It’s time to start thinking about updates for your US expatriate taxes in 2017 now that we’re nearing the end of 2016. Each year, the IRS releases updated tax rates, exemptions and deductions, which usually change due to inflation. Will your income push you into a higher tax bracket this year? Will you need to pay the Alternative Minimum Tax? Here are the details you need to know!
1. Tax Rates
The tax rates will stay the same, but the incomes that fall into each tax bracket will change a bit. Here are the new tax brackets for the 2016 filing year.
2016 Tax Brackets
|Rate||Single Filers||Married Joint Filers||Married Filing Separately||Head of Household Filers|
|10%||$0 to $9,275||$0 to $18,550||$0 to $9,275||$0 to $13,250|
|15%||$9,275 to $37,650||$18,550 to $75,300||$9,275 to $37,650||$13,250 to $50,400|
|25%||$37,650 to $91,150||$75,300 to $151,900||$37,650 to $75,950||$50,400 to $130,150|
|28%||$91,150 to $190,150||$151,900 to $231,450||$75,950 to $115,725||$130,150 to $210,800|
|33%||$190,150 to $413,350||$231,450 to $413,350||$115,725 to $206,675||$210,800 to $413,350|
|35%||$413,350 to $415,050||$413,350 to $466,950||$206,675 to $233,475||$413,350 to $441,000|
|39.6%||More than $415,050||More than $466,950||More than $233,475||More than $441,000|
2. Marginal tax rates
The top tax rate remains 39.6%, which will apply to single taxpayers whose income exceeds $415,050. This rate also applies to married taxpayers filing a joint return when their combined incomes exceed $466,950.
3. Foreign Earned Income Exclusion
This is an important update for Americans living abroad, as it’s a great way to save on your US expatriate taxes! For 2016, eligible taxpayers abroad can deduct $101,300. You may be able to reduce your US tax liability completely with this one exclusion!
4. The Affordable Care Act
The Affordable Care Act (otherwise known as Obamacare) calls for a penalty for most U.S. citizens who do not have qualifying health insurance coverage. If you qualify for Foreign Earned Income Exclusion 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.
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. The IRS charges the GREATER of the two penalties. The percentage of income method for 2016 is 2.5% of household income above the tax-filing threshold ($10,150 for individuals). 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. The IRS will charge the larger of these two penalties.
5. Standard Deduction
The standard deduction on your US tax return remains $6,300 for single filers and those who are married and filing separate returns. If you are married filing jointly, that amount is doubled to $12,600. If you file Head of Household, your standard deduction increases by $50, from $9,250 to $9,300.
6. Personal Exemption
The personal exemption increased from $4,000 (in 2015) to $4,050. Remember that this amount may be phased out for higher income levels. As a single filer with an Adjusted Gross Income of $259,400, this is where it begins to phase out. Once you reach $381,900, the exemption is completely gone. For those married filing jointly, the phase out begins at $311,300 and is completely erased at $433,800.
7. Gift Tax
The gift tax exclusion is one item that has not changed this year. Any gift of $14,000 or less can be excluded from your US expatriate taxes. Remember that this amount is per person—a married couple can give a gift of $28,000 jointly.
8. Alternative Minimum Tax (AMT)
The AMT can be complicated, but this article simplifies the explanation of its purpose. 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. 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 paying too much.
The exemption amount for single filers rises to $53,900 this year, and will be $83,800 for married couples filing jointly.
9. Earned Income Credit
This credit generally applies to those low-income earners who have children. The more children you have, the more likely you are to qualify. There are specific rules for eligibility, and there is one that is most important to US expats: 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. Here are the specifics:
- Must have earned income, such as wages, tips or the income from running a business or farm. Most other types of income, such as retirement pensions, though usually taxable, do not count as earned income;
- Must have a Social Security number that is valid for employment for self, spouse and any qualifying children;
- A person can get the credit even with a small amount of investment income, such as interest from a bank account. However, the amount of investment income is limited to $3,400;
- The filing status used must be single, head of household, married filing jointly or qualifying widow or widower. A taxpayer who files as married filing separately cannot get the credit;
- Generally, must be either a U.S. citizen or resident alien;
- Cannot be a qualifying child of another person;
- Cannot file Form 2555 or Form 2555-EZ. These forms are used to claim the foreign earned income exclusion, a tax benefit for Americans who live and work abroad.
The maximum Earned Income Credit amount rises to $6,269 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,242 from the last tax year.
There you have it – some of the biggest tax updates for the quickly approaching new year. If you begin thinking about your US expatriate taxes now, you can save time (and money, if you file by April 17th if you owe tax!). For more tax tips and ways to use credits, deductions and exclusions to save on your US expatriate taxes, download a US expat tax guide for your particular situation!
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