Tax Reform and Expats – A Brief Look
Editor’s Notes: This article was originally published on February 13, 2018.
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Tax reform has been everywhere in US news lately, as the 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 in tax reform targeting expats specifically, many of the changes will still have an impact for those living overseas. Here are highlights of just some of the tax bill changes for expats happening in 2018.
Tax Bill: Expats Other Taxpayers Can Expect Lower Income Tax Rates
Probably the most well-known of the changes, the tax reform bill keeps seven tax brackets, but lowers the tax rates for everyone and increases the width of each bracket. This means more income is taxed at new lower rates. The top rate decreases from 39.6% to 37%, while the lowest rate remains at 10%.
For example, a family with $90,000 of taxable income or a single filer with $70,000 will each see their highest marginal rate go from the 25% tax bracket to 22%.
Expats and Tax Reform: Deductions and Exemptions
One of the biggest tax reform changes for expats is the elimination of the moving expense deduction (except for members of the military on active duty). With this change, many businesses must now include moving expenses they pay in your taxable compensation 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. Also, you cannot deduct out-of-pocket moving expenses.
Under pre-tax reform law, an exemption amount ($4,050 in 2017) was deducted on the tax return for the taxpayer, spouse, and each person claimed as a dependent on the return. However, under the new law these exemptions are eliminated or, more precisely, the exemption amount is $0. 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 prior 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 often not as common as it is in the U.S. Additionally, even for those who 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 tax bill, expats could still take advantage of the mortgage interest deduction (although for mortgages taken out after December 15, 2017, it would be limited to only the interest on the first $750,000 of new mortgage debt). Taxpayers are also still allowed to deduct up to $10,000 of state and local taxes, which may include income or sales tax, real property tax, and personal property tax. 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, which could be a stretch if the mortgage interest deduction is all you have to work with.
Tax Reform and Expats: Family Credits
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 previously started to phase out at $75,000 of adjusted gross income for a single taxpayer ($110,000 for joint filers), this amount will now increase to $200,000 ($400,000 for joint filers).
Taxpayers who claim the foreign income exclusion (by filing Form 2555 or Form 2555-EZ), or who claim the foreign housing exclusion or deduction, cannot claim the refundable portion of the child tax credit. However, the doubling of the child tax credit now means that you may qualify for the full child tax credit even if you exclude foreign income and without concern about the refundable portion restriction.
For an expanded discussion on the changes around the tax reform for expats and other taxpayers, please refer to H&R Block’s overview of the Tax Cuts and Jobs Act.
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