TAX POLICY

Economic Benefits of 

Income Exclusion for 

U.S. Citizens Working 

Abroad Are Uncertain

Report to Congressional Requesters

May 2014

GAO-14-387

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-387, a report to 

congressional requesters

May 2014

TAX POLICY

Economic Benefits of Income Exclusion for U.S. 

Citizens Working Abroad Are Uncertain

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 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.

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.

View GAO-14-387. For more information, 

contact James R. McTigue, Jr. at (202) 512-

9110 or mctiguej@gao.gov.
Page i GAO-14-387 Tax Policy

Letter 1 

Background 4

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 14

U.S. Tax Costs Could Influence Some U.S. Overseas 

Employment Decisions, though There Is Little Evidence the Tax 

Expenditure Affects Exports 24

The Tax Expenditure’s Net Effects on Economic Efficiency and 

Equity Are Uncertain; Some Alternatives Could Better Target 

Benefits but Would Add Complexity 32

Concluding Observations 41

Agency Comments and Our Evaluation 42

Appendix I Objectives, Scope, and Methodology 43

Appendix II Provisions That Interact with Section 911 49

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 61

Appendix IV Assessment of the Current Tax Expenditure and Four Alternatives 65

Appendix V GAO Contact and Staff Acknowledgments 78

Tables

Table 1: Estimated Number of Forms 2555 with Foreign Earned 

Income Filed by Countries with the Most Filings, Tax Year 

2011 18

Table 2: Comparison of Estimated Distribution of Returns for the 

FEIE and All Form 1040s, Tax Year 2011 19

Contents
Page ii GAO-14-387 Tax Policy

Table 3: Comparison of Estimated Income of Returns for the FEIE 

and All Form 1040s, Tax Year 2011 20

Table 4: Comparison of Estimated Tax Rates for Returns Claiming 

FEIE to All Form 1040 Returns, Tax Year 2011 20

Table 5: Comparison of the FEIE and FTC by Hypothetical 

Country, Tax Year 2013 22

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 27

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

Current Exclusion 47

Table 8: Selected Provisions Affecting Income Tax Treatments for 

Americans Working Abroad 49

Table 9: Foreign Earned Income Excluded Is Used to Determine 

Tax Rates and Applicability for Other Tax Provisions 51

Table 10: Provisions Which Provide Definitions Relevant in 

Interpreting Section 911 55

Table 11: Section 911 Definition Is Used in Defining Earned 

Income or Tax Home 57

Table 12: Comparison of Tax Costs of U.S. and Non-U.S. Workers 

in Three Hypothetical Locations, at $107,600 Foreign 

Income Level 62

Table 13: Comparison of Tax Costs of U.S. and Non-U.S. Workers 

in Three Hypothetical Locations, at $175,000 Foreign 

Income Level 63

Figures

Figure 1: Effect of Tax Legislation on the Amount of the Foreign 

Earned Income Exclusion (1986-2014) 7

Figure 2: Tax Expenditure Revenue Loss Estimates (Fiscal Years 

1986-2014) 11

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

2013 12

Figure 4: Estimated Number of Forms 2555 with the Foreign 

Earned Income Exclusion, Housing Exclusion, and 

Housing Deduction, Tax Year 2011 16

Figure 5: Estimated Number of Returns Claiming the Foreign 

Earned Income Exclusion (Tax Years 1990- 2011) 17

Figure 6: Estimated Number of Forms 2555 with Foreign Earned 

Income Filed by Geographic Region, Tax Year 2011 18
Page iii GAO-14-387 Tax Policy

Figure 7: Various Factors Can Influence the Tax Expenditure’s 

Relationship to U.S. Citizens Working Abroad and 

Exports 25

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

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Page 1 GAO-14-387 Tax Policy

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.1

 

1

GAO, Government Performance and Accountability: Tax Expenditures Represent a 

Substantial Federal Commitment and Need to Be Reexamined, 

One reason for this is that 

GAO-05-690 

(Washington, D.C.: Sept. 23, 2005), and Tax Policy: Tax Expenditures Deserve More 

Scrutiny, GAO/GGD/AIMD-94-122 (Washington, D.C.: June 3, 1994).
 

Page 2 GAO-14-387 Tax Policy

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.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.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 

 

2

See GAO, Corporate Tax Expenditures: Evaluations of Tax Deferrals and Graduated Tax 

Rates, GAO-13-789 (Washington, D.C.: Sept. 16, 2013); Tax Expenditures: Background 

and Evaluation Criteria and Questions, GAO-13-167SP (Washington, D.C.: Nov. 29, 

2012); Designing Evaluations: 2012 Revision, GAO-12-208G (Washington, D.C.: January

2012); and Executive Guide: Effectively Implementing the Government Performance and 

Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996).

3

GAO, Understanding the Tax Reform Debate: Background, Criteria & Questions, 

GAO-05-1009SP (Washington, D.C.: September 2005). This report describes how the 

criteria can be used to evaluate tax policy.
 

Page 3 GAO-14-387 Tax Policy

years.4

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.

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.

5

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 

(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.

 

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.
 

Page 4 GAO-14-387 Tax Policy

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.6

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

This report focuses on the guide’s criteria for evaluating whether the 

tax expenditure is good tax policy and meets its purpose, namely,

• 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.

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 

 

6

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. 

GAO-05-1009SP summarizes the long-standing criteria used to evaluate tax policy.

Background
 

Page 5 GAO-14-387 Tax Policy

on their worldwide income.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).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.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.

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. 

government10). It does not include income derived from capital, such as 

interest, dividends, capital gains, or retirement distributions.11 To qualify 

for the FEIE, the U.S. citizen or resident alien’s tax home12

 

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.)

must be in a 

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.

1026 U.S.C. 911(b)(1)(B)(ii).

1126 U.S.C. § 911(d)(2).

12For 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).

Exclusion for Foreign 

Earned Income and 

Exclusion or Deduction for 

Foreign Housing Costs
 

Page 6 GAO-14-387 Tax Policy

foreign country13 and, if a U.S. citizen, must be a bona fide resident14 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.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.

 

13The 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.

14For 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.

15If 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.
 

Page 7 GAO-14-387 Tax Policy

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

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.16

 

16The sum of the FEIE and the housing exclusion or deduction is limited to total foreign 

earned income.

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 
 

Page 8 GAO-14-387 Tax Policy

the qualifying period that falls within the tax year.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.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.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.20

 

1726 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).

18Treasury 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, 

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).

1926 U.S.C. § 911(f).

20For 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.
 

Page 9 GAO-14-387 Tax Policy

IRS collects data on use of the FEIE on Form 2555, Foreign Earned 

Income, filed with the taxpayer’s income tax return.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.22 Every 5 years, IRS augments its sample and 

publishes a mandated study with additional detail about taxpayers 

claiming the FEIE.23 Prior special studies—the last study based on 2006 

tax data was published in 200924

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.

—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.

25

 

21On 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. 

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 

22Internal Revenue Service, Individual Income Tax Returns 2011, Publication 1304 

(Washington D.C.: August 2013).

23Foreign 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.

24Scott 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).

25While, 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 GAO-05-690. 
 

Page 10 GAO-14-387 Tax Policy

was repealed.26 Figure 2 shows the revenue losses estimated by 

Treasury for the tax expenditure since 1986.27 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.28

 

26Changes in taxpayer behavior are taken into account when Treasury and JCT prepare 

revenue estimates for proposed legislation. 

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.

27Changes 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.

28Office 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).
 

Page 11 GAO-14-387 Tax Policy

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

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.

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.29

 

29See 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).

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, 

Employment Overseas 

and Exports
 

Page 12 GAO-14-387 Tax Policy

according to survey data concerning global relocation trends.30

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.

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.

31

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

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).

 

30See 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).

31Besides cross-border exports, U.S. companies can also sell to foreign countries through 

affiliate sales abroad.
 

Page 13 GAO-14-387 Tax Policy

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 2014.32

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.

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.34 Concurrent with the 

release of the President’s fiscal year 2015 budget, the administration 

released new crosscutting goals which focus on new priorities.35

 

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

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 

33Pub. 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).

34For more on our work on export promotion, see our export promotion Key Issue page, at 

http://www.gao.gov/key_issues/export_promotion/issue_summary. The Key Issue page 

highlights our relevant reports and multimedia content.

35A new crosscutting goal focuses on increasing foreign direct investment in the United 

States.
 

Page 14 GAO-14-387 Tax Policy

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
 

Page 15 GAO-14-387 Tax Policy

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.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.37 As shown in figure 4, an estimated 17 

percent38

 

36The 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.

of filers claiming the FEIE also claimed the foreign housing 

exclusion or foreign housing deduction.

37The 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.

38Out 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.

A Relatively Small Number 

of Tax Returns Claimed 

the Foreign Earned 

Income Exclusion and 

over Half Reported 

Working for Foreign 

Employers
 

Page 16 GAO-14-387 Tax Policy

Figure 4: Estimated Number of Forms 2555 with the Foreign Earned Income 

Exclusion, Housing Exclusion, and Housing Deduction, Tax Year 2011

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.
 

Page 17 GAO-14-387 Tax Policy

Figure 5: Estimated Number of Returns Claiming the Foreign Earned Income Exclusion (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.

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.
 

Page 18 GAO-14-387 Tax Policy

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

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.

Table 1: Estimated Number of Forms 2555 with Foreign Earned Income Filed by 

Countries with the Most Filings, Tax Year 2011

Country Region Number of Forms 2555

Canada North America 45,740

United Kingdom Europe 30,861

Japan Asia 23,073
 

Page 19 GAO-14-387 Tax Policy

Country Region Number of Forms 2555

Afghanistan Asia 22,987

China Asia 22,362

Germany Europe 19,091

Iraq Asia 13,938

South Korea Asia 13,671

Hong Kong Asia 13,274

United Arab Emirates Asia 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.

In tax year 2011, taxpayers claimed about $30 billion for the FEIE, foreign 

housing exclusion, and foreign housing deduction.39

Table 2: Comparison of Estimated Distribution of Returns for the FEIE and All Form 

1040s, Tax Year 2011

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.

Adjusted gross income

Distribution of returns 

claiming FEIE

Distribution of all 1040 

returns 

No adjusted gross income 23.5 1.7

$1 under $10,000 21.9 15.9

$10,000 under $25,000 11.3 24.1

$25,000 under $50,000 11.3 23.7

$50,000 under $200,000 21.9 31.4

$200,000 under $1,000,000 8.8 3.0

$1,000,000 or more 1.2 0.2

All returns 100.0 100.0

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.

 

39Most of the amount claimed was for the FEIE. For 2011, the maximum exclusion for 

foreign earned income was $92,900.

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
 

Page 20 GAO-14-387 Tax Policy

Taxpayers claiming the FEIE had higher average income ($163,450) than 

the average Form 1040 filer ($58,706), as shown in table 3.40

Table 3: Comparison of Estimated Income of Returns for the FEIE and All Form 

1040s, Tax Year 2011

Adjusted gross income

Average income 

of FEIE filers

Average income of 

all 1040 filers

Under $25,000 $55,409 $9,011

$25,000 under $50,000 $109,239 $36,497

$50,000 under $200,000 $182,680 $92,604

$200,000 under $1,000,000 $505,453 $344,323

$1,000,000 or more $2,932,212 $3,187,604

All returns $163,450 $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.

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

Average U.S. tax 

rate of FEIE filers

Average U.S. tax rate 

of all 1040 filers

Average total tax 

rate of FEIE filers

Average total tax rate 

of all 1040 filers

Under $25,000 0.2 2.3 0.3 2.3

$25,000 under $50,000 2.1 5.1 3.0 5.1

$50,000 under $200,000 6.7 10.4 10.4 10.4

 

40The 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. 

http://www.urban.org/publications/1001689.html.
 

Page 21 GAO-14-387 Tax Policy

Adjusted gross income

Average U.S. tax 

rate of FEIE filers

Average U.S. tax rate 

of all 1040 filers

Average total tax 

rate of FEIE filers

Average total tax rate 

of all 1040 filers

$200,000 under $1,000,000 9.4 20.5 22.1 20.8

$1,000,000 or more 11.4 23.0 26.9 23.9

All returns 6.8 12.3 14.6 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.

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.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.42

 

41Taxpayers who choose to claim the FEIE cannot double dip and claim the FTC for 

foreign taxes on the income excluded.

42Taxpayers 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.

The Foreign Earned 

Income Exclusion Is More 

Beneficial Than the 

Foreign Tax Credit for U.S. 

Taxpayers in Lower Tax 

Countries
 

Page 22 GAO-14-387 Tax Policy

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

Country where U.S. taxpayer resides and 

earns income United States a Country ANo income tax

Country B

Income tax lower than 

the United States

Country C

Income tax higher 

than the United States

Earned income $107,600 $107,600 $107,600 $107,600 

Less: Standard deduction $6,100 and one 

exemption $3,900

($10,000) ($10,000) ($10,000) ($10,000)

U.S. taxable income without FEIE $97,600 $97,600 $97,600 $97,600

Using FEIE only

U.S. taxable income with FEIE $97,600 $0 $0 $0 

Foreign income tax $0 $0 $10,670 $26,900 

U.S. income tax $20,628 $0 $0 $0 

Total worldwide income tax $20,628 $0 $10,760 $26,900 

Effective foreign income tax rate 0% 0% 10% 25%

Effective (residual) U.S. income tax rate 19% 0% 0% 0%

Effective worldwide income tax rate 19% 0% 10% 25%

Using FTC only

U.S. taxable income without FEIE $97,600 $97,600 $97,600 $97,600

Foreign income tax $0 $0 $10,760 $26,900 

U.S. income tax after foreign tax credit $20,628 $20,628 $9,868 $0

Total worldwide income tax $20,628 $20,628 $20,628 $26,900 

Effective foreign income tax rate 0% 0% 10% 25%

Effective (residual) U.S. income tax rate 19% 19% 9% 0%

Effective worldwide income tax rate 19% 19% 19% 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

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 

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.
 

Page 23 GAO-14-387 Tax Policy

broadly targeted to attract or retain high-skilled workers—such as 

scientists, researchers and engineers—to locate in otherwise high-tax 

jurisdictions.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.

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.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.45

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 

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.

 

43As of 2010, 16 countries had special tax incentives, such as deductions, exemptions, 

and reduced tax rates, for high-skilled workers. See Organisation for Economic Cooperation and Development, Taxation and Employment, OECD Tax Policy Studies, No. 21 

(OECD Publishing, 2011) accessed July 25, 2013, 

http://dx.doi.org/10.1787/9789264120808-en. 

4426 U.S.C § 32(c)(1)(C).

4526 U.S.C. § 911(d)(6).

Excluded Income Counts 

in Determining Eligibility 

for Tax Benefits with 

Income Limits
 

Page 24 GAO-14-387 Tax Policy

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.

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.

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.46

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 

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.

 

46For 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.

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 

Effects on Hiring of U.S. 

Workers Abroad and 

Exports Depends on 

Various Factors
 

Page 25 GAO-14-387 Tax Policy

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

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 
 

Page 26 GAO-14-387 Tax Policy

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.

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.47

 

47Appendix 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.

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.

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
 

Page 27 GAO-14-387 Tax Policy

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 employeea U.S. Non-U.S. U.S. Non-U.S. 

Earned income $107,600 b $107,600 $175,000 $175,000

Less FEIE $97,600 N/A $97,600 N/A

Less: standard deduction $6,100 and 

one exemption $3,900 $10,000 $10,000 $10,000 $10,000

Host country effective tax rate 10% 10% 10% 10%

Host country income tax $10,760 $10,760 $17,500 $17,500

U.S. effective tax rate 19% c N/A 23% N/A

U.S. income tax after FEIE $0 N/A $18,865 N/A

U.S. income tax after Foreign Tax 

Credit N/A N/A $9,105 N/A d

Total income after tax $107,600 $107,600 $148,395 $157,500

Difference between U.S. worker 

after-tax income and that of a nonU.S. worker $0 N/A -$9,105 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

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 

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.
 

Page 28 GAO-14-387 Tax Policy

companies use a tax equalization policy for their overseas assignees.48

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,

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.

• 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.

 

48See 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).

Experts and Stakeholders 

Have Varying Views on the 

Emphasis Employers Place on 

Certain Overseas Hiring 

Factors
 

Page 29 GAO-14-387 Tax Policy

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 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.

Most Experts Interviewed 

See Little Evidence the 

Tax Expenditure Affects

Exports
 

Page 30 GAO-14-387 Tax Policy

• 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.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.50

The few empirical analyses that have asserted a relationship between the 

tax expenditure and exports have weaknesses.51 A 1980 study concluded 

that repealing the tax expenditure would lead to a decline in exports.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.53

 

49Commerce 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).

However, the model from the 1980 study has several limitations. For 

example, the model drew on export data from 1974, when more recent 

50See Performance.gov, “Cross-Agency Priority Goal: Exports” accessed May 30, 2013 

http://goals.performance.gov/content/exports. 

51Our 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).

52Mutti, “American Presence Abroad.” 

53PricewaterhouseCoopers (PwC), Economic Analysis. 
 

Page 31 GAO-14-387 Tax Policy

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, Commerce54 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.55

 

54John 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). 

55See GAO, Export-Import Bank: More Detailed Information about Its Jobs Calculation 

Methodology Could Improve Transparency, GAO-13-446 (Washington, D.C.: May 23, 

2013).
 

Page 32 GAO-14-387 Tax Policy

Using criteria from our tax expenditure evaluation guide, we evaluated 

whether the tax expenditure56

• 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.

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.57

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. 

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.

 

56Unless 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.

57Resources 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-13-167SP and 

GAO-05-1009SP for a more detailed discussion of economic efficiency.

The Tax 

Expenditure’s Net 

Effects on Economic 

Efficiency and Equity 

Are Uncertain; Some 

Alternatives Could 

Better Target Benefits 

but Would Add 

Complexity

Does the Tax Expenditure 

Generate Net Economic 

Benefits for Society?
 

Page 33 GAO-14-387 Tax Policy

citizens than doing so otherwise would be, and as a result could interfere 

with the efficient allocation of U.S. labor between locations.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.

59

 

58If 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). 

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 

59See 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). 
 

Page 34 GAO-14-387 Tax Policy

justified if the differences are much greater internationally than 

domestically.

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.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.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 

 

60The 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.

61Determining 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.

Is the Tax Expenditure Fair 

and Equitable?
 

Page 35 GAO-14-387 Tax Policy

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 rule62

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.

—

moderates this negative effect.

63

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.64

Transparency: Taxpayers may not fully understand their obligations 

under the tax expenditure. According to IRS, there is a common 

 

62For 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.

63Expatriation 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 http://www.irs.gov/publications/p519/ar01.html).

64Appendix IV contains additional detail on our assessment of transparency and simplicity 

for taxpayers and administrability for IRS.

Is the Tax Expenditure 

Simple, Transparent, and 

Administrable?
 

Page 36 GAO-14-387 Tax Policy

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.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.66

 

65Tiffanie 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).

66Treasury 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).
 

Page 37 GAO-14-387 Tax Policy

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.

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.67

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 

 

67To 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.

How Well Does the Tax 

Expenditure Achieve Its 

Purposes?

Some Alternatives to the 

Tax Expenditure Would 

Increase Efficiency and 

Equity, While the Effect of 

Others Would Depend on 

Details of the Reform

Alternative: Eliminating the Tax 

Expenditure
 

Page 38 GAO-14-387 Tax Policy

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.68

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.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.70

 

68The 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.

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.

69Such 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.

70The 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.

Alternative: Targeting Tax 

Relief for Extreme Cost of 

Living Differences
 

Page 39 GAO-14-387 Tax Policy

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.71

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 

 

71Currently, 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.

Alternative: Targeting Tax 

Relief Based on Benefits 

Received and Obligations as 

Citizens

Alternative: Uncapping the 

Exclusion
 

Page 40 GAO-14-387 Tax Policy

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.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.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.

74

 

72GAO, International Taxation: Study Countries That Exempt Foreign-Source Income 

Face Compliance Risks and Burdens Similar to Those in the United States, 

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 

GAO-09-934 

(Washington, D.C.: Sept. 15, 2009).

73American 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.

74Under 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.
 

Page 41 GAO-14-387 Tax Policy

beyond the scope of this report.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.

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.

 

75Subtitle 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.

Concluding 

Observations
 

Page 42 GAO-14-387 Tax Policy

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.

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 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.

James R. McTigue, Jr.

Director, Tax Issues

Strategic Issues

Agency Comments 

and Our Evaluation
Appendix I: Objectives, Scope, and 

Methodology

Page 43 GAO-14-387 Tax Policy

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 residents1

 

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.

—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.

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 44 GAO-14-387 Tax Policy

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 (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 
Appendix I: Objectives, Scope, and 

Methodology

Page 45 GAO-14-387 Tax Policy

the Congressional Research Service.2 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.3 The literature related 

to the FEIE is more limited in volume. Prior GAO and CRS in-depth 

reports are more than 30 years old.4

 

2

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).

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. 

3

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, 

GAO-13-789 (Washington, D.C.: Sept. 16, 2013).

4

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).
Appendix I: Objectives, Scope, and 

Methodology

Page 46 GAO-14-387 Tax Policy

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 
Appendix I: Objectives, Scope, and 

Methodology

Page 47 GAO-14-387 Tax Policy

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.
Appendix I: Objectives, Scope, and 

Methodology

Page 48 GAO-14-387 Tax Policy

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.

We used the tax expenditure evaluation guide we developed to evaluate 

the performance of the foreign earned income exclusion and possible 

options.5

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

This report focuses on the guide’s criteria for evaluating whether 

the tax expenditure is good tax policy and meets its purpose, namely,

• 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.

 

5

GAO, Tax Expenditures: Background and Evaluation Criteria and Questions, 

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, GAO-05-1009SP (Washington D.C.: September 2005) 

summarizes the long-standing criteria used to evaluate tax policy.
Appendix II: Provisions That Interact with 

Section 911

Page 49 GAO-14-387 Tax Policy

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 Description of provision Interaction with section 911

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.

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.

Appendix II: Provisions That Interact with 

Section 911
Appendix II: Provisions That Interact with 

Section 911

Page 50 GAO-14-387 Tax Policy

Description of provision Description of provision Interaction with section 911

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.

Federal employees are not eligible for the 

foreign earned income or housing exclusion.

Tax treatiesa 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.

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.

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.

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.
Appendix II: Provisions That Interact with 

Section 911 

Page 51 GAO-14-387 Tax Policy 

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 Description of provision Interaction with section 911 

Requirement to file a U.S. income 

tax return 

26 U.S.C § 6012(c) 

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. 

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. 

Figuring tax on income not 

excluded 

26 U.S.C § 1a

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. 

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. 

Alternative minimum taxa

26 U.S.C § 5581 

The alternative minimum tax is a separate income 

tax calculation intended to ensure that higherincome 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. 

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. 

Earned income creditb

26 U.S.C § 32(c)(1)(C) 

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. 

Taxpayers that claim the foreign earned 

income exclusion cannot also claim the 

earned income credit. 

Child tax credit 

26 U.S.C. §24(b)(1) 

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. 

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. 

Adoption Credit 

26 U.S.C. §23(b)(2)(B) 

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. 

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. 

Adoption Exclusion 

26 U.S.C. §137(b)(3) 

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. 

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. 

Hope Scholarship Credit, Lifetime 

Learning Credit, and American 

Opportunity Credit 

26 U.S.C. § 25A(d)(3) 

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. 

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. 
Appendix II: Provisions That Interact with 

Section 911

Page 52 GAO-14-387 Tax Policy

Other provision and citation to 

reference in provision to 

section 911 Description of provision Interaction with section 911

Student Loan Interest Deduction

26 U.S.C. § 221(b)(2)(C)

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.

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.

Tuition and Fees Deduction

26 U.S.C. § 222(b)(2)(C)

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.

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.

Coverdell Education Savings 

Account (ESA)

26 U.S.C. § 530(c)(2)

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. 

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.

Interest from U.S. savings bonds 

used to pay higher education 

expenses

26 U.S.C. § 135(c)(4)

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.

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.

Deduction phase-out for individual 

retirement account contributions

26 U.S.C. § 219(g)(3)

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.

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.

Saver’s credit

26 U.S.C. § 25B(e)

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. 

Foreign earned income and foreign housing 

amounts that can be excluded under section 

911 are included in determining income for 

purposes of applicable percentage.

Contribution phase-out for Roth 

individual retirement account 

contributions

26 U.S.C. § 408A(c)(3)(B)(i) 

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.

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.
Appendix II: Provisions That Interact with 

Section 911

Page 53 GAO-14-387 Tax Policy

Other provision and citation to 

reference in provision to 

section 911 Description of provision Interaction with section 911

Annuities

26 U.S.C. § 72(f)

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.

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. 

Refundable credit for coverage 

under a qualified health plan

26 U.S.C. § 36B(d)(2)(B)

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. 

Foreign earned income and foreign housing 

amounts that can be excluded under section 

911 are included in determining household 

income.

Unearned Income Medicare 

Contribution

26 U.S.C. § 1411(d)(1)

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.

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). 

Penalty under the requirement to 

maintain minimum essential 

coverage

26 U.S.C. § 5000A(c)(4)(C)

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. 

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.

Self-Employed Health Insurance 

Deduction

26 U.S.C. § 162(l)

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. 

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.

Social security and tier 1 railroad 

retirement benefits

26 U.S.C § 86(b)(2)

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. 

Foreign earned income and foreign housing 

amounts that can be excluded under section 

911 are included in determining income for 

purposes of the thresholds.
Appendix II: Provisions That Interact with 

Section 911

Page 54 GAO-14-387 Tax Policy

Other provision and citation to 

reference in provision to 

section 911 Description of provision Interaction with section 911

Includible compensation for 

purposes of taxation of employee 

annuities

26 USC § 403(b)(3)

Annuity contracts purchased by a tax exempt nonprofit 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. 

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.

Limitation on benefits under 

qualified defined benefit plans

26 USC § 415(b)(3) 

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-ofliving adjustments) or 100 percent of the 

participant’s average compensation for high 3 

years.

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.

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)

Self-employed individuals owe a tax on their selfemployment 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. 

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. 
Appendix II: Provisions That Interact with 

Section 911

Page 55 GAO-14-387 Tax Policy

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

Other provision and citation Description of other provision Interaction with section 911

Social security and tier 1 railroad 

retirement benefits

26 U.S.C § 86(f)(4)

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. 

Under section 911, amounts received by an 

individual as a pension or annuity are not 

considered foreign earned income. 

Taxability of beneficiary of 

employees’ trust

26 U.S.C § 402(b) 

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.

Under section 911, amounts included in 

gross income because of section 402(b) are 

not considered foreign earned income.

Taxation of employee annuities

26 U.S.C § 403(c)

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. 

Under section 911, amounts included in 

gross income because of section 403(c) are 

not considered foreign earned income.

Trade or business expenses

26 U.S.C § 162(a)(2)

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. 

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. 

Cost of living adjustment

26 U.S.C § 1(f)(3)

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).

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. 

Mortgage Interest

26 U.S.C § 163

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. 

Housing expenses for purposes of section 

911 do not include interest deductible under 

section 163.

Property Tax

26 U.S.C § 164

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.

Housing expenses for purposes of section 

911 do not include taxes deductible under 

section 164.
Appendix II: Provisions That Interact with 

Section 911

Page 56 GAO-14-387 Tax Policy

Other provision and citation Description of other provision Interaction with section 911

Deduction of taxes, interest, and 

business depreciation by 

cooperative housing corporation 

tenant-stockholder

26 U.S.C § 216(a)

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.

Housing expenses for purposes of section 

911 do not include amounts deductible 

under section 216(a).

Gain from dispositions of certain 

depreciable realty

26 USC § 1250 

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. 

When determining the amount of tax owed, 

unrecaptured section 1250 gains are 

determined after increasing the amount by 

any capital gain excess.

Wages defined for income tax 

withholding provisions in relation to 

exclusion from gross income under 

this section

26 U.S.C § 3401(a)(8)

Generally, for income tax withholding purposes, 

wages mean all remuneration for services 

performed by an employee for an employer. 

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.

Place where persons claiming 

benefits of this section file returns

26 U.S.C § 6091

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. 

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.

Trading With the Enemy Act

50 U.S.C. App. §§ 1–44 

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.

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. 
Appendix II: Provisions That Interact with 

Section 911

Page 57 GAO-14-387 Tax Policy

Other provision and citation Description of other provision Interaction with section 911

International Emergency Economic 

Powers Act (50 U.S.C. 1701 et 

seq.),

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.

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.

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

Description of provision Wording of provision Interaction with section 911

Certain unearned income of 

children taxed as if parent’s income

26 U.S.C § 1(g)(2)(A)(ii)(ll), 

(4)(A)(i). 

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.

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 

Alternative minimum tax treatment 

of unearned income of minor 

children

26 U.S.C. § 59(j)(1)(A) 

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.

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 

Treatment of community income 

property

26 U.S.C § 66 (d)(1).

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).

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 
Appendix II: Provisions That Interact with 

Section 911

Page 58 GAO-14-387 Tax Policy

Description of provision Wording of provision Interaction with section 911

Accident and health plans

26 U.S.C § 105(h)(3)(B)(v). 

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. 

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 

Qualified pension, profit-sharing, 

and stock bonus plans minimum 

coverage requirements

26 U.S.C. § 410(b)(3)(C)

Employers may establish qualified pension, profitsharing 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. 

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 

Qualified pension, profit-sharing, 

and stock bonus plans definitions 

and special rules

26 U.S.C. § 414(q)(8)

Employers may establish qualified pension, profitsharing 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. 

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 
Appendix II: Provisions That Interact with 

Section 911

Page 59 GAO-14-387 Tax Policy

Description of provision Wording of provision Interaction with section 911

Exempt organizations

26 U.S.C § 505(b)(2)(E)

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. 

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 

Group-term life insurance provided 

by an employer

26 U.S.C § 79(d)(3)(B)(iv)

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. 

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 

Passive activity losses and credits

26 U.S.C § 469(e)(3)

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. 

This provision adopts by reference the 

definition of earned income in section 

911(d)(2)(A), but not subsection 

911(d)(2)(B). 

Community income of nonresident 

alien individuals

26 U.S.C § 879(a)(1)

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. 

This provision adopts by reference the 

definition of earned income in section

911(d)(2). 

Tax on group health plans which 

fail to satisfy continuation coverage 

requirements

26 U.S.C. § 4980B(g)(1)(C) 

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. 

This provision adopts by reference the 

definition of earned income in section 

911(d)(2). 
Appendix II: Provisions That Interact with 

Section 911

Page 60 GAO-14-387 Tax Policy

Description of provision Wording of provision Interaction with section 911

Source rules for personal property 

sales

26 U.S.C § 865(g)(1)(A)(i)(l)

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.

This provision adopts by reference the 

definition of tax home in section 911(d)(3).

Residence and source rules 

involving possessions

26 U.S.C. § 937(a)(2)

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.

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).

Treatment of certain foreign 

currency transactions

26 U.S.C § 988(a)(3)(B)(i)(l)

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.

This provision adopts by reference the 

definition of tax home in section 911(d)(3).

Penalty under the requirement to 

maintain minimum essential 

coverage

26 U.S.C. § 5000A(f)(4)(A)

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.

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.

Resident alien and nonresident 

alien defined.

26 U.S.C § 7701(b)(3)(B)(ii)

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.

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.
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

Page 61 GAO-14-387 Tax Policy

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.

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 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

Page 62 GAO-14-387 Tax Policy

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 United States Country A Country B Country C 

Effective tax rate 19% 0% 10% 25%

Nationality of employee U.S. Citizen U.S. Citizen

Non-U.S. 

Foreign 

National

U.S. 

Citizen

Non-U.S. 

Foreign 

National U.S. Citizen

Non-U.S. 

Foreign 

National

Earned income $107,600 $107,600 $107,600 $107,600 $107,600 $107,600 $107,600 

Less standard deduction 

$6,100 and one exemption 

$3,900

($10,000) ($10,000) N/A ($10,000) N/A ($10,000) N/A

Less FEIE N/A ($97,600) N/A ($97,600) N/A N/A N/A

Host country taxable income N/A $0 $0 $107,600 $107,600 $107,600 $107,600 

Host country income tax N/A $0 $0 $10,760 $10,760 $26,900 $26,900 

U.S. and total tax when FEIE 

is available

 

U.S. taxable income $97,600 $0 N/A $0 N/A $97,600 N/A

U.S. income tax after foreign tax 

credit

$20,628 $0 N/A $0 N/A $0 N/A

Total income after tax $86,972 $107,600 $107,600 $96,840 $96,840 $80,700 $80,700 

Difference between U.S. citizen 

after-tax income abroad and in 

the U.S.

N/A $20,628 N/A $9,868 N/A ($6,272) N/A

Difference between U.S. citizen 

after-tax income and that of a 

non-U.S. citizen

N/A $0 N/A $0 N/A $0 N/A

U.S. and total tax if FEIE if 

was not available

 

U.S. taxable income $97,600 $97,600 N/A $97,600 N/A $97,600 N/A

U.S. income tax after foreign tax 

credit

$20,628 $20,628 N/A $9,868 N/A $0 N/A

Total income after tax $86,972 $86,972 $107,600 $86,972 $96,840 $80,700 $80,700 

Difference between U.S. citizen 

after-tax income abroad and in 

the U.S.

N/A $0 N/A $0 N/A ($6,272) N/A

Difference between U.S. citizen 

after-tax income and that of a 

non-U.S. citizen

N/A ($20,628) N/A ($9,868) N/A $0 N/A

Source: GAO analysis.
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

Page 63 GAO-14-387 Tax Policy

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

United 

States Country A Country B Country C

Effective tax rate 23% 0% 10% 25%

Nationality of employee U.S. Citizen

U.S.

Citizen

Non-U.S. 

Foreign 

National

U.S. 

Citizen

Non-U.S. 

Foreign 

National

U.S. 

Citizen

Non-U.S. 

Foreign 

National

Earned income $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 $175,000 

Less standard deduction $6,100 

and one exemption $3,900

($10,000) ($10,000) N/A ($10,000) N/A ($10,000) N/A

Less FEIE N/A ($97,600) N/A ($97,600) N/A N/A N/A

Host country taxable income N/A $0 $0 $175,000 $175,000 $175,000 $175,000 

Host country income tax N/A $0 $0 $17,500 $17,500 $43,750 $43,750 

U.S. and total tax when FEIE is 

available

 

U.S. taxable income $165,000 $67,400 N/A $67,400 N/A $165,000 N/A

Foreign Earned Income excluded N/A $97,600 N/A $97,600 N/A NA N/A

U.S. income tax (no FEIE or foreign 

tax credit)

$39,493 $39,493 N/A $39,493 N/A $39,493 N/A

U.S. tax on excluded income N/A $20,628 N/A $20,628 N/A N/A N/A

U.S. income tax after FEIE $39,493 $18,865 N/A $18,865 N/A $39,493 N/A

Foreign tax allocable to excluded 

income

N/A $0 N/A $9,760 N/A N/A N/A

U.S. income tax after foreign tax 

credit

$39,493 $18,865 N/A $9,105 N/A $0 N/A

Total income after tax $135,507 $156,135 $175,000 $148,395 $157,500 $131,250 $131,250 

Difference between U.S. citizen 

after-tax income abroad and in the 

U.S.

N/A $20,628 N/A $12,888 N/A ($4,257) N/A

Difference between U.S. citizen 

after-tax income and that of a nonU.S. citizen

N/A ($18,865) N/A ($9,105) N/A $0 N/A

U.S. and total tax if FEIE if was 

not available

 

U.S. taxable income $165,000 $165,000 N/A $165,000 N/A $165,000 N/A

U.S. income tax after foreign tax 

credit

$39,493 $39,493 N/A $21,993 N/A $0 N/A

Total income after tax $135,507 $135,507 $175,000 $135,507 $157,500 $131,250 $131,250 

Difference between U.S. citizen 

after-tax income abroad and in the 

U.S.

N/A $0 N/A $0 N/A ($4,257) N/A
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

Page 64 GAO-14-387 Tax Policy

Country of employment

United 

States Country A Country B Country C

Effective tax rate 23% 0% 10% 25%

Nationality of employee U.S. Citizen

U.S.

Citizen

Non-U.S. 

Foreign 

National

U.S. 

Citizen

Non-U.S. 

Foreign 

National

U.S. 

Citizen

Non-U.S. 

Foreign 

National

Difference between U.S. citizen 

after-tax income and that of a nonU.S. citizen

N/A ($39,493) N/A ($21,993) N/A $0 N/A

Source: GAO analysis.
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 65 GAO-14-387 Tax Policy

Using criteria from our tax expenditure evaluation guide, we evaluated 

whether the tax expenditure1

• 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.

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.2

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. 

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.

 

1

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.

2

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, GAO-13-167SP (Washington, D.C.: 

Nov. 29, 2012) and Understanding the Tax Reform Debate: Background, Criteria & 

Questions, GAO-05-1009SP (Washington, D.C.: September 2005) for a more detailed 

discussion of economic efficiency.

Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Does the Tax Expenditure 

Generate Net Economic 

Benefits for Society?
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 66 GAO-14-387 Tax Policy

citizens than doing so otherwise would be and as a result, could interfere 

with the efficient allocation of U.S. labor between locations.3

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.

4

 

3

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).

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 

4

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).
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 67 GAO-14-387 Tax Policy

justified if the differences are much greater internationally than 

domestically.

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.5

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 

 

5

Another value judgment relates to the progressivity of a tax—the degree to which taxes 

should increase as the ability to pay increases.

Is the Tax Expenditure Fair 

and Equitable?
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 68 GAO-14-387 Tax Policy

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 
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 69 GAO-14-387 Tax Policy

current design of the tax expenditure—specifically the dollar limit and the 

stacking rule6

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 benefitted 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.

—moderates this negative effect.

7 The National Taxpayer Advocate has 

reported that the numbers of those giving up their U.S. citizenship are 

growing.

8

Citizens living abroad benefit from services provided by their hostcountries’ governments to which they pay taxes. Given that credits for 

foreign income taxes paid reduce the amount of tax that these citizens 

 

6

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.

7

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 http://www.irs.gov/publications/p519/ar01.html).

8

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).
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 70 GAO-14-387 Tax Policy

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.9

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.

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.10

 

9

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.

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 

10For more on GAO’s work on the tax gap, see our Tax Gap Key Issue page, at 

http://gao.gov/key_issues/tax_gap/issue_summary#t=1. 

Is the Tax Expenditure 

Simple, Transparent, and 

Administrable?
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 71 GAO-14-387 Tax Policy

States. IRS has undertaken research to study the needs of international 

taxpayers in helping them comply with their U.S. tax liabilities.11

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.12 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.13

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.14

Administrability: IRS faces challenges in administering the tax 

expenditure, because IRS does not have the same level of information 

 

11Tiffanie 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).

12Foreign 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.

13Treasury 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).

14Whereas the form 2555 for the exclusion has an EZ version, the foreign tax credit form 

1116 does not have an EZ version.
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 72 GAO-14-387 Tax Policy

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.15 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.

16

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.

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.

17 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.18

 

15Wages 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.

IRS began including 

16Subtitle 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.

17Treasury 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). 

18Treasury Inspector General for Tax Administration, Improvements Needed to Reduce 

Erroneous Claims.
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 73 GAO-14-387 Tax Policy

international taxpayers in its National Research Program in 2008 and 

plans to use the results to target enforcement on noncompliant 

taxpayers.19

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.

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. 20

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 

 

19The 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.

20To 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.

How Well Does the Tax 

Expenditure Achieve Its 

Purposes?

Some Alternatives to the 

Tax Expenditure Would 

Increase Efficiency and 

Equity, While the Effect of 

Others Would Depend on 

Details of the Reform

Alternative: Eliminating the Tax 

Expenditure
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 74 GAO-14-387 Tax Policy

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.21

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.22

 

21The 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.

Whether a system of cost-of-living adjustments would be more 

burdensome for Treasury or taxpayers than the current tax expenditure, 

22Such 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.

Alternative: Targeting Tax 

Relief for Extreme Cost of 

Living Differences
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 75 GAO-14-387 Tax Policy

which already has some adjustment for higher housing expenses, 

depends on the degree of accuracy and completeness desired in the 

adjustments.23

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.

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.

24

Removing the maximum limit on the exclusion—that is, uncapping the tax 

expenditure—and excluding all foreign earned income from taxation 

 

23The 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.

24Currently, 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.

Alternative: Targeting Tax 

Relief Based on Benefits 

Received and Obligations as 

Citizens

Alternative: Uncapping the 

Exclusion
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 76 GAO-14-387 Tax Policy

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.25

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 

 

25GAO, International Taxation: Study Countries That Exempt Foreign-Source Income 

Face Compliance Risks and Burdens Similar to Those in the United States, GAO-09-934 

(Washington, D.C.: Sept. 15, 2009).
Appendix IV: Assessment of the Current Tax 

Expenditure and Four Alternatives

Page 77 GAO-14-387 Tax Policy

could make the tax expenditure unnecessary.26 Such an approach would 

impose a departure tax for citizens working abroad who reside in a 

foreign country for a minimum period of time.

27 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.28

 

26American 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.

27Under 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, 

http://www.procopio.com/news/tax-simplification-the-need-for-consistent-tax-treatment-ofall-individuals-citizens-lawful-permanent-residents-and-non-citizens-regardless-ofimmigration-status-residing-overseas-including-the-repeal-of-u.s.-citizenship-basedtaxation; 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).

28See Joint Committee on Taxation, Present Law and Issues in U.S. Taxation of CrossBorder Income, JCX-42-11 (Washington, D.C.: Sept. 6, 2011). 
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 78 GAO-14-387 Tax Policy

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

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.

Appendix V: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(451050)
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