Americans Helping Americans Abroad

AARO Tax 202 Seminar - March 19, 2018

Led by Tim Ramier (This email address is being protected from spambots. You need JavaScript enabled to view it.), Chair of the AARO tax committee, with the participation of John Fredenberger (This email address is being protected from spambots. You need JavaScript enabled to view it.), former Chair of the AARO tax committee, and Kelli Perkins (This email address is being protected from spambots. You need JavaScript enabled to view it.), CPA from the Houston-based ABBM Group, which specialized in taxes for overseas Americacan

Please note the IRS website (https://www.irs.gov/) and more specifically, Publication 54 (https://www.irs.gov/pub/irs-pdf/p54.pdf) for more specific information.

In the News

Taxpayer Advocate

Nina Olsen, the National Taxpayer Advocate, will be chairing a conference on International Taxpayer Rights in Amsterdam in May. Both Tim and John intend to go. AARO has met with Nina Olsen and her staff every year as part of the Overseas Americans Week appointments. Our word has been taken seriously, leading to some changes, but there is still work to be done. In talking about this upcoming event, Tim reminded the audience of the  U.S. Taxpayers’ Bill of Rights (https://www.irs.gov/taxpayer-bill-of-rights).

Filing deadlines

April 15 is the deadline for filing in the US. Overseas filers have an automatic extension to June 15 and they can request, before the June 15 deadline, an extension to October 15. The extension request form is sent to the Austin office. If you think you owe tax, you should have an estimated tax by April 15, though, in order to make payment without being subject to penalties.

FBAR filing has an automatic extension until October 17 this year.

The End of OVDP

The Overseas Voluntary Disclosure Program will end on September 18, 2018. This program was never recommended by AARO. In fact it was criticized frequently and came up on the list of doleances in meetings at the Taxpayer Advocate’s office. It was difficult to comply with and expensive.

If you have not been reporting your income to the IRS or your FBARs to FinCEN, then you should consider coming into compliance. The streamlined procedure has been in place for several years and can be cut off at any time, but there is no scheduled end to the program, yet. To come into compliance, you need to send in 3 years of back tax files and 6 years of back FBARs. Once compliant, you need to continue being compliant. https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures

Legislative Developments

Representative Mark Meadows continues to champion the repeal of FATCA. Carolyn Maloney continues to champion “same country exception”, which means that FATCA would not apply to banks reporting on resident U.S. persons, and George Holding is drafting a bill to call for residence or territorial based taxation.

Some Reminders

If you owe no tax, send it to the Austin, TX office and if you owe tax, send the file, including payment, to the Charlotte, NC office:

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215 USA

Internal Revenue Service Center
P.O. Box 1303
Charlotte, NC 28201-1303 USA

Average exchange rates, for your income: https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

Year-end exchange rates, for your FBAR and, if needed, form 8938: https://www.fiscal.treasury.gov/fsreports/rpt/treasRptRateExch/currentRates.htm

What’s in the Tax Cut and Jobs Act of 2017 (TCJA)

John Fredenberger presented the changes that will affect us next year when we file our 2018 income. There were not enough handouts at the event; the document is copied here:

JOHN C. FREDENBERGER

ATTORNEY AT LAW – TAX CONSULTANT – AVOCAT A LA COUR

3 AVENUE MATIGNON – 75008 PARIS, France

Tel: (+33) 01 45 04 10 10 Mobile: (+33) 06 31 00 50 01

This email address is being protected from spambots. You need JavaScript enabled to view it. - This email address is being protected from spambots. You need JavaScript enabled to view it.

A.A.R.O. TAX 202 - 19

MARCH 2018

THE TAX CUT AND JOBS ACT OF 2017 (TCJA)

  1. HOW YOU ARE DIRECTLY AFFECTED:
    1. Personal Exemptions - eliminated for tax years 2018 through 2025
      1. Before TCJA, the Personal Exemption was $4,050.
      2. TCJA eliminates the Personal Exemption
      3. TCJA eliminates the Dependent Child Exemption.
      4. Before TCJA, Personal Exemptions were "phased-out" when their Adjusted Gross Income (AGI) exceeded: $156,900 for Married Filing Separate (MFS); $261,500 for Singles; $287,650 for Head of Household (HH); and $313,800 on a return filed jointly..
      5. Personal Exemptions were zero when AGI exceeded the above amounts by $120,500 ($61,250 for MFS).
      6. Conclusion: Those with substantial Adjusted Gross Income are not affected by the loss of Personal Exemptions.
    2. Standard Deduction - doubled for tax years 2018 through 2025.
      1. Before TCJA, the Standard Deduction was: $6,300 for Singles and MFS; $9,300 for Head of Household and $12,600 for a joint return.
      2. For those 65 or older during the tax year, add $1,300 if Single and $1,200 for all others.
      3. TCJA increases the Standard Deduction to: $12,000 for Singles and MFS; $18,000 for HH; $24,000 for a joint return.
      4. Those 65 or older during the tax year, add $1,300 for Single and $1,200 for all others.
    3. Itemized Deductions
      1. Medical - 7;5% of AGI for 2017 & 2018; 10% thereafter.
      2. SALT (State and Local Taxes) limited to $10,000.
      3. Interest deduction on new mortgages limited to $75,000.
      4. Tax preparation fee - no longer deductible.
      5. Moving expense deduction - no longer deductible.
      6. Casualty & Theft losses limited to Federal Disaster Area declared by the President and subject to 10% of AGI.
      7. Conclusion: The number of those who Itemize Deductions will reduce from 46.5 million to 19.3 million.
    4. Other Effects:
      1. Alimony paid on separation or divorce agreements signed after 31 December 2018 are not deductible. Alimony received is still taxable.
      2. "Kiddie Tax" (on unearned income of dependent children under 19) now taxed at trust and estate rates up to 37% on unearned income over $12,501.
      3. Child tax credit doubled to $2;000
      4. Non-taxable Estate and Gifts are capped at 11.2 million from 2018 to 2025;
  2. HOW ARE YOU INDIRECTLY AFFECTED
    1. The Tax Cuts and Jobs Act of 2017 (TCJA), according to the non-partisan Congessional Office of Budget (CBO) and the Joint Committee on Taxation, will add net a little over one trillion dollars to the public debt. The IRS collects three trillion dollars annually. The total public debt is estimated to reach twenty trillion. Get ready for higher taxes in 2021
    2. If you are going to start a business, create a pass-through entity (LLC, Sub-Chapter S Corporation, etc.)

To sum up: For the taxpayer, the bill eliminates personal exemptions until 2025. Since these exemptions are phased out for higher income taxpayers, those taxpayers will not be much affected by the elimination. To counter-balance the elimination of these personal exemptions, the standard deduction is doubled. The effect will be to move taxpayers to use the standard deduction rather than itemized deductions. In addition, the list of what can be itemized is more limited than before.

For the U.S. Treasury, the bill adds cost. There will be lost tax income and increased borrowing with added interest expense.

The Transition Tax and GUILTI

Kelli Perkins presented the status of the Transition Tax and GUILTI (Global Intangible Low Taxed Income)

The Transition Tax is a one-time 15.5% tax on liquid assets or retained profits held in a foreign business entity. After that the entity will be taxed on income at the new, low corporate rate of 20%. This will affect small business owners who live abroad as well as the big targeted companies like Apple and Google. It may mean that the forms used to report (not tax) ownership on over 10% interest in a foreign company can be used to create a basis for this tax on assets (not income). Payout of this tax can be made over an 8-year period. There is word circulating that the IRS may go through those forms back to 1986! Unfortunately, there are no forms for this tax, yet, and no instructions, so tax advisors do not, yet, know how to advise.

Hereafter is a more detailed summary of theses two elements:

  • The tax reform adopted on December 22, 2017 impacts US owners (10% or greater) in foreign incorporated businesses (either CFC or foreign entity with a 10% domestic corporate shareholder) in the following manner:
    • For 2017, if the business is on the calendar year (or for 2018, if the business is on the fiscal year), the US owner will be required to include in income his or her share of the accumulated profits of the business since 1986 as follows:
      • This is a one-time “transition tax” intended by Congress to pay for the new participation exemption allowing US corporations to repatriate foreign dividends free of US tax starting in 2018
      • The accumulated profits are taxed at rates that vary depending on whether the balance sheet includes:
        • cash or cash equivalents: to this extent the retained profits will be taxed at a rate of up to 15.5%
        • other assets: to this extent the retained profits will be taxed at a rate of up to 9%
      • The taxpayer can elect to pay the transition tax in eight installments (with the first installment due for 2017 as of April 15, 2017, extended to June 15th for 2018) as follows:
        • Years 1-5: 8% of the balance
        • Year 6: 15% of the balance
        • Year 7: 20% of the balance
        • Year 8: 25% of the balance
    • For 2018, a new tax on “Global Intangible Low Tax Income” or GILTI will apply to individual US shareholders of a foreign incorporated business (CFC) to the extent the business’s revenues (whether or not distributed) exceed a fixed return of 10% on the tangible assets on the balance sheet. 
      • This will be relevant for businesses that do not have significant tangible assets (consultants, accountants, advisors, etc). 
      • While corporate US shareholders are eligible for additional foreign tax credits for taxes paid by the business and deductions, individual US shareholders are not. 
      • Where applicable to US shareholders, the new GILTI tax greatly increases the overall tax rate on business income. 

Where either of the above measures apply to a US individual, implications and structuring options should be discussed with the tax advisor involved

Congress has been made aware of the egregious effect that this aspect of TCJA will have on small business owners residing overseas who risk being taxed twice and it has extended until June 15th the delay to pay the tax; hopefully in an effort to add clarity and balanced and fair treatment or exclude entirely U.S. overseas persons.

Q and A

During the question period, there were several questions pertaining to French income and French retirement accounts (P.E.R.C.O.) and how to report them. All advisors agreed that the accounts should be reported on the FBAR, but there were no clear answers as to reporting the income. Tim promised to look more specifically into the issue by the French tax seminar on May 23.

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