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Expat Tax Blog

Jan 6

Tax Reform and Reporting of Children and Other Dependents

by julie

As the saying goes, children are our future. Uncle Sam knows this, and he also knows how expensive it is to raise children. Taxpayers with children and other dependents have always received rather significant tax benefits to aid with the expenses associated with those dependents. The tax reform bill makes several changes that, depending on the specific situation, may either increase or decrease a person’s tax bill.

Personal exemption suspension

One of the few changes that will negatively impact taxpayers (although for many people, it will be more than offset by other changes) is the elimination of the personal exemption. This means that starting in the 2018 tax year, taxpayers can no longer claim the personal exemption deduction for themselves, their spouse, or their dependents.

Child tax credit increase

For parents, there is some very good news in the Tax Cuts and Jobs Act. The child tax credit has been increased up to $2,000 for each qualifying child under the age of 17. For lower income taxpayers, as much as $1,400 of that amount is refundable.

Many middle class taxpayers found that this substantial tax benefit was phased out for them. To remedy this, the tax reform bill increased the income level where the tax credit starts to be phased out to $400,000 (married filing joint) or $200,000 (single filers). This means more taxpayers who have dependent children can claim this tax credit, and those who do claim it can claim more.

Whole Story at TFX.

Jan 3

States Without Income Tax

by julie

There are a handful of states without an income tax, and a couple of others that only tax dividends and interest. Of course, these states must still fund government programs, so they raise the money using fees, property taxes, sales taxes, and various other sources of income. Depending on the details of your individual situation, it may be worth considering a move to one of these states to help stretch your retirement dollars.

The details below are based on data from the states and 2018 data from the Tax Foundation. The Tax Foundation data accounts for per-capita local and state taxes.

Alaska

Assuming your only consideration is money, Alaska takes first place as the clear winner. But, if the remote nature of the state and the harsh winters bother you, look further down the list for other options. Tax Foundation data shows the average local and state tax per capita came in at $7,555, which is 18th lowest among all the states. In addition, senior citizens are given a property tax exemption on $150,000 of property value.

Alaska funds the government using gas and oil royalties. Along with low taxes, full-year Alaskan residents get an annual payment from Alaska’s Permanent Fund that distributes dividends based on these royalties.

This fund has distributed $1,100 annually, on average, over the previous five years. As Alaskan production has dropped, so have the royalties, but that is still a significant amount of money for just living in Alaska. If this average royalty is subtracted from average tax paid, the result is $2,200 per capita, making it the lowest tax bill in the nation.

Florida

When you think of a state for retirees, Florida often tops the list. While weather is a significant factor, so too is the fact that Florida repealed the income tax in 1855. Florida generates funds using property taxes and sales tax (6%). The 2017 per-capita average tax paid came in at $3,322, placing Florida in 24th place among the states.

Whole Story at TFX.

Dec 31

Are royalties as a retiree subject to self employment tax?

by julie

Retiree earns $45,000 from music royalties – are these considered earned income? It depends.

First, let’s examine what royalties are. Royalties proceeds from the sale of intellectual property are considered earned income. An author/creator of work may receive extended (sometime lifetime) royalties from the result of their personal service.

Occupation matters

There are exceptions where royalties from creative work is not subject to self-employment tax. This happens where creating the intellectual property is incidental and not typical for the taxpayer profession. For example. a math teacher who once published a book of poetry will report royalties on sch E. If he had published a math tutorial then royalties would be self-employment income.

This is why TP occupation field is so important.

In the case of a retiree, we must examine what their occupation was in their younger years to determine whether they constitute self employment. In the case of the taxpayer, were he a journalist in the past, then the royalties would be self employment.

Whole Story at TFX.

Dec 28

What Do the Changes in Deductions Mean for You?

by julie

Changes in the tax rates are easy to understand, but much of the benefit of the tax reform is realized in changes to deductions. Deductions are often misunderstood by taxpayers, and are one area where there is more room for interpretation than one might otherwise expect with tax law. This leads to a level of complexity that many taxpayers find frustrating. They want to be fully compliant with the law, but also do not want to pay more in taxes than they are required to.

Fortunately, one rather significant change that will affect many people – and has the potential to greatly simplify their tax return – is an increase in the standard deduction. Although many people find it beneficial to itemize their deductions, it also significantly increases the complexity of their return and the amount of time it takes for recordkeeping.

To help reduce the complexity of returns, the Tax Cuts and Jobs Act almost doubled the previous standard deduction. For those who usually take the standard deduction, the nearly doubling of the standard deduction means a pretty clear lowering of taxes owed. For taxpayers who usually itemize, this increase may mean that they can take the standard deduction instead and have either lower or the same taxes as before without the headache of itemization.

Whole Story at TFX.

Dec 27

Why only 2% of Chinese pay any income tax

by julie

“Of course not, I’m not an idiot,” says Liu Yongli, a chauffeur in Beijing, when asked whether he has ever paid personal income tax. That may explain why personal income tax accounted for only 8% of total tax revenue in China last year, compared with an average of 24% in the OECD, a group of rich countries.

The finance ministry estimates that 187m people ought to be paying income tax. Yet a former finance official reckons that in 2015 only 28m people—just 2% of the population—did so.

A revamp of the income-tax system has been in the works for several years. A tax-evasion scandal this summer involving Fan Bingbing, China’s most famous actress, who ducked nearly 300m yuan in taxes, may have added urgency to the task. (Ms Fan was eventually fined 884m yuan.)

Fanning the flames

The public interest is enormous. A state-sponsored “consultation exercise” on the reform in July attracted over 130,000 comments which is around 100 times the average for such exercises, which the national parliament is legally required to conduct before approving new laws.

Salaried professionals in big cities have long complained that they bear an unreasonable share of the tax burden. That is because firms are legally required to withhold a portion of salaries in taxes. Employers agree to scam allowing them to shirk on social insurance contributions, which can be as high as 40% of a worker’s salary.

The finance ministry reckons that a worker on a monthly salary of 15,000 yuan is enjoying savings of around 1,000 yuan a month as a result of raising the tax-free threshold.

But the reforms also include rules that aim to make it harder for companies to avoid social-insurance contributions by paying workers under the table. Those who make more than 60,000 yuan a year will be required to file annual tax returns, starting next year.

But China has run a budget deficit in 21 of the past 22 years. Last year the deficit breached the government’s self-imposed cap of 3% of GDP. Public debt stands at around 50% of GDP. Although none of these figures is alarming, especially by the standards of the rich world, the economy’s slowing growth will eventually make the government’s debts harder to control.

Original Story at the Economist.