The Tax Cuts and Jobs Act (TCJA), which commenced 01 January 2018, is believed to be the most significant overhaul of the US Internal Revenue Code (Code) in over 30 years, and is predicted to have a substantial impact on US taxpayers, both those living domestically in the US and those expats living abroad. Keep in mind, even if you are a permanent resident or citizen of a foreign country residing in the US, like all US citizens (regardless of domicile) you are still required to report your worldwide income to the Internal Revenue Service (IRS).
The TCJA reduces tax rates for individuals and corporations and repeals many deductions (including personal exemptions). Most of the individual changes will expire at the end of 2025, meaning the previous Code rates and deductions will return in 2026 unless Congress passes additional legislation before then revoking the changes.
Included in this reform are a number of crucial changes to existing international tax provisions. We will address some of these changes in Pt.2 of this update.
The changes have been touted as simplifying the Code, however, there are still many uncertainties in relation to the meaning and implementation of many of the provisions of the TCJA, and as such, there is a lot to understand in relation to what has changed and who benefits from these changes.
Many Tax Brackets Will Benefit from Reduced Tax Rates
Individuals: There are still seven tax brackets for individuals, but the rates have changed to: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
US citizens, resident aliens and others required to file US income tax returns will continue to be placed in one of seven tax brackets based on their income. However, the rates have been lowered for some of these brackets. Most notably, the top income tiers – above $500,000
Corporate: The top corporate tax rate has been reduced from 35% to a flat rate of 21%.
The Federal Estate Tax Threshold Has Doubled
There were suggestions that the US federal Estate Tax regime would be abolished, however largely it remains in place, albeit with some significant changes. The Estate Tax applies to the transfer of property after you pass away. Previously, estates above $5.49 million for singles and $10.9 million for couples in value (indexed for inflation) were subject to federal estate and gift tax.
Even though you may not be a US citizen, if you are you married to one or inherit property from one, you may be subject to Estate Tax. The good news is that fewer estates will be subject Estate Tax as the threshold has now doubled for estates of decedents dying and gifts made after 31 December, 2017 and before 1 January 2026, with estates below $11.2 million (or $22 million for married couples with portability) in value being exempt from Estate Tax. The bad news is the thresholds revert to 2017 levels after 31 December 2025.
The generation-skipping transfer tax exemption also has been doubled.
Non-Resident Aliens: While the exclusion amount that applies to US citizens or residents of the US has increased, the exclusion amount that applies to for non-resident aliens has NOT increased. The exclusion amount remains at $60,000; any amount in excess of the $60,000 threshold will be taxed at 40%.
The Personal Exemption Has Been Removed
Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents, which lowered your taxable income. However, this has now been eliminated. For US taxpayers with children meeting the qualifying age, there is good news. The child tax credit, which is available for any child under the age of 17, has been increased from $1,000 to $2,000, and the refundable amount of the credit increased from $1,100 to $1,400. Also, a new $500 credit now will be allowable for non-child dependents, such as an elderly parent. However, taxpayers that earn $200,000 and above for singles and $400,000 and above for married couples, won’t benefit.
The Mortgage Interest Deduction Has Been Lowered
Current US homeowners are in the clear, but new homebuyers post 31 December 2017 will only be able to deduct mortgage interest in respect of the first $750,000 of new mortgage debt a reduction from $1 million.
The deduction is allowed on a first or second home. The interest on home equity line of credits will no longer be deductible.
In addition, expats will no longer be able to deduct foreign real property taxes under the TCJA.
The exclusion from gross income and wages for qualified moving expense reimbursements has been
repealed except in the case of a member of the Armed Forces of the United States on active
duty who moves pursuant to a military order.
The Tax Deduction for Alimony Payments Has Been Eliminated
The relief for some, but not for others, is the elimination of the tax deduction for alimony payments. Previously, the individual paying alimony or maintenance payments could deduct payments from their income. The person receiving the payments would then include them as income. The new provision will apply to couples who sign divorce or separation paperwork after December 31, 2018.
There are many more changes that will affect US citizens. However, the most important point to remember for now is the new tax reform will not affect your 2017 taxes. You won’t need to worry about these changes until you begin filing your 2018 tax return, which will be in 2019.
At Back9, we have extensive experience with taxpayers that carry either or both US and Australian citizenship, Australians with US interests or assets, and Americans residing in Australia. We can help you determine the potential impact of the US tax reform, as well as develop an approach based on your specific circumstances. Get in touch with us for a confidential discussion.
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