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POSSIBLE Reduction on the Tax Alert

May 17th, 2003

I have been told that there is a possible ameliorating factor in the repeal of the foreign earned income exclusion. Apparently, there is another layer of protection, the Foreign Tax Credit.

I do not understand it fully yet, but it seems to be a formula which allows foreign taxes (paid to Japan) to be deducted from your net U.S. taxes. In effect, they would tax you in the U.S. only if the taxes you pay to the host country are lesser than your U.S. taxes.

Instead of the new changes adding ten thousand dollars a year to your tax bill, it may only be several hundred dollars.

I have yet to confirm this completely. My father and I ran it through his TurboTax program, and we got my taxes due down to about $400, but then we ran into some problems with the software. I am not certain if the tax credit can completely erase your U.S. tax debt if the foreign tax is greater, or if a minimum alternative tax applies.

I also don’t know if the tax credit only applies to national income tax, or to other taxes as well. The forms I have read seem to talk about “income-related” taxes being creditable, but does that include prefecture and city taxes? How about National Health Insurance, which is tied to your income?

I will try to contact the IRS office at the embassy tomorrow and see what they say.

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