Calendar year 2009 will likely see massive tax law changes that could negatively impact United States citizens living and working outside the United States.

For calendar 2008, expatriates will experience a small tax decrease because of an increase in the foreign earned income exclusion and the foreign housing exclusion.

Foreign Earned Income Exclusion

The foreign earned income exclusion , which was $85,700 in 2007, will increase to a maximum amount of $87,600 for calendar year 2008.

Foreign Housing Exclusion

In 2007, the maximum housing cost amount that could be excluded for an individual residing in Bermuda was $72,000. The foreign housing exclusion is actually a two-step computation. The maximum housing cost amount actually differs by country and is subject to periodic increases or decreases that are issued by the Department of the Treasury. Once the maximum housing cost allowable is determined for a country, it must then be reduced by a base housing amount which in 2007 was $13,712. Thus, for an individual residing in Bermuda in 2007, the maximum housing exclusion would have been $72,000 less $13,712 or $58,288.

For calendar year 2008, the Department of the Treasury has made two changes to this formula. The maximum housing cost for an individual residing in Bermuda in 2008 is now $90,000 and the base housing amount has been changed to $14,016. Thus, the maximum housing exclusion for 2008 will be $90,000 less $14,016 or $75,984.

Tax Planning and Dependent Children

In 2008, a $3,500 deduction can be claimed for each dependent. A dependent is defined as a child under age 19, or under age 24 and a full time student as of December 31 of 2008. Children who have income and who are claimed as a dependent on their parents return cannot take advantage of the $3,500 personal exemption on their own tax return.

However, once the parents' income exceeds $239,950, dependent deductions begin to phase out, and are fully phased out when the parents' income exceeds $365,000. Hence, for taxpayers with income in excess of $365,000, there was no tax benefit for claiming a child as a dependent.

Taxpayers in this situation who were receiving no benefit in claiming their child as a dependent stopped claiming their child on their return as a dependent so that the child could take advantage of the personal exemption on their own return.

Recent legislation now requires a parent who has a qualifying child as of 2009 to claim the child on the parents' tax return even though the parents may not receive a tax benefit from doing so.

Year-end gift giving

Individuals can give up to $12,000, or $24,000 if your spouse agrees, to children, grandchildren, parents, or brothers and sisters without owing gift tax. This limitation is applicable on a per recipient basis. So, if you have four children and your spouse agrees, you can give $24,000 per child or $96,000 in total, without owing gift tax.

You also will not owe any gift tax on gifts in excess of $12,000 as long as you do not use up your $1,000,000 lifetime exclusion.

College Savings Accounts

An individual can donate up to $60,000 to a college savings plan, or $120,000 if the spouse agrees, without incurring gift tax. The recipient is not subject to income tax for payments from a college savings plan for tuition, books, and other related school expenses.

Capital Gains and Losses

Many individuals who sell stocks rely on their brokers to report the tax basis of the securities that were sold. Currently, very few brokers provide this service to their clients. With individuals switching brokers, and with the consolidation and or bankruptcy of brokers, the tax basis in a security sold in a majority of cases is unknown to the seller. The most recurring problem that we encounter in preparing an individual's tax return is establishing the date of purchase and the cost basis of the security that was sold.

Commencing in 2010, the Internal Revenue Service will require brokers to report the tax basis of securities sold by customers. Unfortunately, this will only affect securities purchased after 2010. Earlier purchases will remain the responsibility of the taxpayer for establishing the purchase date and cost basis.

Student Loan Forgiveness

Given the current economic crisis, lenders have been approaching former students offering to discount the remaining debt in return for a lump sum payment. For example, if the remaining loan is $25,000, the lender might agree to accept $20,00 as payment in full. The debtor should be aware that the $5,000 is not a tax free gift and is to be treated as taxable income from the lender.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com