Tax changes for expats 2018

There are some major changes in store for the 2018 tax year and we have outlined some of the more significant ones to help with your tax preparation planning:

— Redesign of Form 1040: The new design uses a “building block” approach. Form 1040 is supplemented with new Schedules 1 through 6, which will be required to use for U.S. tax filers living outside the United States.

— Forms 1040A and 1040-EZ are unavailable to file your 2018 taxes. If you have used one of these forms in the past, you will not file Form 1040.

— Most tax rates have been reduced. The 2018 tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Therefore, the top tax bracket will no longer be 39.6%.

— The standard deduction amount has been increased for all tax filers. The new amounts are:

1) Single or Married filing separately: $12,000;
2) Married filing jointly or Qualifying widow(er): $24,000;
3) Head of household: $18,000.

— The personal exemption has been suspended. Therefore, you will not be able to claim a personal exemption deduction for yourself, your spouse, or your dependents.

— There are other tax law changes affecting the 2018 tax year, but the ones listed above will impact nearly all tax returns prepared for 2018.

Expat pay in China, Singapore drops, Hong Kong rises, according to ECA survey

The average cost of hiring an expatriate middle manager in Singapore has dropped to US$220,095 from US$235,545, a 5% drop, according to MyExpatriate Market Pay, published by ECA International. “Singapore saw one of the most dramatic falls in expatriate costs in Asia, with the average pay package falling US$12,450 on the result of lower salaries being provided and also a fall in the costs of various benefits,“ said Lee Quane, regional director – Asia at ECA International. China also dropped significantly by about US$6,000 to US$276,387.

In contrast, expatriate pay packages in Hong Kong rose in 2017, after hitting a five-year low in 2016. The pay package for a middle manager in Hong Kong last year was US$268,514, a rise of US$3,027 compared to 2016. Malaysia also fell significantly by US$17,188 resulting in an average pay package of US$150,868. Cheaper accommodation than its Asian neighbors, and a low tax regime were the main factors cited for the lower pay rates. Japan topped the list globally as the most expensive place to hire expats.

US brokerages close accounts of American expats

According to a report on the indonesianexpat.biz website, American expatriates are being informed by their US brokerages that their accounts are being frozen or that they need to close down their accounts. Brokerages such as Fidelity, Wells-Fargo and Merrill Lynch no longer wish to do business with non-US residents through their US offices, according to the report. Merrill Lynch and Morgan Stanley have been sending out letters to clients informing them of the need to close their accounts by a particular date, and to either find alternative managers or cash out the assets under management. However, overseas branches in the countries of the client often have little knowledge of, or the ability to handle IRAs or 401(k) plans through which many US clients are investing. Nor do they have sufficient knowledge of the US investment landscape. The reluctance to do such business is largely a result of the increased due diligence required, and its consequent costs, under the “Know Your Customer” rules and Foreign Account Tax Compliance Act (FATCA). As a result, unless expats have large sums to invest, their business is viewed as not being sufficiently commercial by brokerages.

US civilians working for US military lose relocation expenses tax break

US expats working overseas for the US military are discovering that they no longer can offset their relocation expenses against tax unless they are in active service. Although the change took effect back in January as part of the Tax Cuts and Jobs Act of 2017, for some employees, their HR department has only recently informed them of the change. In April, nine federal employee associations submitted a letter to the US General Services Administration (GSA) seeking for the issue to be addressed, which was soon followed by a letter to the GSA from Mark Warner and Tim Kaine, Democratic Senators from Virginia, asking that the agency’s administrator “rectify this situation immediately”. In the meantime while the matter is resolved, some US government agencies are already deducting relevant taxes from payrolls in the absence of an official instruction to the contrary.

Dynasty trusts boom as rich US citizens take advantage of new tax ceilings

Under the Tax Cuts and Jobs Act of 2017, the amount that can be passed to heirs has doubled to about US$22 million per married couple, but the new threshold is only good until 2025. As a result, the use of a ‘dynasty trust’ is becoming popular as a means by which Americans can pass on their wealth to future generations in a tax efficient manner beyond that date.

Dynasty trusts can be funded tax free with assets up to about US$11 million, and with complex tax planning for even higher amounts. According to the Los Angeles Times 12 of the top US wealth planners say they are seeing increased interest in the trusts. Although the trusts can only be set up in a few states that allow for trusts without expiration dates such as South Dakota or Delaware, state residency is not required. The trust then pays out some of the returns on the assets to the nominated heirs, while the remainder is reinvested within the trust. Recipients enjoy the income free of estate and gift taxes, although taxes may be due on the operations of the underlying assets. The trust also controls how its assets are managed and to whom the returns are paid, and thus may be used to shield assets from the heirs’ creditors or former spouses.

Tax exemptions for foreign investment in local start-ups

In order to attract foreign investment to help boost start-ups in the Special Administrative Region, the Hong Kong government is considering making investments into its ITVF scheme by foreign funds or persons easier and tax exempt, according to a report by law firm Deacons.

The ITVF scheme was established by the government’s Innovation and Technology Venture Fund as a co-investment vehicle between the government and international venture funds. Under the current arrangement, strict territorial conditions have meant that foreign investors may lose their tax exempt status. To address this, the Innovation and Technology Bureau has proposed to expand the current list of Specified Transactions to also include a share transaction in an ITVF scheme investee company that is carried out through or arranged by a Specified Person, or carried out by a non-resident partner fund.

The Inland Revenue Ordinance (Amendment of Schedule 16) Notice 2018 was tabled on the May 2nd, and clarifies that a “non-resident ITVF partner fund” means a partner fund that is a non-resident person to which the general profits tax exemption in section 20AC applies.

The Notice will most likely be enacted on 22 June, according to the report.

FBAR FILING DEADLINE

If you are not already speaking with one of our CPA’s, we just want to remind you that the expat tax filing deadline is just two weeks away (June 15). While expatriates do receive an automatic extension until June 15 to file instead of the usual April 15 deadline, this extension does not apply to any tax due, and we highly recommend filing as soon as possible to minimize potential interest and penalties.

Might miss the June 15 deadline? No worries. We can help you file an extension until October 15. However, you must submit the extension by June 15 to qualify. Contact us now to get started.

 

Tax challenges for “Accidental” Americans make the US news

The challenges facing “accidental” Americans in dealing with U.S. tax regulations have once hit again the American mainstream news. Accidental Americans are generally defined as individuals who have acquired U.S. citizenship through a parent, but who have not lived in the U.S. They are still subject to the same tax regulations as Americans living in, or who grew up in the U.S.

Bloomberg has reported how accidental Americans living in France are taking legal action against the Foreign Account Tax Compliance Act (FATCA), claiming to have been denied proper banking services because of it. FATCA requires foreign banks to report financial accounts held by U.S. citizens to the Internal Revenue Service (IRS) in the U.S.

France’s administrative Supreme Court is due to rule around the end of the year on a case that claims the application of FATCA is unconstitutional. On April 22, the NBC Nightly News also covered the challenges accidental Americans face when it comes to dealing with the FATCA regulations.

IRS Building

The U.S. Treasury Department and the Internal Revenue Service (IRS) released a third notice April 16 (Notice 2018-26) regarding the so-called “Toll Tax.”

The notice is part of the transition to a new territorial tax regime and signals the intent to issue regulations related to mandatory repatriation.

The main takeaway is that Notice 2018-26 communicates how the U.S. Treasury Department and the IRS plan to issue future regulations that will generally not take into account certain transactions. The transactions covered under the notice are those the IRS deems were entered into with a principal goal of reducing a U.S. shareholder’s toll tax when the U.S. shareholder’s toll tax liability is determined.

The notice also communicates how certain foreign taxes accrued in the toll tax year reduce post-1986 earnings and profits. It also:

–clarifies rules for determining the foreign cash position of specified foreign corporations that are liquidated, acquired, or disposed of;

–turns off the downward attribution of stock from a partner to a partnership when the partner owns less than five percent in the relevant partnership;

–and clarifies that an election is available with respect to both current year operating losses and net operating losses from a prior year.

The notice also modifies the previous Notice 2018-13 by excluding accounts receivable and accounts payable with a term of more than one year for determining net accounts receivable for the purposes of calculating the aggregate foreign cash position; and provides penalty relief related to Section 965, as well as waiving similar penalties with respect to estimated toll taxes in connection with changes to existing stock attribution rules.

U.S. taxpayer got an extra day to file their taxes after the IRS’ website crashed yesterday and issued an error message advising tax filers to “come back on Dec. 31, 9999.”

The IRS says the website crashed due to “system issues” that began shortly after the April 17 tax deadline yesterday. The IRS did not communicate the cause of the crash, while noting Aprils 17 is the “busiest tax day of the year.”

Following the restoration of the IRS website  in the evening of  April 18, the IRS said individuals and businesses with a filing or payment due date of April 17 have until midnight Wednesday, April 18 to file.

The filing deadline for 2017 for expat taxpayers who resided outside of the U.S. as of April 17, 2018 remains June 15, 2018.

Expat and U.S. taxpayers can also apply electronically for a six-month extension.

Have any questions about expat taxes? Find out how we can help free of charge for an initial consultation with one of our U.S. tax experts.

There has been a lot of discussion among the expat community about how the new Transition Tax (also called a “Toll Tax” or “Repatriation Tax”) could affect their tax bills.

 

Unfortunately, many taxpayers’ concerns are warranted, since some expats will likely see a higher tax bill for their 2017 returns who own a stake in a specified foreign corporations (SFC), consisting of:
  • a 10% or more share of a controlled foreign corporation (CFC);
  • or a 10% share or more of any foreign corporation in which one or more domestic corporations is a U.S. shareholder owning a share of 10% or more (the foreign corporation does not have to be a CFC).

The stated objective of the Transition Tax is to replace the long-standing ability to defer foreign source income through non-U.S. corporate holdings, with a one-time deemed repatriation tax applied to those earnings. While the actual calculations are somewhat complicated and based on information generally included in Form 5471, the tax is essentially determined by calculating the net earnings and profits (E&P) of all SFCs.

Taxpayers affected by the Transition Tax may opt to pay the one-time “deemed repatriation tax” over eight annual installments, with the first installment due on the same date as their tax return. The election to pay the transition tax in eight installments must also be made by the due date of the return.

The tax is paid using a separate voucher specifically used for the Transition Tax, i.e. if you owe taxes for 2017, you will make two payments, one for your tax return and the other for the Transition Tax payment.

Who is affected? For the 2017 tax year, anyone filing Form 5471 under Categories 4 and 5 (Category 2 and 3 filers may be required to file for 2018 and subsequent tax years). The tax also applies to any taxpayer holding 10% or more of a CFC or a CFC with one or more domestic corporations as a U.S. shareholder (see above).

What do to? Tax filers can elect to pay this tax in eight installments, with the first payment due by their tax return’s due date (June 15 for U.S. expat tax filers who are eligible for the automatic two-month extension). The election to pay installments (instead of a one-time lump sum payment) must also be made by your federal tax return’s extended due date. We will need to create a separate letter of engagement for calculations of the total Transition Tax figure and exact amounts due under an eight-year installment election, as this requires a thorough review of your foreign corporation’s financials under U.S. tax law.

If you think you might be concerned by the Transition Tax, our team of U.S. tax experts are ready to walk you through the process  — find out how we can help free of charge for an initial consultation.

 

The Internal Revenue Service (IRS) has issued a circular March 23 reminding taxpayers that income from virtual currency transactions is reportable on their income tax returns.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions, and in appropriate circumstances, are liable for penalties and interest. In severe cases, taxpayers may be prosecuted and criminal charges could include tax evasion and filing a false tax return.

Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.

IRS Building

Scam groups pretending to be charitable organizations are enticing people to make donations to groups or causes that don’t actually qualify for a tax deduction, according to the Internal Revenue Service (IRS) in a recent circular.

The scam has been added to the IRS 2018 list, known as the “dirty dozen” of most commons scams that taxpayers may encounter, particularly at returns-filing time. Tax professionals are also at risk from scams.

The U.S. tax authority has seen a “steep upswing” in the number of reported thefts of taxpayer data from tax practitioners, according to a report by Forbes.

There has been a re-emergence of old scams such as the “new client” scam. In this ruse, a phishing email is sent purporting to be from a potential new client, with an attachment holding malicious code, masquerading as background details on the client or an IRS communiqué. Once opened, financial data is stolen, and scammers then submit fraudulent tax returns on behalf of the individuals, so that tax refunds are generated. These are then collected in various ways by the scammer.