Tax Reform Update: How Will Expats be Affected?

Tax Reform Update

Last week, the House passed a new tax bill, taking a step toward the complete transformation of the American tax code. The massive 429-page Tax Cuts and Jobs Act contains advisements for amending the current taxation procedures for both corporations and individuals. To save you from having to read the massive bill about tax reform yourself, our tax experts have reviewed it and compiled a summary of the issues that will likely affect expats.

What We Know About the House Bill:

The Alternative Minimum Tax (AMT) has been eliminated. This would benefit any expat who utilizes the Foreign Tax Credit. Higher earners would escape having to pay the AMT, while those not earning more than the income thresholds will at least be spared the extra paperwork. This is because the Foreign Tax Credit often triggers a requirement to calculate the AMT, even if no amount is due.

Expat reporting requirements will remain the same. Although the bulk of the bill is geared toward simplification of the tax code, expats will unfortunately still be expected to complete the same reports as before, including the Foreign Bank Account Report (FBAR), 8938, 5471, 8865, and any others as dictated by their individual situation.

The highest marginal rate was lowered from 39.6% to 35%, but only for those with income in excess of one million dollars. This will be a boon for high earning expats, as their tax rates will be reduced.

Certain reductions were repealed that could affect expats in particular situations. For instance, the moving expenses deduction, the alimony deduction, and the medical expenses deduction were repealed. Additionally, the mortgage interest deduction has been limited but not eliminated.

What Remains To Be Seen:

The Foreign Earned Income Exclusion and the Foreign Tax Credit (as it applies to individuals) were not addressed in the tax bill, which are two of the provisions that often are the most beneficial to expats. However, changes were made to the Foreign Tax Credit for corporations.

The Net Investment Income Tax (NIIT) was not addressed as it pertains to individuals, though a new NIIT was created for private universities. This tax applies to expats even if they reside in countries with tax treaties and is therefore a top concern for expat taxpayers.

Further, the House bill seems to embrace the territorialization of corporate income taxation as discussed in the initial framework. There could be real changes set in motion as to how multi-national corporations are taxed, but those may not be applicable to most individual taxpayers.

In a nutshell, the reform does not address the issues that affect expats the most. There are tweaks that will alter the tax rates for some, but expat tax preparation has not been fundamentally changed. Once the details of the bill are enumerated more clearly, we will know more about the future of expat taxes.

Have Questions About What the Reform Means for You?

We can help you navigate the proposed tax legislation or gear up to prepare next year’s taxes! Contact one of our experts today to have your specific questions answered.

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