The US tax system has undergone dramatic changes since Trump’s tax reforms took effect. Notable among these changes are the effects they will have on corporations, individuals, and US expatriates. The Tax Cuts and Jobs Act, otherwise known as TCJA made sweeping changes to US tax laws, and it's imperative that all of the amendments and additions are fully understood for compliance purposes. The TCJA is approaching its second year since inception, and it is the most significant modification of federal tax code in decades. Several important modifications were implemented through the new tax legislation, notably an increase in the standard deduction from $6000-$12,000 for individuals. For married couples, that figure increased to $24,000. For the 2018 tax year, 90% of filers took the standard deduction, reducing compliance costs to $5 billion annually.
Naturally, there are many pros and cons of the modified tax code, such as the reduction of important deductions such as state and local taxes paid, and mortgage interest. Based on the updated tax reforms, an overwhelming number of US citizens and permanent residents will be subject to lower tax liability moving forward. Roughly 5% of taxpayers were required to pay more taxes in 2018 than they paid before TCJA was implemented. Notable among the changes was a sharp reduction in the corporate tax rate from 35% to 21%, with full deduction of capital investments through 2022. According to the Tax Foundation Taxes and Growth Model, the net impact of the new tax law will see the US GDP improve by an estimated 1.7% over a 10-year budget window, with reduced conventional federal revenues of $1.47 trillion, and a decrease of $48 billion on a dynamic basis.
Delinquency, Tax Filing, and Tax Fairness for Americans Abroad
The multi-faceted components of the Tax Cuts and Jobs Act requires laser focus when it comes to US expats. This is particularly true of filers who have neglected, forgotten, or simply avoided filing Form 8938 and FBAR (Foreign Bank Account Reporting) with the IRS and the Treasury Department respectively. Those who have failed to file their tax returns in previous years need to carefully assess the new tax law to ascertain whether they will be delinquent, compliant, or in violation of reporting requirements. As it stands, nearly 2 years after TCJA, any US permanent resident or citizen living abroad meeting the tax reporting requirements of the IRS will still be required to pay taxes, and file returns with the IRS. The new legislation certainly changes the field of operations for US taxation, but that only relates to US corporations. This means that the current tax legislation is somewhat territorially based, but it certainly doesn't affect the tax reporting obligations of US expats.
While then candidate Trump touted the adoption of a shift towards residence-based taxation, this has not occurred at an individual level and expats are required to report income derived abroad to the IRS. True to form, The Tax Fairness for Americans Abroad Act of 2018 made provisions for an end to citizenship-based taxation. However, George Holding’s bill was introduced just before the recess. The thrust of this bill was to exempt US expats from having to pay taxes on foreign income.
The Importance of Understanding George Holding’s Tax Proposals
Unfortunately, for those hoping for greater traction with this bill, problems abound. It was introduced while Republicans held a majority in Congress. Now, it would have to be reintroduced by Democrats and signed as a bipartisan bill to be passed. In essence, this bill, if it ever passed (section 911 A) would add a provision stating that non-resident citizens can choose to be considered as qualified non-resident citizens, having only their US-based income taxed, and excluding all incomes derived from abroad. This would mean a tremendous difference in the overall tax burden paid to the IRS.
In the event that bipartisan agreement on George Holding’s bill gains ground, FBAR reporting requirements would not change. Anyone with $10,000 + in foreign financial accounts would still have to report that to the Treasury Department and file annual FBAR returns. Any US person with 10% + ownership in overseas companies would still have to report that information. This means that FATCA reporting rules remain in effect for US expats. Anyone who has failed to disclose details of their foreign income, or holdings in foreign corporations is still protected to a degree by the IRS amnesty programs. And on this note, the IRS is more interested in disclosure than it is on punishing US taxpayers for filing late, or not at all.
This lenience is designed to get more people to participate in reporting by way of amnesty programs. US expats needn't disclose their entire tax history either. The Trump Tax Cuts only require 3 years of tax returns to be disclosed under the streamlined procedures system. However, all foreign bank account reporting must be submitted as far back as 6 years. Punitive measures are also limited for those with foreign offshore accounts, or foreign income. These streamlined procedures require that taxpayers meet the non-residency requirement vis-a-vis the payment of taxes, reporting of income, and the timely filing of returns. Foreign tax credits and foreign earned income exclusions can be used to mitigate the tax burden owing to the IRS.
Consult an Expert to Avoid Confusion, Punitive Measures, and Criminal Charges
Taxpayers are strongly cautioned against trying to navigate these choppy waters on their own. With all the changes that have been introduced, it is important to use the expert services of a tax preparation consultant who understands the IRS streamlined procedure. It is absolutely essential to select an office that deals specifically with expat taxation, not merely a middleman who is seeking to capitalize off the fears of expats living in uncertainty. The streamlined procedures serve as one of many tax amnesty programs that are available. While this one is designed for non-willful delinquent taxpayers, there are some options available to delinquent taxpayers too.
If you failed to file your FBAR for example, or you neglected to include essential information on your tax return, you may be able to avoid criminal prosecution by paying cash penalties. For this reason alone, it is imperative that US expats in contravention of reporting requirements to learn about their options. All of this is taking place against the backdrop of limited tax amnesty. For this reason, it is imperative to act sooner rather than later. Tax amnesty is often a stopgap measure designed to facilitate compliance among defaulters. There are pros and cons to each program, and it's always advisable to contact a professional expat tax preparation consultant to know what your options are.
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