Expat Tax Blog
Article 4 of a Series
The first 3 articles in this series addressed some of the larger changes to the tax code due to the passage of the Tax Cuts and Jobs Act. In this final article, several less impactful changes, or changes affecting fewer people, are described.
Alternative Minimum Tax (AMT)
The alternative minimum tax has caught more and more taxpayers who were never meant to be the ones penalized by it. The tax reform law has made changes to remedy that situation, and has increased the income level for the AMT exemption so far fewer middle class taxpayers will owe it. The exemption amount has been increased to $109,400 for married couples and widow(er)s and $70,300 for singles or those filing separately. The exemption phaseout does not occur until $1,000,000 for married couples and $500,000 for singles and those filing separately.
Retirement contributions is an area of tax law that have historically provided many benefits. The changes here are relatively minor. The ability to recharacterize Roth IRA conversions from traditional IRAs, SIMPLE plans, SEP plans, 401(k), and 403(b) plans was repealed. There is still the ability to treat regular contributions to traditional or Roth IRAs as being made to one another.
Previously, retirement account loan balances became immediately due upon termination of employment. Now, if a taxpayer’s employment is terminated while they have an outstanding retirement plan loan, the plan sponsor can offset the account balance with the loan balance. If the plan sponsor does this, the employee can now roll over the balance to another eligible plan any time until the loan due date.
Other laws that were passed in 2017 & 2018 give retirement plan owners access to their funds to help with disaster losses. These losses need to have occurred due to federally declared disasters in 2016 through 2018. The benefits include waiver of the 10% penalty, the ability to include certain distributions due to hurricanes in income across 3 years, the ability to repay distributions back into the plan, more options for loans, and extended terms for loans.
Whole Story at TFX.
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.
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.
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.
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.
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.
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.
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.