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Summary of Changes for U.S. Expats after The Trump Tax Reform

The Tax Cuts and Jobs Act (TCJA), also known as the Trump Tax Reform, made widespread changes to the Internal Revenue Code which will affect your 2018 tax return. Here are some of the more common changes that could affect your tax return.

Updates on Foreign Earned Income Exclusion (FEIE)

US citizens living and working overseas qualify for the FEIE as they meet the bona-fide residency test and therefore the first $104,100 (2018 exclusion cap) of income earned in the foreign jurisdiction is excluded from US taxation.

Foreign Real Estate Tax Deduction

After the tax tax reform, foreign real estate taxes are not deductible as an itemized deduction as posted on the Journal of Accountancy. Nevertheless, some taxpayers living in a foreign residence and earning wages abroad may be able to claim an exclusion from gross income under the housing exclusion, but such taxes must come from a residential property that they live in permanently. Considering the foreign real estate taxes paid as reasonable expenses attributable to the residential housing, they are includible on form 2555, Foreign Earned Income. Holding the foreign property at your personal name will make it easy to report on your personal return…

Tax Reform For U.S. Citizens with Foreign Companies 

U.S. citizens and U.S. Expats who own a foreign company with over 10% ownership are in for a big surprise and a higher tax rate. After President Trump’s tax reform signed into law in December 2017, two new taxes were created for U.S.citizens holding profit in foreign companies or offshore: the tax on accumulated profits or repatriation tax and the tax on foreign profits or GILTI: Global Intangible Low-taxed Income. See below for more details.

Repatriation Tax

This tax applies to the accumulated profits from offshore and foreign companies owed by U.S. citizens with at least 10% stock holdings. If the profits remained with the foreign company, the U.S. owner must pay a 15.5% one-time tax that should be divided up to 8 yearly installments:

  • 8% of the tax liability in current year, second, third, fourth and fifth years
  • 15% of the current tax liability in the sixth year
  • 20% of the current tax liability in the seventh year
  • 25% of the current tax liability in the eight year

The tax first installment was due on April 15, 2018, it was delay until next year FOR U.S. EXPATS only. There is hope the law will be amended to exclude U.S. Expats who own small foreign companies. The deemed repatriation tax was designed…

Global Intangible Low-taxed Income (GILTI)

U.S. shareholders of CFC’s, also known as controlled foreign corporations now have to include GILTI into their gross income for that tax year. This is for all tax years of foreign corporations after December 31,2017 and tax years for all U.S. shareholders that fall within the foreign corporations’ year-end for tax purposes. 

So basically you can look at it like this, the net CFC tested income will be the aggregate tested income minus the aggregate tangible income return.  A deemed tangible income return is the QBAI multiplied by 10%.  But the shareholder does not stop there with their calculation.  The GILTI inclusion amount is then calculated…

Changes Affecting Most Taxpayers

Personal Exemption Rate is Reduced to Zero

Prior to 2018, a personal exemption amount of over $4,000 per person could be used to reduce taxable income. This personal exemption amount has been reduced to zero for 2018 through 2025.

Standard Deduction Increase

The standard deduction for most returns has been almost doubled over the amount that was allowed last year. The deduction for Single and Married Filing Separately returns is $12,000, Head of Household returns is $18,000, and Married Filing Jointly and Qualifying Widow(er) returns is $24,000. The additional amounts for being over 65 or blind will still be allowed. Because of this change, this year many taxpayers will find that claiming the standard deduction instead of itemizing deductions will give them a lower tax.

SSN Required for Child Tax Credit (CTC)

An SSN is now required to claim CTC. No credit will be allowed for any qualifying child unless the taxpayer provides that child’s SSN or a Work Authorization Permit from Homeland Security. Prior to this year, CTC could be claimed for a child who had an ITIN.

Increase in CTC

The Child Tax Credit has been increased from $1,000 to $2,000 for 2018. The modified adjusted gross income threshold where the credit is phased out is $400,000 for joint filers and $200,000 for all others (up from $230,000 and $115,000, respectively), so many more taxpayers will be able to claim this credit. The maximum age for a child eligible for the credit remains 16 (at the end of the tax year).

New Credit for Other Dependents (ODC)

Beginning in 2018, a new $500 credit is available for dependents who do not qualify for the CTC. Most dependents listed on the tax return who do not qualify for CTC will now qualify for the smaller ODC, including parents who are claimed as dependents.

Changes To Itemized Deductions

Medical

For taxpayers of all ages, the deduction threshold for medical expenses is 7.5% of AGI.

State and Local Taxes (SALT)

There is a cap on the deduction for state and local taxes paid. The deduction for state and local income taxes, real estate taxes, and personal property taxes combined is limited to $10,000 per return, ($5,000 for Married Filing Separately returns).

Limitation on Deduction for Home Mortgage Interest

You may be able to deduct mortgage interest only on the first $750,000 ($375,000 if married filing separately) of indebtedness. Higher limitations apply if you are deducting mortgage interest from indebtedness incurred on or before December 15, 2017.

No Deduction for Home Equity Loan Interest

No matter when the indebtedness was incurred, you can no longer deduct the interest paid on a home equity loan unless loan proceeds were used to buy, build, or improve your home.

Limitation on the Deduction for Casualty and Theft Losses

You can no longer deduct a personal casualty or theft loss unless the loss occurred in a federally declared disaster area.

Deductions for Employee Business Expenses Eliminated

One of the biggest changes under this new law was the elimination of the deduction for un-reimbursed employee business expenses beginning with 2018 tax returns. This effectively means that employees will no longer be able to offset their taxable income by common business expenses they incur. (This change under the TCJA does not affect self-employed individuals.)

Form 2106, Employee Business Expenses, is now to be used only for certain categories of employee:

  • Qualified performing artists
  • Fee-based state or local government officials
  • Armed forces reservists
  • Employees with impairment-related work expenses

Standard Mileage Rate

The 2018 standard mileage rate is 54.5 cents per mile for business miles.

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Additional Changes

Moving Expenses

Beginning January 1, 2018, moving expenses cannot be deducted by most people. Active duty members of the U.S. Armed Forces who move pursuant to a military order and incident to a permanent change of station can still deduct moving expenses and exclude reimbursed moving expenses. Additionally, most taxpayers cannot exclude employer reimbursements for moving expenses from income.

Qualified Business Income Deduction (QBID)

A new deduction for qualified business income from a trade or business, including sole proprietorship, S corporations, or partnerships, is available on Form 1040. QBI doesn’t include W-2 wages. The deduction is subject to many limitations, such as income level and type of business. If you have QBI, you can reduce your taxable income, whether you itemize deductions or claim the standard deduction. In its simplest form, if adjusted gross income less itemized or standard deduction is under $157,500 ($315,000 for joint filers) you can deduct 20% of your QBI from income before computing your tax.

Alternative Minimum Tax (AMT)

Fewer taxpayers will be subject to AMT due to increased exemption amounts and phaseout thresholds.

Depreciation Changes

There are numerous changes to how depreciation can be claimed on assets purchased during 2018. Many assets can be entirely written off in 2018 rather than being depreciated over several years. Accelerated Depreciation Changes

Healthcare Mandate Penalty Repealed for 2019

Beginning in 2019, individuals who fail to carry health insurance will no longer be required to pay an individual shared responsibility payment with their tax return.

 

We look forward to helping you get the most benefit from these tax law changes. Please contact us for more information, in FAS CPA & Consultants are ready to assist you with all of your offshore tax matters. You can call us or email at support@fascpaconsultants.com and request a free consultation that will answer your most pressing tax questions.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized In Tax Planning, International Business, Wealth Management and Offshore Banking. You can email him to fa@fascpaconsultants.com or follow us on Facebook : FAS CPA & Consultants.

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