A new year brings a new tax season. A lot has changed for Americans filing US taxes in 2019 though, as it’s the first tax season for tax returns that include the changes made in the 2017 Tax Cuts and Jobs Act, aka the Trump Tax Reform.
As all American citizens and green card holders, including expats, are required to file US taxes each year reporting their worldwide income, in this article we’ll look at the major changes that expats should be aware of when filing in 2019 tax season.
Dates and deadlines
In 2019, the IRS will start accepting tax returns on 28 January, a day earlier than last year, due to the way the calendar falls.
Filing due dates for expats haven’t changed in 2019. Any US taxes due should still be paid by 15 April to avoid interest, while tax returns are due by 15 June. Expats who won’t be ready to file by 15 June, perhaps because they have to file their foreign taxes first before claiming US foreign tax credits as part of their IRS tax return, still need to request an extension until 15 October online.
Many expats also have to report their foreign bank and investment accounts, if the combined total of their foreign account balances exceeds 10,000 USD at any time during the year. Qualifying accounts also include business accounts and any other foreign financial accounts that an expat may control or access. The FBAR filing deadline remains 15 October this year.
New 2019 Foreign Earned Income Exclusion limit
Many expats claim the Foreign Earned Income Exclusion on form 2555 when they file, allowing them to exclude up to around 100,000 USD of their earned income from US taxation, so long as they meet the IRS criteria to demonstrate that they live abroad.
These criteria are either that expats spent at least 330 days outside the US last year (or if they moved abroad mid-year, 300 days out of the 365 days after they moved abroad), or that they are a permanent resident of another country.
For the 2018 tax year, the Foreign Earned Income Exclusion limit on the amount of earned income that expats can exclude from US tax has risen to 103,900 USD, up from 102,100 USD for the year 2017.
New form 1040
One of the biggest changes that many US expats will notice when filing in 2019 is that form 1040 is different.
The change was made to fulfil a campaign promise President Trump made to make filing easier. Whether the new, smaller ‘postcard-sized' form 1040 does, in fact, make filing easier depends on each expat’s circumstances, however.
Expats with very straightforward circumstances, for example having a single source of income from employment, will find the new form quicker and easier to complete, once they are familiar with it.
Expats with income from other sources such as rents, dividends, or self-employment, however, will find that the fields they need to fill in have been moved onto new schedules, so they will need to dedicate some time familiarizing themselves with the new form.
Tax rates and thresholds
The main aim of the Tax Reform was to reduce tax rates. The corporation tax rate has been reduced from 35 percent to 21 percent. Rules for the taxation of foreign corporations’ profits have also changed, affecting many expats and entrepreneurs.
Income tax rates have also been reduced, as well as changed being made to the tax rate thresholds. The highest rate payable is now 37 percent compared to 39.6 percent previously, but due to the new reduced rates and thresholds, nearly everyone will benefit.
The personal exemption was scrapped in the Tax Reform, with the Standard Deduction being raised to 12,000 USD per person instead.
For the many expats who by claiming either the Foreign Tax Credit or the Foreign Earned Income Exclusion when they file their IRS tax return reduce their US tax bill to zero, the new tax rates and brackets won’t affect them too much. Expats claiming the Foreign Tax Credit may find that they have more excess US tax credits that they can carry forward, as the difference between the foreign tax they pay and the US tax they would owe is now greater. Others who do owe some US tax may now pay less.
New child tax credit
The Tax Reform combined the old Child Tax Credit and Additional Child Tax Credit to create a single new Child Tax Credit.
The changes will benefit many expats with children who claim the Foreign Tax Credit. Those expats who do owe some US tax can now receive a 2,000 USD tax credit per child, while those who have eliminated their US tax bill entirely thanks to the Foreign Tax Credit can now claim a 1,400 USD refundable tax credit per child. The refundable credit works like a tax refund, as a simple payment, regardless of whether any US tax is owed.
New for entrepreneurs and business owners
The Tax Reform brought two dramatic changes for many expats with a foreign registered corporation.
Previously, many expats created foreign corporations, often in low or no tax countries, to reduce their US tax bill, as the US didn’t tax foreign corporate earnings that were retained in the business. This led to many large US multinationals incorporating abroad to avoid US tax.
To remedy this, the Tax Reform introduced firstly a repatriation tax, often referred to as the Apple Tax, so that all American controlled foreign corporations have to pay a 15.5 percent tax on all their retained earnings.
Secondly, the Tax Reform introduced a tax on future earnings of American controlled foreign corporations called GILTI (Global Intangible Low Taxed Income), starting in the tax year 2018.
So, many expats with foreign corporations have taken a double tax hit, on past profits retained in the business, and on profits going forward.
Many expats have taken steps to minimize their tax bill going forward, perhaps passing controlling ownership to a trusted non-US taxpayer such as a spouse, or creating a US parent company, as US corporations’ foreign earnings are taxed at a discounted rate.
Expats affected who haven’t taken any steps yet should consult a US expat tax specialist as soon as possible.
One amnesty program for expats, the OVDP (Overseas Voluntary Disclosure Program), closed down in 2018. However, the Streamlined Procedure program is still active.
The Streamlined Procedure allows expats who are behind with their US tax filing because they weren’t aware of the requirement for expats to file to catch up without facing penalties, and it remains an excellent opportunity for expats in this situation to avoid future headaches.
Hugo Lesser works for Bright!Tax, an award-winning, leading provider of US tax services to the estimated 9 million Americans living abroad. If you have any questions regarding your situation, get in touch and we'll be happy to help.