Ah, the new year has begun. And while we are all eagerly awaiting the official opening of the tax season to file our 2013 expat tax returns, the IRS has announced the tax law changes that will take effect in 2014. We believe that knowledge is power–so here is a quick look at the 2014 changes that may affect the amount of money in YOUR pocket.
Foreign Earned Income Exclusion (FEIE)
The FEIE helps many expats reduce their taxable income. In 2013, you could deduct up to $97,600. And for the 2014 tax year, this number jumps again to $99,200. This not only impacts the income you can deduct, but also your deductions with the Foreign Housing Exclusion, as the calculation for that is directly tied to the FEIE.
Tax Rate for High-Income Earners
The top tax rate in 2014 remains a whopping 39.6%, which is the same as 2013. But this year there is a small adjustment and this tax bracket applies to single-filers earning more than $406,751 and married joint filers earning over $457,601. If you are using FEIE to offset your income, note that the tax rates apply to your adjusted income before you apply the FEIE.
Deductions and Exemptions
For those filing itemized deductions on their 2013 expat tax return, you will see your deductions phasing out when your income exceeds certain thresholds. Deductions will be reduced by 3% of your adjusted gross income in excess of $250,000 (single) and $300,000 (married filing jointly). Thankfully you can’t lose more than 80% of your deductions as a result of this limitation. For 2014, the thresholds are increased to $254,200 for single and $305,050 for married filing jointly.
Personal exemptions for 2013 are up $100 from last year for single and married filing jointly; $3800 and $3900 respectively. In 2014 those figures will increase by $50. Not significant, but at this point, every little bit helps!
Most Americans have heard of Obamacare (the Affordable Care Act), the major US healthcare initiative, but many don’t quite understand how it may impact them in 2014. For US expats, it is very likely it will not impact you while you reside abroad. If you qualify for FEIE or you are covered under a US-based expatriate health plan, you will be exempt from the provisions. For those who are abroad on shorter-term contracts or assignments, however, you may be affected. These individuals are sort of caught in the middle- you can’t enroll in a US insurance plan because you don’t reside there, but you are somehow required to adhere to Obamacare’s regulations nonetheless.
Beginning in 2014, individuals who don’t hold the ‘minimal essential coverage’ as defined by the Act, will be assessed a penalty tax on their income tax return. The 2014 taxes are as follows:
- 2014 – The GREATER of $95 per adult and $47.50 per child (up to $285 for the family) OR 1% of your family income (defined as income over and above the filing threshold)
Keep in mind that if you return to the US and enroll in a plan, you will only be taxed on the months you were without coverage. The tax is levied on a monthly basis and if you have acceptable coverage only one day out of a month, you are considered covered and no tax will be assessed for that month. For more information, this article provides a more thorough overview of Obamacare’s impact on US expats.
Expats working for a US company may still be responsible for Social Security and Medicare taxes. However, if you work for a foreign employer (and receive foreign earned income) in a country that has a Totalization agreement with the US, you will only pay these taxes in one country—which eliminates that dreaded dual-taxation.
If you are, indeed, required to pay Medicare taxes in the US, they are on the rise. For the 2014 tax year, you will pay 1.45% on up to $200,000 (single) and $250,000 (married filing jointly) of income. For income over those thresholds you will pay an additional .9%. For example, if you earned $250,000 as a single filer, you would pay 1.45% on $200,000, and 2.35% on $50,000 (1.45% + .9%).
If you work for a US company who takes taxes out of your paycheck, it is important to note that employers are not required to tell you they are going to increase your Medicare tax withholdings. However, by law they are required to withhold the additional tax in the first pay period in which you earn over the applicable threshold. If you weren’t aware of that, you might get quite a surprise in that next paycheck.
Say Hello to FATCA
The long-awaited arrival of FATCA is here. Foreign financial institutions and taxpayers must begin submitting account information this year, effective July 1. This has been a source of consistent irritation and anxiety for Americans abroad, as many banks and lenders are choosing to close their accounts or simply decline their request to open accounts in order to avoid FATCA hassles. Expect those frustrations and hassles to grow as the year goes on.
Need help with your 2013 expat tax return?
Understanding all of the tax changes can be a challenge. If you would like one of our expert CPA’s or IRS Enrolled Agents to prepare your US expat tax return, please contact us today. In addition to our expat tax preparation services, we also offer consultations for those who need advice on their particular tax situation.