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Tax Cuts And Jobs Act (TCJA): Changes For American Expatriates



Many American citizens who live outside the US have for years raised concerns about the United States’ Citizen-Based-Taxation System. They may have been hopeful when tax reform was being proposed but have been disappointed that their concerns have been ignored. The new tax reform bill Tax Cuts and Jobs Act called TCJA (pronounced tick-jah) has brought about massive changes in the way individuals are going to be taxed but not much has changed for American Expatriates.

As most of my readers know, if you are a US Citizen, you are required to file a US tax return annually. The information needed to be filed along with your tax return via Form 8938, Form 3520,  Form 5471, Form 8865 remains in place. So does the requirement to file Form 114 AKA the FBAR. Not only does non-compliance with these rules and regulations come with stiff penalties, they also make banking in the countries of residence burdensome for expats. Most foreign banks do not want US citizens for customers as they have to comply with FATCA requirements.

The Net Investment Income Tax has also remained in place, therefore high earning expats with passive income may find themselves subject to this tax.

On the good side, the Foreign Earned Income Exclusion [FEIE] and the Foreign Tax Credit [FTC] have not been repealed. If you want to read in detail about what this is, my post is here. An expat can exclude up to $104,100. And for those who go over the limit, they can take the tax paid in the country of residence as a credit. The United States has tax treaties with many countries so most expats can avoid double taxation.

New Points To Look Out For Under TCJA

There has been a major shake-up in the tax brackets, deductions and exemptions. The Standard Deduction has increased substantially. You may now find yourself in a lower tax bracket than you were in earlier.

-If you are planning to move in to the United States, the Moving Expense deduction is no longer available for moves made after January 1st, 2017.

-The Affordable Care Act mandate has been eliminated.

-The big and most onerous change that US Expats will find is with their ownership in foreign corporations. Under the TCJA, U.S. shareholders owning at least 10% of a foreign subsidiary may end up paying a one-time “expatriation tax” on profits earned abroad that have not been taxed previously. Some US shareholders will have this change impact their 2017 tax returns.

This is a very short and simplistic analysis of the tax change for owners of foreign corporations among other aspects affecting expats. Most tax professionals are working with and trying to understand the new law. We await more guidance from the Internal Revenue Service. As always look out for more information about this subject coming through this space from me. Please consult with a tax professional for proper guidance.

Have a question? Contact Manasa Nadig.

Your comments are always welcome!

I am Manasa Nadig, enrolled to practice and represent taxpayers with the Internal Revenue Service. I have been in the business of Tax Preparation & Tax Planning since 1999. My firm, MN Tax Solutions, LLC is based in Michigan, USA. Please connect with me on TaxConnections for more information about myself & the services provided by my firm.

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6 comments

  1. Nononymous says:

    The transition tax or expatriation tax for small business owners is potentially a disaster for dual citizens who’ve lived and worked all their lives in their home countries. In many cases, retained earnings are the primary form of retirement savings for independent professionals who have incorporated as a personal business.

    It is by no means clear that Congress intended to give these individuals a 15 percent haircut. However, the compliance industry seems very certain – business owners must pay up, and we’ll happily help with the paperwork, for a fee.

    No dual-citizen business owner living outside the US and already compliant should consider paying this until there is more clarity, and even then they should probably fiddle their returns so that they aren’t donating 15 percent of their retirement savings to the US treasury. Business owners who are not currently compliant should do everything they can to stay off the radar and remain non-compliant.

    More and more, non-compliance is emerging as the best strategy for dual citizens outside the US (with minimal or no financial ties to the US of course). Particularly given the general inability of the IRS to collect penalties or taxes owing beyond US borders.

  2. JC Double Taxed says:

    The tax is more than 15% of retained earnings RETAINED BY OWNERS.

    ex.
    When a business pays off a business loan that comes out of retained earnings. The money does not go to the owner but goes to the bank.

    When a business reinvests profit in a business. Then while that comes out of retained earnings, that is sunk in the business and not available for distribution to the owner.

    Nasties here include: retrospectivity & Double Taxation without relief from tax treaties.

    Any U.S. persons overseas caught up in this must visit the message boards of The Isaac Brock Society, purpleexpatorg, Facebook Citizenship Based Taxation and American Expatriates Groups, citizenshiptaxation dot ca, and FixTheTaxTreaty dot org

  3. Edward K. Dwyer says:

    This tax is not a double tax, and in a sense,is not retroactive either.1 Double Tax:The S/H has not paid tax on the CFC’s earnings when it was earned–any tax was paid by the CFC not its S/H. And the S/H is effectively given a US tax deduction for his/her share of such fun taxes, which reduce E&P

  4. Edward K. Dwyer says:

    Also, the US S/H would have been taxed in the future on these earnings when distributed and at a much higher rate than 15.5 PCT. So it is not a retroactive tax, just an acceleration of the timing of that taxation, and at a lesser rate. So much for its being retroactive. And the S/H gets a basis step up for the earnings being taxed, and can pay over an extended period on an interest free basis. As well, the S/H can get this amount out tax free in the future. My only gripe is that owners of CFC shares through a partnership or those owning the CFC shares directly, did not get the same deal as S corp. S/Hs.

  5. Re: The question of double taxation

    As a reminder, we are discussing the “transition tax” applied to individual shareholders who are “tax residents” of other countries and subject to taxation in those countries.

    Here is the order of events as contemplated by the Internal Rev. Code 965:

    1. Inclusion of retained earnings in income of U.S. shareholder and U.S. tax paid on that deemed distribution.

    2. The 965 deemed distribution is taxable in the U.S. but there is no taxable event in the country of residence and therefore no tax paid in the country of “tax residence”.

    3. There is no credit allowed for the U.S. tax paid (in the year the transition inclusion is made) on the individual’s tax return where he actually lives.

    4. When the amount that was the 965 distribution is later distributed in the country of tax residence the individual is taxed on that amount a second time.

    The amount 965 inclusion is taxed twice (first by the United States and then by the country of residence).

  6. Re: Retroactivity

    Again, it’s important to recognize that we are talking about how this applies to individual shareholders who are tax residents of other countries.

    The retained earnings (not previously subject to Subpart F inclusions) would be subject to taxation at the point that they would be distributed. But:

    1. There is no guarantee that those earnings would ever have been distributed. They could have remained in the company forever. So, this is really a forced distribution of earnings that might or might not have been distributed. For example, Canadian Controlled Private Corporations are often used as pension plans for individual shareholders.

    2. If and when the earnings would have been distributed they would have been taxed first in the country of “tax residence”, providing the opportunity for a tax credit to be taken against U.S tax owing on those distributions.

    It seems to me that, at least with respect to individual shareholders, who are tax residents of other countries, this is a tax on earnings that:

    – were not subject to U.S. taxation at the time that they were earned; and

    – might never have been taxed by the U.S.

    It’s not “early payout” when it might “never have been paid out”.

    This discussion illustrates the difficulties of applying this tax to individual shareholders who are “tax residents” of other countries.

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