How Expats Could Win Through the Tax Reform
The tax reform will not only cause changes to U.S.-based taxpayers and business corporations. Even expats will experience its effects. President Trump signed the new tax bill at the end of December and is in effect starting this year.
Discover how you could win through the tax reform as a foreign-based taxpayer or business owner. The following factors will determine if you could win under the tax reform.
Expect Greater Deductions When You Have No Dependents
Dependents are one of the reasons to cut tax dues. Yet, under the new tax guidelines, even those with dependents will become loser. Even when they compare the deductions they enjoyed in the previous years and this year.
Married individuals and without dependents last year expected a combined deduction of $21,5000. This year, the value would increase by $2,500, an advantage for taxpayers without dependents.
Two qualified dependents living under a married couple last year resulted in a combined deduction of $29,600. Since the tax reform suspends personal exemptions, this value will decrease by $5,600 this year. Even having qualified dependents cannot help a lot in your tax payments under the tax reform.
If you are a single taxpayer last year, your combined deduction was $10,650. Under the tax reform, that amount would increase by $1,250.
Dependents would take a slice out of your budget. With the tax reform this year, those who do not have dependents to care for would enjoy greater tax benefits.
For those with children under their care, there is something that might compensate this reform. Child and dependent tax credits also change this year. Before, each qualified child has $1000 tax credit which is increased to $2000 now. There is also a $500-value of nonrefundable credit for other qualified dependents. Having a Social Security Number is a major requirement for a child to qualify. Without SSN, a child can still avail of the $500 nonrefundable credit if the child has Individual Taxpayer Identification Number.
Get into the Rental Business
Rental business owners will have no cap on their expenses. This year might be the ideal time to start or maximize your rental business. The tax reform also allows the deduction of foreign real property taxes on your rental property.
Businesses related to rental services will take advantage of the reform due to the provision from the new tax bill that the cap is not applicable to taxes used for the production of income where the rental business is a part of.
The new bill also puts a limitation of $10,000 on combined taxes on sales, state and local properties, and state and local incomes. Unfortunately, those homeowners who claimed itemized deductions on their US tax returns will not be able to do so in the new tax bill.
Removing the entire category of Job Expenses and Certain Miscellaneous Deductions is also noteworthy. Under this category are the following deductibles: hobby expenses, job-related education, investment fees, and unreimbursed employee expenses. For the investment incomes, the 3.8% net investment income tax and tax rates for capital gains and dividends remain.
Minimize or Refrain from Moving
Expats could win more with less moving this year. The tax reform this year suspends the deductions for moving expenses. Only those under the U.S. Armed Forces, their spouses and dependents will enjoy the moving expenses deductions. With this provision, relocating employees will be expensive.
This is going to be a major change for the expats. The expats will seem to lose while the government would win with an estimated increase in revenues by $7.6 billion in the next 10 years.
The suspension of the deductions for moving expenses might hinder important relocations for business owners and workers. Even then, businesses have to move and this provision would challenge the budgeting strategies of enterprises.
Receive Alimony Payments
Alimony is the payment made to a spouse or former spouse under a separation or divorce agreement. Each state in the US might have different laws on who receives it and how, but the tax reform has variations set aside for alimony.
The spouse receiving alimony will have the advantage since the alimony will not be considered as the payee’s income. The payor spouse will have less advantage because alimony and other maintenance payments are not deductible.
Fortunately (or not, depending if you are the payee or the payor), the law suspends the effectivity of the alimony changes by one year. Any divorce or separation set after December 31, 2018 will be affected by the new law.
Spend More Time In the US
U.S. expats can now spend more time in their home country. Starting in 2019, expats will no longer be at risk of any penalties on the Affordable Care Act. In the previous tax laws, any month that an individual does not have minimum essential coverage will be taxed. The only option is to apply for an exemption. With the tax reform, individual shared responsibility will be reduced to zero. With this provision, expats can now spend longer time without fear of extra tax payments.
The tax reform brings tax changes but planning and preparation are key to take advantage of the new provisions and lessen tax payments.