In December 2017, the U.S. government introduced several tax changes. These tax changes not only impact U.S. individual and corporate taxpayers but U.S. citizen taxpayers residing in foreign countries as well. For U.S. citizens residing in Canada and other foreign countries, some of these tax changes are in favor of the cross-border U.S. citizen while some come with additional tax burdens.
It is important for U.S. citizens residing abroad to be aware of these tax changes, and take the necessary tax planning measures for tax changes that impact them. Planning your taxes can help avoid or minimize the tax burden wherever possible.
To help you plan your tax situation, the following is an overview of the U.S. tax reforms that affect U.S. citizens residing abroad, including Canada, beginning with the tax year 2018 and onward.
U.S. Taxes for Americans Living Abroad
Increase in Estate Tax Exemption Limit
Beginning in 2018, the estate tax exemption limit has been increased to $11.2 million per person ($22.4 million for a married couple). This results in fewer Americans residing abroad being impacted by the estate and gift taxes.. As the exemption also applies to gift taxes, this increased exemption limit, f, makes it easier to renounce U.S. citizenship. Since individuals with net worth above $2 million are subject to a repatriation tax, they are now able to gift more of their estate to minimize the exit tax burden.
Nevertheless, affluent U.S.-Canada cross-border citizens should consider taking estate tax planning steps. In addition, planning steps should be taken when transferring assets between a U.S. spouse and Canadian spouse to avoid any unnecessary estate taxes.
Proper estate planning is also required if a Canadian individual is moving to the United States or owns U.S. real estate property. Non-citizens of the U.S. are entitled to this increased exemption pro-rated based on the value of U.S. assets relative to worldwide assets
Increased Child Tax Credit
Although the child tax credit has increased, families with children may be worse off. The new law increased the child tax credit from $1,000 to $2,000 per child. When a taxpayer’s child tax credit is more than their tax liability, they may be eligible to claim an additional refundable child tax credit as well as the child tax credit. This additional child tax credit has increased to $1,400. up from $1,000 per qualifying child)
In 2017, the phase out income threshold was $55,000 for married couples filing separately; $75,000 for single or head of household filers; and $110,000 for married couples filing jointly. The new phase-out begins at $200,000 for all except married filing jointly begins at $400,000.
Unfortunately, these additional benefits replace the exemptions previously allowed for dependents. From tax year 2018 onward, the personal exemption deduction for yourself and dependents will no longer available. In most cases, the increased child tax credit does not compensate for the loss of personal exemptions. In the past, for qualifying households, the child tax credit of $1,000 per child was available in addition to personal exemptions. Increased amount of credit per child of $2,000 now replaces the personal exemption of $4,050 but this credit is available only to those who qualify.
This tax largely impacts U.S. Canada cross-border business owners, such as U.S. citizens (dual citizens), who own 50% or more of a business in Canada, also known as a ‘controlled foreign corporation’ (CFC) for U.S. tax purposes. Unfortunately, not only large business owners, but small business owners, with U.S. citizenship that have Canadian corporations are also affected by this. Repatriation tax is a one-time tax on retained foreign earnings,that the CFC has made since 1986. The tax is 15.5% on cash and investments held in the corporation and 8% tax on non-cash assets. The repatriation tax burden can be a significant amount. As a result, the U.S. government has announced a period of 8 years to pay the tax. The new repatriation tax helps pay for the transition to a territorial corporate tax model from a worldwide one. The measure is also a potential windfall for investors if U.S. multinationals subsequently increase dividend payments.
In some cases, this repatriation tax may be offset by generating tax in Canada by paying dividends or bonuses. The Canadian tax on this income will be higher since Canadian income tax rates are higher than U.S. tax rates. Foreign tax credits for these Canadian taxes may be used to offset the U.S. tax burden and unused foreign tax credits (FTCs) can be carried forward for 10 years. As a safe tax practice, it is best to consult a cross-border tax professional to help strategize tax measures to offset the repatriation tax burden.
Elimination of Moving Expenses Deduction
Many Americans residing in foreign countries often claimed the moving expense deduction for expenses incurred in relocating to a new location for work reasons. However, now they will no longer be able to avail this deduction as it has been eliminated other than for members of the Armed Forces.
Changes to Itemized Deduction
As an alternate to ‘standard deduction’, U.S. taxpayers could claim a tax deduction of many expenses through the ‘Itemized Deduction’ option if they could provide substantial supporting documents for these expenses.
The standard deduction is raised from $12,700 to $24,000 for married couples. For single filers, the standard deduction will increase from $6,350 to $12,000 and head of household can claim $18,000. Because the standard deduction amount has been almost doubled, the new law limits foreign residing U.S. citizens’ ability to claim several other expenses. These changes are as follows:
- The mortgage interest deduction is limited to the interest paid on $750,000 ($375,00 for single taxpayers) of acquisition debt acquired AFTER December 15, 2017 down from the current $1 million ($500,000 for singles). In addition, interest on home-equity loans will no longer be deductible after December 31, 2017.
- The limit on charitable contributions has been increased to 60% of AGI.
- State and property tax deduction will be limited to $10,000 ($5,000 for singles). There will still be a choice to deduct either state income tax or sales tax.
- There will be no deductions allowed for casualty losses unless incurred in a Federal disaster.
- The miscellaneous itemized deductions (subject to 2%) are gone. These include employee business expenses, investment expenses, tax preparation fees, job hunting, etc.
- Medical expenses return to being deductible at 7.5% of AGI in 2017 AND 2018. They will return to 10% in 2019.
- There will be no phase-out of itemized deductions.
Changes to Alimony
For agreements entered into after 2018, the payments will no longer be deductible to the payor(er), nor included in taxable income of the recipient. Specifically for expats, this may negatively affect those who pay alimony to a non-resident alien spouse. This will effect taxation in Canada under the treaty if the recipient and payor live in different countries
No Foreign Tax Credit (FTC) for Net Investment Income Tax
If the U.S. citizen has investment income above AGI threshold limits ($250,000 for a married joint filer), then they are subject to an additional 3.8% net investment income tax. This tax was put in place as a “medicare tax” for individuals who earn large amounts of investment income. However, this tax liability may not be offset with FTC’s, thus, resulting in double taxation.
U.S. tax changes impact U.S. citizens and greencard holders, regardless of which part of the world they reside in. With various tax changes announced for the tax year 2018 onwards, it is best practice to consult a U.S.-Canada cross-border tax professional to guide you with these tax changes, and manage your U.S. and Canadian tax situation without increased tax burden.
AG TAX LLP CAN HELP
If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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