Top Updates for Your US Expatriate Taxes in 2018

Top Updates for US Expatriate Taxes in 2018

It’s that time of year again – the holiday decorations are being dusted off and festivities are being planned. As the year comes to a close, you are likely looking forward to what lies ahead. Where will you be when the ball drops in Times Square? Regardless of your location, no doubt we will all raise our glasses at midnight and be thinking the same thing: goodbye tax year 2017 and welcome tax year 2018! Let’s take a look at the IRS updates that will be applied to your 2017 income tax returns.

Tax Rates

As is customary, the tax brackets have been adjusted for inflation for tax year 2017. Find your new rate below:

2017 Tax Brackets
Rate Single Filers Married Joint Filers Married Filing Separately Head of Household Filers
10% $0 to $9,325 $0 to $18,650 $0 to $9,325 $0 to $13,350
15% $9,326 to $37,950 $18,651 to $75,900 $9,326 to $37,950 $13,351 to $50,800
25% $37,951 to $91,900 $75,901 to $153,100 $37,951 to $76,550 $50,801 to $131,200
28% $91,901 to $191,650 $153,101 to $233,350 $76,551 to $116,675 $131,201 to $212,500
33% $191,651 to $416,700 $233,351 to $416,700 $116,676 to $208,350 $212,501 to $416,700
35% $416,701 to $418,400 $416,701 to $470,700 $208,351 to $235,350 $416,701 to $444,550
39.6% More than $418,400 More than $470,700 More than $235,350 More than $444,550

Foreign Earned Income Exclusion

Now for the figure that many Americans living abroad have eagerly awaited: the Foreign Earned Income Exclusion (FEIE) limit for the year! For 2017, eligible taxpayers can exclude up to $102,100. You may be able to reduce your US tax liability completely with this exclusion!

Qualifying Health Insurance Coverage and The Affordable Care Act

The Affordable Care Act (otherwise known as Obamacare) calls for a penalty for most US citizens who do not have qualifying health insurance coverage and are not exempt from such coverage. If you qualify for the FEIE through the physical presence test or bona fide residence test or are enrolled in a US expatriate health plan, you are exempt and need not be concerned about this tax – just be sure to file Form 8965 with your return!

Unfortunately, if you do not qualify for an exemption or have qualifying coverage, you may need to pay this tax. This penalty can be calculated in one of two different ways: the percentage of income method or the per person method. Note that the IRS charges the greater of the two penalties. The percentage of income method for 2017 is 2.5% of your household adjusted gross income. The maximum penalty under the percentage of income method is the national average of the total yearly premium for a Bronze plan (Obamacare’s lowest level of coverage). The per person method is calculated at $695 per adult and $347.50 per child, with a family maximum of $2,085.

Standard Deduction and Itemized Deductions

Like many of the other aforementioned amounts, the standard deduction for 2017 has also been adjusted for inflation. For single filers and those who are married and filing separate returns, you are eligible for a standard deduction of $6,350 (up from $6,300 in 2016). If you are married filing jointly, that amount is doubled to $12,700 (up from $12,600 in 2016). For those that file as Head of Household, your standard deduction for 2017 is $9,350 (up from $9,300 in 2016).

If you choose to itemize your deductions on Schedule A of your tax return, the deduction will begin to phase out once your adjusted gross income reaches the following thresholds:

Single                                            $261,500
Head of Household                $287,650
Married filing jointly              $313,800
Married filing separately      $156,900

Personal Exemption

For 2017, a personal exemption of $4,050 (up from $4,000 in 2016) can be claimed for each individual listed on your tax return. It is important to note that the higher your income is, the greater the chance that these exemptions will be phased out on your tax return. These phaseout limits are as follows:

                                    AGI – beginning of phaseout    AGI – completed phaseout

Single                                                     $261,500                               $384,000
Head of Household                         $287,650                               $410,150
Married filing jointly                       $313,800                               $436,300
Married filing separately               $156,900                               $218,150

Gift Tax

As was the case for 2016, the gift tax exclusion an amount that has not changed this year. Gifts of $14,000 or less do not need to be reported on a US Gift Tax return. Remember that this amount is per person—a married couple can give a gift of $28,000 jointly.

For those married to non-US citizens, the first $149,000 of gifts made to your non-US citizen spouse does not need to be reported as a taxable gift on a US Gift Tax return.

For individuals in receipt of gifts from non-US citizens in 2017 (not including non-US citizen spouses), you may find yourself with an additional reporting requirement if that gift is more than $15,797. Our team of experts can advise you of your obligations if you are in doubt.

Alternative Minimum Tax (AMT)

Congress created the AMT in 1969 as a way to ensure that people with high incomes and corporations could not avoid taxes by using various tax shelters. Taxpayers must calculate their AMT separately from their “regular” taxes calculated on IRS Form 1040. The AMT starts with the taxpayer’s taxable income (income after personal exemptions and standard or itemized deductions) and adds back various adjustments to calculate net alternative taxable income. The AMT rules disallow many personal exemptions and many deductions. The resulting higher taxable income is then taxed at flat rate. The taxpayer compares the tax calculated under the AMT method to the tax calculated under the “regular” method and owes the higher of the two.

The exemption amount for single filers rises to $54,300 this year, up from $53,900 in 2016. For married couples filing jointly, the exemption amount will be $84,500 up from $83,800 in 2016. Those choosing to file as married filing separate will have an exemption amount of $42,250, up from $41,900 in 2016.

If you think you may need to pay AMT, it is recommended that you speak with a tax professional who may be able to help you avoid overpayment. In a nutshell, the AMT can be complicated, but this article clarifies how it works.

Earned Income Credit

This refundable credit applies to low- to moderate-income earners and is designed to supplement the individual’s income. Those individuals with children may be entitled to a larger credit. There are specific rules for eligibility, but the most important rule for US expats is that if you use the Foreign Earned Income Exclusion, you are not eligible for the Earned Income Credit. However, if you are overseas on a short assignment and making less than the maximum allowed amount for the credit, you may still be eligible.

The maximum Earned Income Credit amount rises to $6,318 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,269 from the last tax year. The other Earned Income Credit amounts did not change from the 2016 tax year.

Want more information about the upcoming tax year?

Our expat tax experts are standing by with all the information you need. Contact us with your specific tax questions and we’ll be happy to get back to you with the answers!