By Olga Kocybik (AIWC Düsseldorf)
If you are a US citizen or resident alien living outside the United States, even though you may not owe any US tax, you generally are required to file US income tax returns, estate tax returns, and gift tax returns. Some may also be required to file a state or local tax return.
Regardless of whether you are required to file U. tax and information returns, if you have an interest in or signature or other authority over foreign (non-US) financial accounts - and the aggregate value exceeded $10,000 at any time during the year - you generally must file a Report of Foreign Bank and Financial Accounts (FBAR).
In late 2017 Congress passed the Tax Cuts and Jobs Act (Tax Reform). Tax Reform largely does not affect individual’s taxes until the 2018 tax year, which we file in 2019. This article will highlight the most important changes for U. resident aliens and US citizens living outside the United States (collectively referred to in this article as “expatriates” or “expats”).
2018 Minimum Earned Income
Whether someone must file a federal income tax return depends on their gross income, filing status, age, and whether they are a dependent.
As Tax Reform eliminated personal exemptions through 2025, minimum gross earned income requirements for filing a US tax return now equal only the standard deduction for one’s filing status. For the 2018 tax year, they are as follows. It is important to note that other minimum income filing requirements apply to those over age 65 and children with unearned or investment income, as well as self-employed individuals with annual net earnings of at least $400. The below gross “earned” income figures would also include non-employee income reported on Form 1099-MISC.
- $5 if married filing separately (MFS)
- $12,000 if filing single
- $18,000 if filing head of household
- $24,000 if married filing jointly (MFJ)
Foreign currencies will need to be converted to US dollar equivalents (see Euro exchange rates below).
In addition, some individuals may be required to file a tax return or submit other
information returns even if they earn LESS than the minimum income for their filing status. It is also important to note that because retirement benefits are not “foreign earned”, they are not eligible for the Foreign Earned Income Exclusion and, although, these payments are usually taxable only in the country of residence, you are/may be required to file a US tax return to report such income.
Tax Reform Changes Applicable to Expats
Tax Reform has not affected the reporting requirements for those with regular employment, sole proprietors or self-employed. If your tax returns are generally not complex, such as you use the Foreign Earned Income Exclusion ($104,100 in 2018) or foreign tax credits and normally do not pay anything with the filing of your US return, you will see no changes except for the layout of the forms: some schedules have been added, some eliminated or combined with others; and, line items are set out differently as well.
In a nutshell, Tax Reform resulted in the following:
- the income tax bracket spread has increased resulting in lower tax rates, but this will have no effect on the overall filing situation for many expatriates
- the standard deduction has increased to $12,000 for single and MFS and $24,000 for MFJ taxpayers. The personal exemption has been eliminated
- some itemized deductions have been capped or eliminated
- the Child Tax Credit has doubled to $2,000 per qualifying child per year
- alimony has become neither taxable income to recipients nor tax deductible for payers
- the estate, gift, and generation-skipping tax limit amounts have almost doubled to $10 million (from $5.49 million)
In addition, for 2018, the tax rates and brackets for the unearned income of a child have changed and are no longer affected by the tax situation of the child’s parents. The new tax rates applicable to a child’s unearned income of more than $2,550 are 24%, 35%, and 37%.
Other Aspects of Tax Reform Affecting Expats
Despite lobbying by various expat groups, FBARs are still required to be filed based on the $10,000 threshold and, as anticipated, the Net Investment Income Tax (NIIT) has not been repealed for those living abroad.
Note: NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts
Deadlines for Filing 2018 Tax Returns (Form 1040) and Information Returns
April 15, 2019
- file individual tax return (Form 1040) - for expats, this deadline is automatically extended until June 17, 2019
- file Report of Foreign Bank and Financial Accounts (FBAR) - or simply wait until October 15- the automatic extension deadline
Note: Expat children with foreign financial accounts are also required to file FBARs
- file trust return (Form 3520), or apply for an extension until September 16, 2019
June 17, 2019
- file Form 1040 or an extension of time to file until October 15, 2019, file Form 4868
- in order to avoid late payment penalties, make a payment of any US tax you owe
Note: In general, such late payment penalties - as well as interest on unpaid tax amounts - would apply to those who changed residence countries during 2018 and, therefore, may owe some taxes in the US those who owe NIIT; and/or to some business owners.
September 16, 2019
- file the extended trust return (Form 3520)
October 15, 2019
- file the extended tax return (Form 1040); or
- apply for an additional two-month extension to file Form 1040 until December 16
- file the FBAR (October 15 is an automatic 6-month extension/no additional extension is possible)
December 16, 2019
- the final deadline to file 2018 US tax returns
Delinquent Tax Returns and FBARs? For those who and have not already been contacted by the IRS, the IRS does have voluntary disclosure programs. For eligible US taxpayers residing outside the US, under their Streamlined Filing Compliance Procedures all penalties are waived. Requires filing past 3 years tax returns and past 6 years FBARs.
Tax Reform and Business Owners
One of the key changes relate to what is known as the “Repatriation Tax”. It is also called “Section 965 Tax” or “Transition Tax” and deals with a one-time tax assessment on previously accumulated earnings and profits of specified foreign corporations. This part of Tax Reform is very complex and is a topic in itself.
In short, imagine a US citizen who lives and runs a business through a GmbH in Germany and pays every cent of German tax due here. Before the reform took place, the profits of active foreign companies would have been deferred and not taxed by the US until they are distributed to US owners. As a matter of fact, since Germany is a high tax jurisdiction, there would be no additional US tax burden except for a possible 3.8% NIIT. On US returns, earnings and profits less dividends would have been reported as a cumulative amount year after year.
Starting with tax year 2017 returns, business owners have been subject to a one-time Transition Tax on the accumulated earnings and profits (from the year 1986 to-date) at a rate of 8% or 15.5% depending on the nature of assets held by the company. Foreign taxes paid by the business are disallowed as credits on an individual tax return. The tax would be payable in 8 instalments starting with the filing of 2017 tax return.
Starting with 2018 returns, current business earnings must now be included as income in the owner’s individual US tax return without any regard to foreign tax credits. For many, these provisions might mean double and retroactive taxation of foreign profits, but not for those operating in Germany. As long as the business profits have been taxed in Germany at a rate higher than 21% (which is the new corporate tax rate enacted by Tax Reform), the individual taxpayer would be able to elect to be taxed as a corporate entity and offset the U.S. tax calculated on the current earnings with the German business income taxes they paid here. While the election adds another layer of complexity when it comes to the filing of U.S. tax returns, it is viewed as a solution to many business owners operating in high tax jurisdictions.
Foreign Currency Conversion Exchange Rates
Yearly average January 1-December 31, 2018: €1=$1.1792; $1=€ 0.848 (when reporting income on tax returns)
At the end of the calendar year (as of December 31, 2018): €1=$1.1468; $1=€0.872 (when reporting
balances of financials accounts on FBARs and on a Statement of Specified Foreign Financial Assets (Form 8938))
Disclaimer: In applying the provisions of this and any other tax article, it is important to understand the impact of applicable tax laws will vary between individual taxpayers. Please consult your tax adviser to determine how the tax laws discussed may affect your particular US tax situation.
References
https://fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange/current.html
https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates
