The Tax Cuts and Jobs Act fully transformed the tax code and, in many ways, made it much simpler. But for those Americans living abroad, for whom taxes have always been complicated, has anything changed? Does the Tax Cuts and Jobs Act make it easier for individuals and small business owners living abroad to file? Here’s what expats need to know about tax reform.
- Provisions preventing double taxation remain.
The Foreign Earned Income Exclusion and Foreign Tax Credit, two very important tax code provisions for expats, remain in place. These provisions help expats avoid double taxation, so their inclusion in the tax reform is a welcome relief. However, the amount of the Foreign Earned Income Exclusion that can be excluded from taxes each year is now indexed to inflation. Inflation calculations have changed (see below), which unfortunately means taxes will increase over time.
- Inflation calculations have changed.
The Tax Cuts and Jobs Act changed the measure of inflation from the “regular consumer price index” to the “chained consumer price index”. A lower rate of inflation will be used to calculate tax figures, and that means taxes will gradually increase.
- Reporting requirements are generally the same.
The burdensome reporting requirements expats are required to submit along with their tax returns remain in place. 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). Banking abroad may continue to be difficult, and onerous penalties will exist for those who fail to file taxes.
- Corporate taxes have significantly changed.
The tax reform bill has transitioned the U.S. to a territorial system of corporate taxation. Previously, the U.S. operated using worldwide taxation, meaning that corporations had to pay taxes on the income they earned abroad. The change in systems will affect expats who own corporations outside the U.S. because they will face a one-time deemed repatriation tax of 15.5% on any previously untaxed overseas profits. This will ensure taxes are paid as the U.S. transitions to that territorial system.
- Fewer tax brackets, fewer deductions.
Tax brackets are fewer and larger now, which means many taxpayers (expats too) will find themselves in a lower bracket than they were previously. The standard deduction has also nearly doubled. That’s the good news. But for anyone considering a move to or from the U.S., you’ll need to know that deductions are fewer (the moving deduction, for example, has been completely eliminated). Now is a great time to speak with your accountant regarding any upcoming moves.
Net Investment Income Tax was not eliminated and will still impact expats.
So, a mixed tax bag for expats. Living and/or owning a business abroad still has its challenges. Tax reform hasn’t solved all the issues. Be sure you’re working with a qualified CPA as you navigate international waters.
What challenges do you face as an American living or working abroad? Submit your questions and comments below.