Tax Reform and Expats – A Brief Look Ahead
Ed note: H&R Block Expat Tax Services is a specialized team of tax attorneys, CPAs and enrolled agents whose singular focus is preparing taxes for Americans living abroad. Remember that U.S. tax reporting for expats is complex and specific to each person’s situation.
Tax reform has been everywhere in US news lately, as the recent bill represents the biggest tax law change in over thirty years. While you may have heard rumors of changing taxation based on residency rather than citizenship, this was in reality only a focus on the corporate tax side of things and does not affect most individuals. Although there are not any individual provisions targeting expats specifically, many of the changes will still have an impact for those living overseas. Here is just a highlight of some of the Trump Tax Plan and Expat changes happening in 2018.
Lower Income Tax Rates
Probably the most well-known of the changes, the tax reform bill promises to keep the current seven tax brackets for individuals, but lower the tax rates for everyone. The top rate would decrease from 39.6% to 37%, while also increasing the amount of taxable income needed to reach that top rate in most situations. The other six brackets would have a similar decrease, with the lowest bracket remaining at 10%.
For example, a family making $90,000 of taxable income or a single filer making $70,000 will each see their highest marginal rate go from the 25% tax bracket to 22%.
Deductions and Exemptions
One of the biggest Expat tax changes is the elimination of the moving expense deduction (except for members of the military). With this change many businesses will now include moving expenses they pay as a benefit as taxable income since the ability for the employer to exclude these amounts no longer exists. This may result in a larger tax bill in years you relocate for employment purposes.
Under current law, an exemption of $4,050 is deducted on a tax return for each person claimed as a dependent on the return. However, under the new law these exemptions are eliminated. In order to make up for this, the standard deduction will be almost doubled (for example, the standard deduction of a single filer would increase from $6,350 under current law to $12,000 under the new law).
This increased standard deduction may lead to a more beneficial tax outcome for expats as itemizing while living and working overseas is not as common as it is in the U.S. Additionally, even for those that did itemize in prior years, the increase in the standard deduction may be more advantageous. For example, many expats itemized in order to deduct real property taxes and mortgage interest, but many did not receive the benefit of U.S. state and local income tax payments made during the year.
Under the new regulations, the mortgage interest deduction would remain (although it would be limited to only the first $750,000 of new mortgage debt). Taxpayers are also still allowed to deduct up to $10,000 of real property tax and/or state and local income taxes. However, expats will no longer be able to deduct foreign real property taxes under the new rules. With the larger standard deduction, a couple filing jointly will now need over $24,000 of applicable deductions for itemizing to be more beneficial, a stretch if the mortgage interest deduction is all you have to work with.
For taxpayers with children, the amount of the child tax credit will double from $1,000 to $2,000 per child, with the potential for up to $1,400 of the amount to be claimed as a refundable credit. Although the child tax credit traditionally started to phase out at $75,000 of income for a single taxpayer, this amount will now increase to $200,000 ($400,000 if filing jointly). This could mean claiming a credit for taxes paid to another country may lead to a better result than excluding your income, as you are unable to claim the refundable portion of the credit when using the income exclusion.
For example, a couple living in the UK with two dependents under 17 and income of $150,000 USD (who uses the foreign tax credit) would not receive the additional child tax credit in 2017 as their combined AGI is higher than the phaseout. However, the same couple in 2018 would receive a refund of $2,800, assuming that their tax liability is $0 before the child tax credit. Alternatively, if either one of them claimed the income exclusion instead, they would be precluded from receiving any of the $2,800 potential refund.
For an expanded discussion on the changes around the Tax Reform and Expats, please refer to this H&R Block article.
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