Each new year presents an opportunity for US expatriates to review their financial planning.
Income tax always has a significant impact on family finances – and especially for US expats (including Green Card holders), who are exposed to income and estate/gift tax burdens to the United States, regardless of where they live.
Here’s an overview of the US government’s recent ‘Tax Cuts and Jobs Act 2017’ and the ways in which it affects US expats.
New income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% were introduced effective for the 2018 tax year onwards.
These new rates replace the previous seven tax brackets and apply to increased income thresholds.
As in the past, the rates depend on the marital status and taxable income for the year.
For example, for 2018 the top rate of 37% (down from 39.6%) applies to married couples with combined income in excess of $600,000 (in contrast to the 2017 threshold of $470,700).
Note: The increase in tax bracket thresholds means that the highest tax rates for qualified dividend and long-term capital gains income apply at these increased thresholds, resulting in further tax savings for high-income taxpayers.
The standard deduction has been increased to $12,000 ($24,000 for married couples).
However, the following itemized deductions have been repealed or limited:
- State, local, and property taxes (now limited to $10,000).
- Home equity loan
- A new mortgage interest limit on amounts exceeding $750,000 for mortgages taken out after 2017.
Also, miscellaneous itemized deductions such as unreimbursed employee expenses, legal fees, investment management fees etc. that were previously limited to 2% Adjusted Gross Income (AGI) are no longer deductible from 2018 onwards.
The personal exemption deduction has been repealed (including the exemption(s) for dependents).
However, the child tax credit has been increased to $2,000 ($1,400 of which is possibly refundable), but is subject to a phase out.
Alimony is no longer taxable on the recipient, nor deductible by the payor for divorces effective after 2017.
Net Investment Income Tax (NIIT)
Although it was put forward for repeal, the 3.8% NIIT remains on investment income. This effectively means that those affected continue to suffer this “surcharge tax”.
Estate and Gift Taxes
The estate and gift tax exclusion threshold are doubled to $11 million (individuals) and $22 million (couples).
If you live in a country that has inheritance tax exposure then you should consider taking advantage of the increased estate and gift tax exclusion amount, by looking at potential planning opportunities to protect your estate from future inheritance tax exposure – through gifting, or other means.
Some expatriates may benefit from these new provisions. However, this overview is a non-exhaustive look at the Trump tax reforms, focusing on the changes that are most relevant to expats.
As always, you should seek professional advice regarding any US tax queries, as President Trump’s “Great, big, beautiful, Christmas-present tax cut” may not be as beneficial as advertised – depending on individual circumstances.
Submitted by Jason Gyamerah
Jason Gyamerah is a Senior Tax Manager in the Zurich office of US Tax & Financial Services, specializing as a dual handler in US and UK tax compliance and consultancy.
Prior to joining USTaxFS, Jason spent 12 years providing advice and guidance to clients in tax investigations and disclosures with top 10 UK accountancy firms. Since 2009 he has been a senior member of the US private client and trust team at USTaxFS, whilst leading the UK compliance team.
Jason holds a BEng in Civil Engineering and is a former lecturer at the University of Texas (Arlington) Business School. He is a member of the Association of Taxation Technicians.