From ACA.CH website
Foreign Earned Income Exclusion Under Attack A bill (S. 3018), “The Bipartisan Tax Fairness and Simplification Act of 2010” introduced late-February 2010 by Senators Ron Wyden (D-OR) and Judd Gregg (R-NH), aims to make the Federal income tax system "simpler, fairer, and more fiscally responsible." Among other things, the bill would eliminate the foreign earned income exclusion, which concerns all US taxpayers living and working abroad.
The proposed legislation would also eliminate the Alternative Minimum Tax – which raises taxes for millions of middle-class Americans – and will reduce the number of individual tax brackets from the current six to three: 15 percent, 25 percent, and 35 percent. Additionally, it would streamline the tax code by eliminating a number of "specialized tax breaks" that favor one business sector or group of individuals over another. Among these “specialized tax breaks” is Section 911 of the Internal Revenue Code – the foreign earned income exclusion, which concerns all US taxpayers living and working abroad.
ACA is reviewing the text of the bill, which is currently referred to the Senate Committee on Finance and has no additional co-sponsors, to ascertain its potential impact on overseas Americans and its chances of passing.

I am all for simplicity, but eliminating the foreign income exclusion would
really bite. This phrase is scary "Reinstitution of per country foreign tax credit." Switzerland is already not seen in a positive light by the IRS.
I wonder what happens now.

The elimination of the foreign earned income exclusion would make tax criminals of additional millions of relatively low-paid American citizens, many or mostly dual nationals, living abroad, for whom a $10,000 penalty for failure to file the various reporting forms (3520, 5471, FBAR) are a sick joke that (assuming they know of their liability) prevent them -- like all those Vietnam draft absconders in Canada in the 1970s (as to which see this: http://www.uniset.ca/other/news/wp_ronaldanderson.html ) -- stayed out of the USA for decades.

For those in "normal" and high tax countries (but bear in mind that in Europe wealth taxes, high rates of payroll tax and purchase taxes such as VAT are not creditable or usually deductible for US income tax) it may make slight difference. But I remember a discussion with the IRS Rep in Paris while visiting Abidjan: I told him of an unnamed American teacher in Nigeria making $25,000 in salary in USD, but with the overvaluation in the 1970s of the naira his small flat and small car brought his "salary" for US tax purposes to something under $100,000 making his US tax more than his salary, and unpayable. The same was true at the time for english teachers in Japan.

Pres. Carter had eliminated the Foreign Earned Income Exclusion: is this a stupid experiment they want to repeat? Do they want to make criminals of so many people and make the tax law object of even more scorn and ridicule to the degree that -- like so many laws that are not respected -- it is all that easier to justify nonfiling?

The IRS man from Paris told me in all sincerity that he just hoped that the teacher, and those like him, could stay beneath the radar. The IRS would certainly not be seeking them out.

While Congress chose to do something about distressed mortgagors and short sales of houses (anyway tax on cancellation of debt income doesn't apply in bankruptcy or when insolvent) it refused to act in the cases of those taxed on dot.com stock options where between the time of exercise and the time of sale the stock became worthless. The only solution for such people was (1) to file separate returns if married and (2) wait out the time (3 years usually) to discharge the tax in bankruptcy.

Laws that are not respected are not obeyed. The 83%/98% income tax that Margaret Thatcher reduced to 40% crippled the British economy. India has, or had, a similar counterproductive tax rate that could only lead to evasion, cheating and emigration.

But that's not all: the US, together with the OECD, would like to abolish the Revenue Rule, Lord Mansfield's 1775 dictum against one country enforcing foreign public law, and in particular the tax law, of another country. The US would like to have cross-border collection agreements with more countries (only the Canadian one is fully effective, and then only against persons who are not citizens of Canada, or in the reverse case the US). One way that the IRS (and HMRC) have done so is redefining common-law fraud and moneylaundering to include tax cheating: that's what enabled Switzerland to extradite Ian Leaf to Britain.

Let's see how far this goes. It's a pity when the low paid are made scapegoats for politicians' folly. Does anyone think that Lebanese-Americans are going to pay US income tax? http://www.professionalsaa.com/tax/A...%20Lebanon.htm Is the IRS going to go to Lebanon to investigate; are they going to go dumpster diving in Hezbollah country?

With the deficit in the US and the bill for social Security and Medicaid coming due for the "baby boomer" generation, I believe this is a real threat.

I pay my tax to the US, but I consider Switzerland my home. I am not an activist but I think an issue is that Americans Abroad do not have representation. We are not united and there is not a strong voice for issues that impact us. Senator Chuck Grassley a key member of taxation committee and Senate finance committee believes the Foreign earned income exclusion should be eliminated. This is a strong concern because he has slipped in tax changes before that have impacted Americans Abroad.

"Since 1976, Rep Chuck Grassley, Senate Finance committee has repeatedly introduced measures that increase the level of double taxation on American citizens living abroad, including retroactive tax hikes. Grassley was eventually able to attach an amendment to a unrelated piece of legislation that went into effect in 2006, which increased taxes on Americans abroad by targeting housing and living incentives paid by foreign employers and held them accountable for federal taxes, even though they did not currently reside in the United States."

That 2006 tax change that increased taxes on Americans abroad was slipped into another non tax related bill at the last minuted by representative Chuck Grassley. It was not even debated and almost no one in congress knew it was there. Grassley believes that American's Abroad are a major source of additional tax revenue and is a supporter for elimination of foreign earned income exclusion.
http://www.nytimes.com/2006/05/30/business/30tax.html

Anything is possible. You may also be assessed a penalty for not subscribing to a US health insurance plan even though you have a perfectly adequate Swiss one and even though the US plan might not pay for out-of-country medical care and evewn if it did that (unless you are a retired diplomat, for which there is a special Swiss exemption in certain cases http://www.eda.admin.ch/eda/fr/home/...ns/inshea.html ) it wouldn't exempt you from having to subscribe to a Mutuelle.

The end result would be to cut persons who are legally US citizens but whose entire lives are bound to another country and citizenship off from the United States. By and large US tax law is conceived without regard to consequences abroad, even border commuters to and from Canada, and only afterwards is thought given to sorting out hardship. My daughter's colleague in a Paris investment bank, himself a Belgian married to an American, gave up his green card last year because it was costing him $30,000 a year in tax, for which he got nothing. Of course now that he's a nonresident alien, any substantial financial transaction with his wife and children is subject to reporting on Form 3520...

I wonder how many Americans married to Swiss nationals, with their assets in Switzerland, arrange for their marital deduction assets to be put into a QDOT at death...

The extraterritorial overspill of US tax law could also soon mean that foreign banks refuse to accept US citizens or green card holders as customers. I guess for them it is back to cash and gold bullion.

Swiss Banks with US exposure are rejecting US customers who reside i the USA and cancelling mortgage offers. 2 buyers at the National de Montreux may lose their deposits b/c finance offers withdrawn by BCV (with no US presence). For UBS/Crédit Suisse one issue is having IRS seize assets out of US branch, while foreign law requires non-US branch to repay depositor: http://uniset.ca/other/cs6/68OR2d379.html

Foreign residents who are US persons can still get banking (after all UBS has a branch in the US Mission to the UN for American staff, and provides lease guarantee accounts for them). But such business is centralised in a few branches, notably Geneva for UBS.

"Accidental Americans" whose "functional nationality" is Swiss are treated like any other Swiss. On the other hand knowledgeable bankers would keep them abreast of the W-9 and QI pitfalls. While not sophisticated enough to address the ineligibility for mutual-fund status of local pension and investment vehicles. The new tax protocol should end the tax anomaly of Third Pillar -- but not relieve savers of form 3520 reporting (or perhaps a special form like simplified 8891, used for Canadian plans).

What I am anxious to see is how the IRS deals with innocent, naive, lower-middle-class earners who cannot possibly fullfil the foreign asset reporting forms properly and can't afford professional help. I've given volunteer assistance for years but as the reporting rules become more onerous and the penalties more draconian, I'm seeing refusals to comply and a psychic withdrawal from everything American.

My normal counsel had been to qualify for Medicare and minimal Social Security by contriving subject earnings for ten years. Some, today, just want to stay below the radar and "wait for the xenophobic penalty system to implode".

There is, after all, a difference to a US-resident with no real foreign connection who opens a sham business in Liechtenstein or the Caymans and spends untaxed trading profits and investment gains via a foreign-basede debit card (these transactions are all monitored trend-wise now; and all MasterCard and VISA transactions are converted to dollars en route to a third currency; SWIFT transactions are likewise accessible to Treasury.) The difference is to "accidental Americans" and permanent expatriates who have no US dollar assets.

Counseling such persons involves analysing whether they are genuinely free of actual or potential US assets and rights, and whether they are in the line of inheritance from or to a US person. Careless planning means that Stiftung or Anstalten assets can be 100% consumed by tax very easily.

I say this because the occasional (ignorant) demands for repeating the Carter elimination of the foreign earned income exclusion guarantees hardship, hostility, loss of allegiance, and unintended criminality.

One should look at why the Philippines abandoned the worldwide income taxation scheme imposed on its citizens (then US protégés) by the Income Tax Act of 1913. Following gross devaluation of the peso and the imposition of the highest rate of tax on simple domestic workers abroad, the tax on Filipino expats was abolished in 1999. It made no sense to keep a tax where everybody was (out of financial necessity) cheating.