.

History of the provision. The foreign earned income exclusion has been part of the Internal Revenue Code since 1926. Originally there was no limit on the exclusion; it applied to all earned income (received for work done as opposed to passive income) derived and received from sources outside of the United States provided that certain residency requirements were met. In 1953, the exclusion was limited to a fixed dollar amount.

Congress reinstated the provision in 1981 to promote exports. In 1978, Congress replaced the earned income exclusion with a new set of deductions under Section 913. However, the Economic Recovery Tax Act of 1981 restored the original structure of the foreign earned income exclusion in Section 911, and increased the exclusion amount from $ 20,000 to $ 75,000. The legislative history indicates that Congress was concerned that the rules enacted in 1978 made it more expensive to hire Americans abroad as compared to foreign citizens, reduced U.S. exports, made U.S. business less competitive abroad, and were so complex that many Americans employed abroad found it necessary to use professional tax preparers:

“The Congress was concerned with the increasing competitive pressures that American businesses faced abroad. The Congress decided that in view of the nation’s continuing trade deficits, it is important to allow Americans working overseas to contribute to the effort to keep American business competitive.

As a result, some U.S. companies either cut back their foreign operations or replaced American citizens in key executive positions with foreign nationals. In many cases these foreign nationals may purchase goods and services for their companies from their home countries, rather than from the United States, because they often are more familiar with these goods and services.”

The real value of the exclusion has dropped by over 45 percent. Since the exclusion of foreign earned income was first limited in 1953, its real value has dropped by over 45 percent. If the $ 20,000 cap enacted in 1953 had been indexed for inflation, the exclusion would be over $ 145,000 in 2005.

Section 911 exclusion has not kept pace with foreign earned income. Treasury Department data show that, over the 1996-2001 period, the foreign earned income exclusion declined from 66.5 percent to 58.6 percent of reported foreign earned income. Although the Section 911 exclusion was increased over this period, it has not kept pace with compensation.

Compensation arrangements. Employers typically reimburse U.S. employees for the additional costs of working overseas, such as school costs, home leave travel, certain medical services, and transportation. Under the tax Code, reimbursements and allowances for such costs are treated as income and are taxable to the employee. In some cases the employer may agree to reimburse the employee for the excess tax cost (including the tax on the tax reimbursement). Under such a tax equalization arrangement, the employer bears the full burden of the employee’s additional tax liability. In other cases, the employee bears the additional tax burden.

In either case, absent Section 911 relief, the tax Code discourages foreign posting of U.S. citizens.

Click here to download the Economic Analysis of the Foreign Earned Income Exclusion, PricewaterhouseCoopers, Nov 7, 2005 pdf file, 37 pages, plus appendices.

AmCham China - Guangdong

AmCham Guangdong is a non-partisan, non-profit business organization, certified in 1995 by the U.S. Chamber of Commerce in Washington DC. AmCham Guangdong represents over 500 American and international companies doing business in South China.