Potential Implications of IRS Changes to Foreign Tax Credits

Regulatory changes to the Foreign Tax Credit have recently been proposed by the IRS. Because these changes – part of the ever-evolving Tax Cuts and Jobs Act (TCJA) of 2017 – concern both foreign businesses and some foreign individuals, we’re taking a closer look to share with you everything expats should know about the proposed changes at hand.

Why are Changes Being Considered?

The sweeping legislation enacted as part of the TCJA affected several sections of the US tax code. One result is that changes were made to the way in which the US taxes certain foreign activities.

What Changed Previously?

As a result of the TCJA, new changes at the beginning of the 2018 tax year include:

  • Provisions that include a dividends-received deduction for dividends from foreign subsidiaries
  • The addition of Global Intangible Low-Taxed Income (“GILTI”) rules that subject certain foreign earnings to US taxation
  • Disregarding certain expenses related to income eligible for the dividends-received deduction, and repealing the use of the fair market value (“FMV”) method of allocating interest expense

What is Being Proposed Now?

The proposed regulations recently issued are an attempt by the IRS to clarify the changes first introduced by the TCJA, and include:

  • Addressing the allocation and apportionment of deductions and adjustments pertaining to foreign tax credit limitations
  • Transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts, and for the carryover and carryback of unused foreign taxes
  • The addition of separate categories of various tax credit limitations, including revised look-through rules
  • The calculation of the exception from subpart F income for high-taxed income
  • The determination of deemed paid credits

What Does the Mean for US Expats?

While these proposed changes are just that, proposals – the IRS has asked for comments from the industry which is generally a major step taken just prior to final rules being drafted and implemented. While US expats with foreign business interests are potentially those who will be primarily affected, the way the IRS ultimately decides to treat such tax credits could have far-reaching influence on how foreign tax credits are treated and utilized by all US expats.

We’re monitoring these changes closely and will share breaking news and tax updates as they come out.

Want to Know More About How the Foreign Tax Credit Changes Could Affect You?

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