Tax Update for Americans Living and Investing Abroad

General Provisions

The 2017 Tax Cut and Job Act (TCJA) included major revisions to the taxation of individuals. This included the temporary (through the 2025 tax year) reduction or elimination of deductions for:

• State and local taxes in excess of $10,000.
• All real estate taxes on foreign property.
• A portion of the mortgage interest on new mortgages in excess of $750,000.
• Unreimbursed employee business expenses.
• Miscellaneous deductions such as tax return preparation and investment-related expenses.
• Alimony for divorces finalized or modified after 12/31/18.

Other changes included:

• Personal and dependent exemptions were eliminated.
• A new tax credit of $2,000 was created for children age 16 or younger provided they have a U.S. social security number. For all other children and other dependents, a credit of $500 is now allowed.
• Beginning in 2019 medical expenses can now be claimed as an itemized deduction only to the extent they exceed 10% of adjusted gross income. This threshold had previously been 7.5%.
• The standard deduction was increased to $24,400 (married filing joint) for 2019.

Changes Specifically Relevant to U.S. Citizens Living Abroad

The two most significant tax provisions impacting Americans living abroad – the Section 911 exclusion and the foreign tax credit – remained unchanged by the 2017 tax law. There were however changes such individuals should keep in mind.

• Housing-related expenses that are not deductible as an itemized deduction (e.g. disallowed mortgage interest and real estate taxes) can be used to increase the section 911 foreign housing exclusion or deduction.
• The deduction for employment-related moving expenses is disallowed through 2025. Because these expenses are no longer deductible, any direct payments or reimbursements for these expenses by an employer now constitute taxable compensation subject FICA, Medicare, and federal and possibly state income tax withholding.
• U.S. citizens who own at least 10% interest in a controlled foreign corporation must now pay U.S. income tax of at least 10.5% on the earnings of the foreign business. The income on which this new tax is levied is referred to as GILTI – Global Intangible Low-taxed Income.

Tax Court Decision On Claiming 911 Exclusion

A Tax Court decision issued during 2019 proved a stark reminder of the consequences of not properly electing the Section 911 exclusion. In this case, the taxpayers elected the Section 911 exclusion on a delinquent tax return after learning they were required to actually file a return to claim the exclusion. (Note: many Americans living abroad do not file assuming they will have no taxable income after taking the Section 911 exclusion into account.). Claiming the exclusion on a delinquent return is generally allowed provided the IRS has not notified the taxpayers of the delinquency before the taxpayers file the late return(s). However, because the very specific requirements outlined in the regulations were not strictly adhered to in this case, the IRS disallowed the election and assessed a significant tax liability, penalties and interest going back more than 10 years.

New IRS Compliance Campaign On Foreign Investment Accounts

In July 2019 the IRS announced a new compliance campaign, a portion of which was aimed at U.S. citizens and long-term residents living or holding assets outside the US. As a result of FATCA (‘Foreign Account Tax Compliance Act’) having been in place for almost 10 years, the IRS now has data from non-U.S. financial institutions on the foreign financial interests of millions of Americans and long-term residents. Measures outlined include the denial of U.S. passports where significant unpaid tax liabilities have been determined by the IRS.

New IRS Procedure for Noncompliant Expatriated Citizens

On September 16, 2019, the IRS also announced new procedures for ‘accidental expatriates’ who relinquished their U.S. citizenship on or after March 18, 2010. This procedure was created to address compliance failures occurring after the enactment of the Foreign Account Compliance Tax Act (FACTA) which required for the first time the reporting of investments maintained outside the U.S. by U.S. citizens and long-term residents. The new procedure will allow them to become compliant with all U.S. tax and reporting requirements and avoid classification as a ‘covered expatriate’ – a designation that can lead to harsh U.S. tax consequences. The basic requirements of the new procedure are that the individual must have unpaid U.S. taxes of no more than $25,000 for the past six years and a net worth of less than $2M. The procedure requires the filing of income tax returns and financial account information returns (e.g. FinCen 114 – Report of Foreign Bank and Financial Accounts and Form 8938 – Statement of Specific Foreign Financial Assets) for the past six years.