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10 Proposed Tax Reform Changes & Impact On Americans Living Abroad (Expats)

1. No change to citizenship based taxation (CBT): First and most important – under the current House proposal the Worldwide Taxation system of the Individuals residing abroad would not change. The Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC)remain intact.

2. Potential for higher tax: Potential for higher tax for taxpayers with children in low-tax or no-tax countries. Despite doubling the standard deductions, this group of taxpayers will be negatively affected by elimination of personal exemptions.

Working example — UAE:

US taxpayer, married to non-US citizen, resides in UAE in a private house, has two dependent children. In 2016, from a salary of $130K, the taxpayer was able to exclude $101,300 through FEIE & standard deductions and personal exemptions for 3 people totaled $18,500. After calculations, the remaining US taxable income was $200.

Assuming all else being equal (passive income, housing arrangements, source of earned income, filing status), under the new rules, standard deductions are doubled to $12,000 but through the loss of personal exemptions, the taxpayer’s remaining US taxable income would be $6,500, taxed at a 25% rate.

3. Increased child credit, but families with children may be worse off: Increased child tax credit from $1,000 to $1,600 per child (even with proposed increase to $2,000 per child) does not compensate loss of personal exemptions. For qualifying households, child tax credit of $1k per child was available in addition to personal exemptions. Increased amount of credit per child of $1,600 now replaces the personal exemption of $4,050 but this credit is available only to those who qualify.

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. Unless the threshold for child credit is raised, families with children will face increase in taxable income.

Whole Story at TFX.

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