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Expat Taxes

How Tax Reform Will Affect Expatriates

by
Bret Willoughby
on
1/28/2018
How Tax Reform Will Affect Expatriates

U.S. citizens are generally taxed on all income, whether from the U.S. or from foreign sources.  However, some tax provisions allow exclusions, deferrals, and credits to offset foreign income. Many are asking how the passage of the Tax Cuts and Jobs Act (TCJA) will affect the taxation of foreign income. While many items did change, others were left intact. 

Here is a rundown:

What Tax Laws Remained the Same?

Under the Tax Cuts and Jobs Act (TCJA), there are no changes to the most common tax benefits the Foreign Earned Income Exclusion and the Foreign Tax Credit remained the same.  The Foreign Earned Income Exclusion allows overseas Americans to Exclude $104,100 of wage or self-employment revenue.  The Foreign Tax Credit can be used by Overseas Americans who pay non-US taxes.

Generally, the 2017 tax laws are the same as prior tax law for overseas Americans.  The vast majority of tax law changes don't take effect until 2018 1040's are prepared.

What Tax Laws Changed?

Starting in 2017

The law as passed created a new tax for 2017 that American shareholders who own non-US corporations or file form 5471 need to pay.  Profitable Foreign Corporations that are owned by Americans are subject to the “Repatriation Tax.”  This is the single most complex part of the new tax law.  The law was drafted with fortune 500 companies in mind but applies to closely held business operating outside the US.

Starting in 2018

Employees who have significant unreimbursed expenses will no longer be able to itemize those deductions.

Retirees living outside the US will no longer be able to itemize their investment expenses.

All exemptions have been eliminated and replaced but the standard deduction doubled.

The credit for children under the age of 17 called the Child Tax Credit was doubled and the Additional Child Tax Credit increased from US$1,000 to US$2,000.  This is a refundable tax credit meaning it will put cash in your pocket even if you did not make any tax payments.  But as in the last several years, the taxpayer cannot take both the Additional Child Tax Credit and take the Foreign Earned Income Exclusion.

There is now a “Dependent Credit” for children over the age of 16 of US$500.

Tax impact on 2018 1040?

Refundable credit management will become more important as the IRS increased the income limits for the Additional Child Tax Credit.

The higher standard deductions combined with the increase to the refundable portion of the Additional Child Tax Credit will result in more expatriates revoking the Foreign Earned Income Exclusion, taking the Foreign Tax Credit or Filing Separately from their spouse. 

Taxpayers should be cautious when not taking the Foreign Earned Income Exclusion on form 2555 if they have taken the Foreign Earned Income Exclusion in the prior year.  If they stop taking the Foreign Earned Income Exclusion in 2018 the IRS deems this to be a “Revocation” and the individual taxpayer is generally prohibited from taking the Foreign Earned Exclusion again for five years. 

Individual Expats with modest wage income (20,000-50,000) and several children may benefit from filing separately from their American spouse.  If both a Husband and wife work the higher earning spouse can continue taking the Foreign Earned Income Exclusion while the lower-earning spouse would claim the children as dependents.  The lower earning spouse could revoke the Foreign Earned Income Exclusion thereby possibly receiving the Foreign Tax Credit, The Child Tax Credit, the Additional Child Tax Credit and the Dependent Credit.

These tax strategies are very complicated and fact dependent.  The earning of each spouse, the number, and age of the children the anticipated length of time remaining overseas all play a factor in the decision to revoke the Foreign Earned Income Exclusion and should be made with a tax expert familiar with the taxation of overseas Americans.

Bret Willoughby writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Bret Willoughby

Bret Willoughby

Bret Willoughby is a practicing tax preparer for expats throughout the world. He created Providence Payroll to meet the needs of Churches, not-for-profit organizations and businesses with remote workers. His web-based payroll processing service benefits both employers and remote workers with an easy way to access payroll information. Clergy have unique payroll and tax-related issues, one that Providence Payroll is qualified to manage.

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