How Will Trump’s New Tax Bill (Tax Cuts and Jobs Act) Affect You?
Foreign Earned Income Exclusions and Foreign Tax Credits
As of January 1, 2018, the new US tax laws have come into effect. Firstly, it is important to note that the Foreign Earned Income Exclusions and Foreign Tax Credits remain unchanged for the most part. Accordingly, a US citizen who is living and working in Israel, and paying taxes on their foreign earned income to the Israeli tax authorities, will continue to be able to utilize the Foreign Earned Income Exclusions and/or the Foreign Tax Credit. For a majority of expats, this eliminates most or all taxes that would otherwise be owing to the US government.
Net Investment Tax
Unfortunately, the 3.8% Net Investment Tax still remains, as well. This tax applies only to high income earners with passive income. If you have been filing your US tax returns from abroad and have never heard about this tax, it likely does not apply to you, so no need to start worrying about it now.
The Standard Deduction
The Standard Deduction has been doubled to $24,000 for the married-filing-jointly status, and $12,000 for all other filing statuses. That means that $24,000 of a married couple’s otherwise taxable income will automatically be deducted and not taxed. This deduction is always a given, no matter what other exclusion or tax credits will be utilized. For a taxpayer who usually did not itemize deductions and was not eligible to claim that many other tax credits, this will likely end up helping the bottom-line tax bill.
No More Personal Exemptions
Although this sounds great, there is a catch: the tax bill also eliminates all Personal Exemptions. When we look at the whole picture, considering the changes to both the standard deduction and the personal exemptions, the new laws will actually end up producing less favorable results for many taxpayers. This can be illustrated by the following example: In 2016, the standard deduction was $12,600, and the personal exemption amount was $4050 per person listed on the tax return, including both spouses and each child/dependent claimed. So, for a family with two spouses and one child, the results are not changed much by the new laws pertaining to standard deduction and personal exemptions; however, for a family with more than one child, the new laws are actually less advantageous to this end.
Child Tax Credits
In order to compensate for the above detriment, the Child Tax Credit has been doubled to $2000/child (from $1000/child), and the refundable portion, known as the “Additional Child Tax Credit”, has been raised to $1400/child (from $1000/child). To help illustrate how the effects of this change compare to the effects of the changes to the standard deduction and personal exemptions, I have been explaining to my clients that while the standard deduction and personal exemptions reduce the taxpayer’s taxable income, the child tax credit actually offsets the taxes owing. So, for a taxpayer at the 10% income tax bracket, one child tax credit of $2000 is worth $20,000 in standard deductions/personal exemptions, whereas the old $1000 child tax credit is only worth $10,000 in standard deductions/personal exemptions. As such, when we add the changes to the child tax credit to the larger picture, we come out with better end results for most families with children.
In addition to the increase to the child tax credit amounts, the child tax credit phase-out threshold has been raised as well. Under the previous legislation, the child tax credit began to phase out for single filers with income of $75,000 and married-filing-joint filers with $110,000 of income. The new tax code increases the phase out threshold to $200,000 for single filers and $400,000 for married-filing-joint filers.
What does this all boil down to at the end of the day for US taxpayers residing out of the US? Most such taxpayers first pay taxes to their local government on their annual income, and then take either the Foreign Earned Income Exclusion or the Foreign Tax Credit on their US tax returns to offset most or all of the US taxes assessed on their income. As a result, most expats do not end up owing any tax with the filing of their US tax returns. In fact, many have even been receiving the refundable portion of the child tax credits of up to $1000 per year. In the common situation just described, many taxpayers with US children under age 17 will end up receiving refunds of up to $1400 per child!