Let me ask a stupid question

If an American working overseas can generally reduce their tax liability (through foreign earned income exclusions, credits, etc.) to avoid double-taxation, why do companies offer tax equalization packages to expats and cite tax as one of the largest expenses of sending Americans abroad for extended periods?  Seems to me that if so many of us can avoid paying twice, then certainly corporate America can do the same, right?

Well, it isn't as simple as that.  First of there are a lot of other countries then the UK, which has certain tax treaties in place for things like retirement income.

Foreign earned income credit is for the individual but doesn't necessarily release the US based employer paying their part of the taxes.

There are also people that earn over 80K US and so the foreign earned income credit may not cover the double tax.

Also, accountants that understand all the ins and outs costs money.  It can be VERY expensive to do on the small scale, where you only have a few expats that you are equalizing.  If you have hundreds and thousands, you might be lucky.  Even then, tax equalization is more of an artwork then a science.

As I dig deeper and deeper, your art versus science comment couldn't be more true.  I guess that it's just hard to envision accountants as 'tax-artists.' Back in the world of living/working in the USA, it seemed that science prevailed.  Turbo Tax is pretty much just a decision tree and a calculator.  Am I naive to think that all of the questions/treaty/domicile information couldn't just be loaded into a program that I can run scenarios on?

Makes me wonder how we ever got someone to the moon.

Well, I have used Turbo Tax to file my US tax returns from overseas.  But that was because my income was very straight forward and my deductions were very straight forward as far as the US was concerned.  A lot of it had to do with nativity.  I was happy that I got my tax burden down to only about 1K a year (between foreign earned income exclusions and mortgage interests deductions).  But that was when I was getting paid in the States.  I probably screwed something up, now that I know more.

On the other hand, you have all sorts of issues with the complexities, like do you delay your US taxes in order to fully account for the UK tax year?  The US wants to know about every foreign financial account you have an interest in, even if you are just an administrator for someone else.  And lots of other stuff... enough to make your head go "boom".

The problem with treaty/domicile/resident is that there are a lot of soft issues.  Like you can participate in a retirement scheme in the UK but you can also deal with your 401K in the US and they all have different tax implications.  As well as domiciled has to do with inheritance tax that could be good or bad depending on who is inheriting what.  TurboTax might be able to give you the "options" but they won't be able to tell you in each situation if you are making it better or worse, because it only understands the US laws, etc...  For the most part, UK folks don't even deal with the self assessment and just have their employer take out the taxes and they are done with it.

I like the concept of art vs science in taxation.  I think of it as a puzzle, where the pieces fit together in several patterns that are "right" (i.e., legally correct), but where some result in lower taxes than others.  Do you want a lower income tax now with exposure to higher inheritance tax?  Do you want to reduce your eventual inheritance tax down to zero, but have higher debts?  If giving all your money to your spouse would drop your income tax down to zero, would you do it or would you worry s/he might run off with it?  There's no way a programme can handle these kinds of meta-decisions; the art of taxation is this sort of planning rather than just chucking the year-end's figures into a machine.

The more money you make, the more pieces of the jigsaw puzzle there are to bounce around.  There are very sophisticated programmes to produce tax returns used by accountants, but realistically, they only do what you tell them to do - so it's the accountant who's making the decisions, not the programme.