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Tax Reform - Winners & Losers Amongst Americans Living Abroad

Tax Reform - Winners & Losers Amongst Americans Living Abroad

Tax Reform Series

The tax reform brings many changes. Most of the literature published thus far focuses on corporate tax changes (Ie - Exxon, Microsoft, Apple, etc) as well as changes for U.S. based taxpayers. This article will focus on changes affecting individuals as well as an analysis of who wins, who loses, and how you can save money.

Standard deductions doubled, personal exemptions eliminated.

Who will win: Taxpayers without dependents

Under the old tax code, a single taxpayer would be granted a standard deduction of $6,500 and a personal exemption of  $4,150 for 2018 tax year, for a combined deduction of $10,650. Post-reform: New standard deduction is $1,250 greater. Married couple without children will have a combined deduction of $24,000, $2,500 greater than prior to passage of the current bill.

Who will lose: Taxpayers with dependents

Prior to the tax bill, a married couple with two qualifying dependent children would have had a standard deduction of $13,000 and individual exemptions of $16,600, for a combined deduction of $29,600, $5,600 greater than the deduction allowed under post-bill passage stripped off personal exemptions.

Reform of child tax credit and qualifying dependents credits

The new law increases the child tax credit to $2,000 per qualifying child from the current credit of $1,000 per qualifying child. Income threshold for the credit eligibility increased: up to $440K for married filing jointly and up to $240K for all other filing statuses.

 The new law also temporarily provides a $500 nonrefundable credit for qualifying other dependents.

The requirement to provide a social security number (SSN) for each qualifying child does not apply to the $500 non-refundable credit for a non-child dependent. A qualifying child who is ineligible to receive the child tax credit due to not having a SSN is still eligible for the non-refundable $500 credit, including children with an Individual Taxpayer Identification Number rather than a Social Security Number.

The credit will partially compensate for the eliminated dependent exemption.

Suspension and reform of certain itemized deductions and income exclusions

Under the new law, itemized deductions for state and local income taxes, state and local property taxes, and sales taxes are limited to $10,000 in the aggregate. This cap does not apply if the taxes are incurred in carrying on a trade or business or otherwise incurred for the production of income (i.e. rental business).

Foreign real property taxes, other than those incurred in a trade or business, are not deductible.

Who will win:

Owners of U.S. or foreign property used in rental business. The tax reform does not put a cap on rental business expenses and allows a deduction of foreign real property taxes paid on rental property.

Who will lose:

Homeowners who previously claimed itemized deductions on their U.S. tax return.

Suspension of miscellaneous itemized deductions subject to the 2% floor

The new law suspends the entire category of Job Expenses and Certain Miscellaneous Deductions. The most common of those deductions were investment fees, unreimbursed employee expenses, hobby expenses, job-related education, etc.

Taxation of investment income

The tax rates for capital gains and dividends are left unchanged. Also left unchanged is the 3.8% net investment income tax.

Suspension of deduction for moving expenses

Big change for expats. The new law suspends the deduction for moving expenses, The new law also suspends the exclusion from taxable wages amounts received (directly or indirectly) from an employer as reimbursement of expenses which would be deductible as moving expenses if directly paid or incurred by the employee. Deductions are retained for members of the U.S. Armed Forces, their spouse and dependents.

Who will win:

The US Government. This provision will increase revenue by approximately $7.6 billion over 10 years.

Who will lose:

Individuals and businesses. Suspension of the deduction for moving expenses is expected to increase the cost of relocating employees. Businesses could face significantly higher costs after taking into account the gross-up for taxes.

Repeal of deduction for alimony payments and corresponding inclusion in gross income

Under the new law, alimony and separate maintenance payments are not deductible by the payor spouse and are not includible in the income of the payee spouse. The effective date of this provision is delayed by one year. It is effective for any divorce or separation agreement executed after December 31, 2018.

Who will win:

Spouse receiving alimony payments

Who will lose:

Spouse making alimony payments

Reduce Affordable Care Act individual shared responsibility payment to zero

Prior to the tax bill, a tax is imposed for any month that an individual does not have minimum essential coverage, unless the individual qualifies for an exemption. Under the new bill, the amount of the individual shared responsibility payment is reduced to zero, starting in 2019.

Who will win:

US expats spending extended period of time in the US will no longer be at risk of Affordable Care Act penalties.

Repeal of special rule permitting recharacterization of IRA contributions

The new law provides that a conversion contribution to a Roth IRA during a tax year may no longer be recharacterized as a contribution to a traditional IRA and unwinding the conversion. Recharacterization is still be permitted for other contributions. This provision does not prohibit a contribution to an IRA and a conversion to a Roth IRA.

The tax reform bill brings big changes to US owners of Foreign Businesses - see our sister post on the topic - Tax Reform - IRC Section 965 Mandatory Repatriation of Deferred Foreign Income for Owners of Foreign Corporation.

Ines Zemelman, EA
Founder of TFX