The Tax Cuts and Jobs Act 2017 (TCJA) changed many things, including reporting and taxing requirements for US taxpayers living abroad. While the plan was marketed as a much needed tax simplification for Americans; the TCJA did not provide much relief, let alone simplification, for U.S. taxpayers living abroad (Expats).
Listed below are 7 items about TCJA that U.S. Expats need to know (Part I) (5 more items about TCJA that U.S. Expats need to know in Part II):
1. The Most Important Tax Code Provisions for Expats Remain. The Foreign Earned Income Exclusion and the Foreign Tax Credit help expats avoid double taxation and are included in the tax reform. However, the amount of the FEIE that can be excluded from taxes each year is indexed to inflation, which brings us to our second point.
2. Tax Brackets, Exemptions and Deductions Have Been Modified. Tax brackets are now larger, meaning taxpayers may now be in a lower bracket than they were previously, and the standard deduction has nearly doubled. For those considering a move to or from the U.S., two new issues should be considered. First, the moving deduction has been completely eliminated. Second, the individual mandate part of the Affordable Care Act has been eliminated. Unfortunately, the Net Investment Income Tax was not eliminated and will still impact expats.
3. Inflation Calculations Have Changed. The tax reform law has changed the measure of inflation from the “regular consumer price index” to the “chained consumer price index,” and changing the way inflation is calculated will affect a number of tax-related issues. The end result is a lower rate of inflation used to calculate tax figures, which will increase taxes over time.
4. The Foreign Information Reporting Requirements are Generally Unchanged. The burdensome reporting requirements expats are required to submit in addition to their tax returns are unchanged. The Foreign Bank Account Report, also known as FinCEN 114, the FATCA requirements, Form 8938 (Statement of Foreign Financial Assets), Form 5471 (Report of Certain Foreign Corporations), and Form 3520 (Report of Foreign Trusts), are here to stay. This means that many expats will continue having trouble banking abroad and face onerous penalties if they fail to file.
5. Elimination of the CFC 30 Day Ownership Requirement. The TCJA eliminates the requirement that a U.S. shareholder must control a non-U.S. corporation for an uninterrupted 30-day period before Subpart F inclusions apply (the so-called “30 day rule”). This change is relevant for U.S. individuals that receive gratuitous transfers of foreign stock, such as individuals who inherit shares from non-U.S. family members. A popular technique that will no longer be as effective as it was in the past is to liquidate an inherited foreign corporation within 30 days of the decedent’s death.
6. Elimination of the CFC Downward Attribution. TCJA eliminates Section 958(b)(4), which prevents downward attribution of stock from certain non-U.S. partnerships, estates, trusts, and corporations to U.S. persons for purposes of determining whether the CFC and U.S. shareholder tests are satisfied. This repeal may result in unintended tax and reporting consequences.
7. Expands the CFC Definition of US Shareholder. The TCJA expands the definition of “United States shareholder” to include any U.S. person who owns 10 percent or more of the total vote or value of all shares of all classes of stock of a foreign corporation. Under current law, the definition of United States shareholder required a U.S. shareholder to hold 10% or more of the voting power of the CFC. Therefore, individuals that own non-voting shares in a foreign corporation that were not previously considered United States shareholders, should determine if their non-voting shares will cause them to become United States shareholders and also cause the entity to become a CFC.