On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act into Law. The act represents the largest and most comprehensive tax reform to the U.S. tax code in over thirty years and took effect January 1, 2018. (…)
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Summary of Changes
Tax Rates
The tax rates were lowered, until 2025. The number of income tax brackets remain at seven, but the income ranges in several brackets have been changed and each new bracket has lower rates. The top tax rate is lowered to 37% with the threshold rising to $600,000 from 39.6% and a threshold of $470,000 (married filing jointly). Its likely that only the highest earners will see a large impact from this change.
Deductions
Deductions were largely revamped and the standard deduction was doubled. Also, several “above-the-line” deductions were removed such as moving expenses and alimony payments. A summary is below.
- The mortgage interest deduction will now only be deductible on the first $750,000 and not the first $1,000,000. This will likely impact many filers whom own homes and have an excess of $750,000 indebtedness for their principle residence.
- Also, unreimbursed employee expenses, tax preparation fee’s, investment fee’s and other miscellaneous deductions have been removed.
- The deduction for state and local income tax, sales tax and property taxes will be capped at $10,000. This likely won’t impact most expats since they do not pay state and local (U.S.) taxes on their foreign income.
- Alimony paid to an ex-spouse will no longer be deductible.
- Moving expenses will no longer be deductible.
- Health care deductions will still be available.
Exemptions
The personal exemption deduction which is a standard amount you can deduct for each qualifying person in your household or whom you support has been removed entirely. However, the child tax credit has been expanded (from $1,000 to $2,000) with a higher phase-out which will likely offset the negative effects of no longer being able to deduct personal exemptions.
Alternative Minimum Tax
The 2018 exemption amount has been raised and there will be many fewer taxpayers within the AMT regime.
Mandatory Deemed Repatriation
This is the most devastating effect of tax reform for individuals living abroad. As the law is written, U.S. owners of controlled foreign corporations (GmbH, AG, etc.) are going to be subject to the mandatory deemed repatriation. Simply speaking this means that small business owners whom collectively have ownership in which 51% (or more) of the owners are U.S. taxpayers (citizens or green card holders) will be subject to a tax on their retained earnings from 1986 to 2017. If you own a foreign company you will need to pay tax on the accumulated earnings from your company from previous year’s even though you did not receive that money personally. The tax rate will be 15.5% for cash and 8% for hard assets. However, the final calculation will likely be much more complicated than just applying 15.5% or 8% to your cash equivalents or hard assets at year end. The foreign tax credit allowed will be approximately 45% and 23% of the taxes paid which means that clients in Switzerland will have a significant tax liability related to deemed repatriation. Also, shareholders can elect to pay the tax liability over a period up to 8 years. Please note that this is the most uncertain part of the tax reform bill and the IRS will need to issue guidelines on who this applies and how it applies exactly.
Important Dates in 2018
January 17 – Deadline for 4th quarterly estimated tax payment for 2017.
April 17 – Due date for 2017 tax returns for taxpayers living in the U.S. Tax payments are due for ALL U.S. taxpayers. Deadline for foreign bank account reports for taxpayers living in the U.S.
June 15 – Due date for 2017 tax returns and to pay any remaining tax due for U.S. taxpayers living abroad. Deadline for foreign bank account reports for taxpayers living abroad.
October 15 – Final deadline to file individual tax returns and FBAR’s for 2017.
October 16 – Start planning for next year!
Personal Commentary
The tax reform act that was passed did not contain the provisions many expats had hoped would be included. This included the following:
Citizen based taxation:
while calls were strong to end this unique system (Eritrea being the only other country which has such a system) neither the House or Senate proposals looked to change to a (hybrid) territorial system which was adopted for corporations.
Net Investment Income Tax:
The 3.8% tax on certain net investment income of individuals remains in the tax code.
Thinking of renouncing your citizenship?
Many expat groups such as American Citizens Abroad, FAWCO and American Expatriates (Facebook) say they made huge progress and there is an end of CBT in sight. What do you think?
I believe this was our closest chance to having the citizenship based taxation (CBT) system repealed in recent history. Since major tax reform only occurs every thirty years it is unlikely (in my opinion) that we will get this close to a repeal of CBT in the next ten to twenty years (if ever). While many groups such as American Citizens Abroad, FAWCO and American Expatriates did lobby on behalf of U.S. citizens living abroad and the issue did gain some (limited) exposure to our fellow citizens and politicians, the fact is that not a single member or committee in Congress or the Senate proposed a territorial based system for individuals. Kevin Brady (the Republican Chairman of the House Ways and Means Committee), which drafted the tax reform bill, said lawmakers considered the lobbying by Republicans Overseas and “they have made the case” to change to a territorial or residency based system. Also, “lawmakers representing that area of the tax code have made that case” that citizenship based taxation would not be repealed. Based on those comments it is clear that residency based taxation was reviewed at the highest level by those responsible for tax reform but it never made it to the table to be reviewed or “scored” for its revenue effects. Also, in the early part of 2017 I was in touch with several politicians, attorneys and other groups whom had their fingers on the pulse of U.S. tax reform and to my complete surprise they said it was not included in any of the proposals. I found this strange as everything I read from the expat groups said differently and it didn’t make any sense to me why they would change it for corporations and not for individuals. However, looking back it is clear that from the beginning it was only corporate taxation which had the support to be changed to a territorial based system.
What should we do?
Keep up the good fight! Stay involved! Write your political representatives in Congress and the Senate and let them know that you are unhappy and being treated unfairly abroad. Stay engaged and get more involved with the expat organizations such as American Citizens Abroad, FAWCO and American Expatriates. While residency based taxation did not get on the table in front of Congress or the Senate it was the first time where the Chairman of the House Ways and Means Committee did acknowledge it. This is a step in the right direction but there is still a lot of work to do!
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