Americans living in Bermuda will see their tax costs rise dramatically as a result of tax legislation US president George W. Bush is expected to sign tomorrow.

The election year tax measure aims to cut US taxes by $70 billion over the next decade by extending low tax rates on dividends and most capital gains until 2010 and preventing 15 million households from being hit by the alternative minimum tax.

However the 4.1 million Americans ? excluding military personnel and foreign service officers ? living outside the United States will bear a portion of those cuts via complicated tax rules which will result in them paying $2.1 billion more in taxes over the next decade.

Currently, US expatriates are exempted from paying US taxes on the first $80,000 of foreign earned income. The new legislation would increase the exemption by $2,400 to $82,400 as of tax year 2006. However, US citizens will see the tax exemption on foreign housing expenses significantly reduced.

Currently, American expatriates can deduct virtually all of their housing expenses which is a benefit that has helped attract Americans to live in high priced Bermuda. The new rules however cap the housing deduction at $11,536 although Treasury has the ability to adjust the housing deduction when countries have abnormally high costs of living relative to the US.

Expatriates will also be subject to higher tax brackets so a single taxpayer or married filing jointly taxpayers who maximise the foreign earned income exclusion and housing deduction ? approximately $93,000 ? would see additional tax costs of $20,806 and $16,811 respectively, said PricewaterhouseCoopers Bermuda tax advisor Rick Irvine. Republican Senator Charles Grassley, chairman of the Senate Finance Committee, who was a key player in an unsuccessful bid to eliminate the foreign income and housing deduction for expatriates in 2003, helped move the last minute modifications to the 2006 tax legislation through Congress.

In 2003, US business groups successfully lobbied against the plan to eliminate the deductions on the grounds it would make it prohibitively expensive to promote American products and ideas.

This time around however the provision related to US workers abroad was added late last week with no warning and therefore little time for opposition.

?This came out of nowhere, this was basically thrown in as a revenue raiser at the last minute without many people having opportunity to comment on it,? said Mr. Irvine. While passage will drive up personal tax costs making it less attractive for American expatriates to work outside of the US, Mr. Irvine said that in Bermuda it is likely that the greatest impact will be on local or exempt companies who employ Americans. Since most Americans here are employed based upon some type of equalisation packages ? which means the tax costs are accounted for in their salaries ? all or a portion of the cost will likely be passed onto the foreign employers driving up the cost of doing business.

Given the increasing cost, Mr. Irvine said the tax changes could in fact make US workers less attractive to non-US companies and encourage them to look for employees who hail from jurisdictions where taxes are not an issue. The United States is the only developed country in the world that continues to impose worldwide income tax on its citizens working overseas.

?It makes the US worker less attractive to a non-US company because it is a real cost of someone from America being here,? said Mr. Irvine.