US President Donald Trump has made a lot of noise about his tax reforms – but what do they mean for American expats?
The answer is not a lot.
The 9 million or so Americans living overseas will not notice much difference when they come to file their next lot of taxes.
The major reform is smoke and mirrors.
The way inflation is calculated is changing. Many tax computations are worked including the ‘regular consumer price index’.
This has been consigned to the financial dustbin.
From now on, the Internal Revenue Service will work with the ‘chained consumer price index’.
The result for expats is the Foreign Earned Income Exclusion (FEIE) will be worked on a lower rate of inflation that will see tax bills rise. The change might be slight now, but over time, especially as the cost of living rises, then the IRS will be taking a bigger chunk of expat income.
The other major change impacting expats is how tax brackets have changed. Most have widened, so many expats will be netted in a bracket with a lower tax rate, while the standard deduction has almost doubled.
At the same time, the moving deduction and individual mandate have been scrapped.
For Americans owning a business overseas, the reform of corporate taxes may leave them worse off.
Although the basis of taxation has moved onshore rather than worldwide, any untaxed profits moved to the US face a one-off repatriation tax of 15.5%.
FATCA and FBAR
Everything else stays the same.
FATCA – the Foreign Account Tax Compliance Act – is still running as before despite the Republicans pledging to repeal the law as part of their election promises.
FBAR – the Foreign Bank Account Report – is still part of the annual tax filing along with a welter of other forms explaining offshore financial holdings.
The FEIE still allows a $100,000 earnings offset and the IRS will accept setting off income tax paid overseas on a dollar-by-dollar basis.
The result seems to be Americans at home will benefit from easier tax filings and smaller bills from Trump’s Tax Cuts and Jobs Act, while the situation remains normal for expats.