On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act cutting corporate tax rates from 35% to 21% and dropping the top individual rate from 39.6% to 37%.
This is the first tax overhaul in more than 30 years, which went into effect January 1, 2018. The overhaul cuts income tax rates, doubles the standard deduction, and eliminates personal exemptions. Corporate cuts are permanent, yet the individual changes expire at the end of 2025. Expats and dual citizens have been fighting for years for reform the burdensome policies affecting Americans overseas, and sadly, those reforms will not be brought about by this bill. Many of the reporting requirements most affecting Americans overseas – like the Foreign Earned Income Exclusion and the Foreign Tax Credit and FATCA – remain untouched. Many expat business owners will see tax increases and complicating factors in 2018.
What’s in This Tax Overhaul?
Following is a summary of the major changes we can expect on the individual level. This is not intended to be a full list, but highlights the areas of the tax code that impacts most taxpayers. Specific details, phase-outs, thresholds, rules, etc. are still being worked on, so stay informed.
MOST CHANGES ARE EFFECTIVE IN 2018 AND DO NOT IMPACT YOUR 2017 TAX RETURN
Changes in the Tax Cuts and Jobs Act affecting expats specifically:
1) Taxpayers living abroad will continue to receive the automatic 2-month extension to file and pay taxes. 2017 tax returns, associated forms, and FBARs are due June 15th, 2018.
3) Deductions for real estate taxes on real foreign properties are eliminated.
4) Expats are not subject to the reduced taxation of “passthrough” entities. Passthrough entity profits will be taxed on the individual level for expat business owners.
5) Net Investment Tax (NIT) cannot be reduced by Foreign Tax Credits (unchanged from previous years).
6) Moving expenses are no longer deductible.
7) Inflation calculation has changed, which means the FEIE will grow at a slower rate, increasing only fractionally each year.
8) Corporate taxes have changed significantly. Expats who are owners of Controlled Foreign Corporations (CFC), will be subject to a one-time “deemed repatriation” tax of 15.5% on any previously untaxed profits, 8% for illiquid assets. Taxpayers may have the option to pay this tax over eight years. If you are a shareholder of a B.V. here in The Netherlands, this affects you. Any undistributed profits will be considered to have been brought back to the U.S., and the repatriation tax will apply.
9) Additional forms required to be filed by many expats remain unchanged. These include The Foreign Bank Account Report (also known as FinCEN 114), the FATCA requirements, Form 8938 (Statement of Foreign Financial Assets), Form 5471 (Report of Certain Foreign Corporations), and Form 3520 (Report of Foreign Trusts, including pensions), and more depending on your situation.
10) As one last kick-to-the-gut, tax preparation fees, which can often be exacerbating for expats, will no longer be deductible.
For All Individual Filers:
1) The Tax Cuts and Jobs Act allows for lower individual rates – our previous rates were 10%, 15% 25%, 28%, 33%, 35% and 39.6%.
New rates, including how much income would apply to them:
• 10% (income up to $9,525 for individuals; up to $19,050 for married filing jointly – MFJ)
• 12% (over $9,525 to $38,700; over $19,050 to $77,400 for MFJ)
• 22% (over $38,700 to $82,500; over $77,400 to $165,000 for MFJ)
• 32% (over $157,500 to $200,000; over $315,000 to $400,000 for MFJ)
• 35% (over $200,000 to $500,000; over $400,000 to $600,000 for MFJ)
• 37% (over $500,000; over $600,000 for MFJ)
2) Standard Deduction has nearly doubled greatly reducing the number of taxpayers who will choose to itemize. The bill increases for single filers to $12,000, up from $6,350. For married filing jointly, the new standard deduction increases to $24,000, up from $12,700.
3) No more Personal Exemptions. Previously, you received $4,050 for yourself, your spouse and each dependent. The tax bill eliminates this exemption.
4) State and local tax deduction (SALT). Under the old law, there was no limitation for the itemized deduction of your state and local property taxes along with income or sales taxes. The new law states that the SALT taxes remain as an itemized deduction but caps them at $10,000. Those taxpayers living in states with high income and property taxes will be unlikely to deduct all their SALT taxes. If you rushed to pay property taxes before year-end, the taxes must have been already assessed in order to claim the deduction in 2017.
5) Mortgage interest deduction. If you take out a new mortgage on a first or second home, you will only be allowed to deduct the interest on debt up to $750,000. The bill will no longer allow for a deduction on home equity loans. Previously, the limit was mortgages up to $1,000,000 plus up to $100,000 on home equity loans. This may mean digging up old paperwork to determine the piece of existing loans that is deductible, and working out complicated basis calculations.
6) Alternative Minimum Tax (Alt Min). While we were all hoping that Alt Min would be eliminated, it was only eliminated for corporations. The income exemption levels are being raised to $70,300 for singles (previously $54,300) and $109,400 for married couples (previously $84,500). With the increased levels, the number of filers hit should be reduced.
7) Child tax credit increased. Under the new law, the credit will be doubled to $2,000 for children under 17. High income earners will now be eligible as the income threshold would be raised from $75,000 single to $200,000 and for married couples $110,000 will increase to $400,000. The first $1,000 will continue to be refundable along with $400 of the additional $1,000. This means if you have no tax liability, you may be eligible to receive a refund of up to $1,400 per child. This credit is available to taxpayers living abroad.
8) New credit for non-child dependents. The law allows parents a $500 credit for each non-child dependent they are supporting. This includes a child 17 or older, an elderly parent or an adult child with a disability.
9) Mandate to buy health insurance. While the Affordable Care Act, commonly referred to as “Obamacare” has not been repealed, there will no longer be a penalty for not buying insurance.
Note: The IRS is ENFORCING the penalty for 2017. This repeal does not affect last year. Many taxpayers abroad qualify for an exemption from this requirement.
For Business Filers:
This subject is beyond the scope of this article, but a couple things should be pointed out in the Tax Cuts and Jobs Act:
1) The corporate tax rate has been slashed from 35% to 21%.
2) For owners, partners, and shareholders of U.S. based S-corporations, LLCs and partnerships, the tax burden would be lowered by a 20% deduction. There are some exclusions and complicated calculations which may apply.
Taxpayers living abroad always have complicating factors in their tax situation. This year promises to be extra complicated. Be sure to seek the advice of a trusted tax expert well in advance of the tax deadline to help navigate the waters of expat tax issues and this year’s tax reform.
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