How does the new tax law impact expats?

Recent tax reform has changed tax obligations. These changes impact not just those currently living in the United States, but also those living abroad. Some changes that will specifically impact expats include adjustments to exclusion rates and corporate taxes.

Exclusion rates and expats: Some things remain the same, some change

The Foreign Tax Credit and Foreign Earned Income Exclusion remain the same. This is important as these laws help to better ensure that expats are not subject to double taxation.

However, the calculation used to determine how inflation impacts the exclusion rate has changed. Previous law based the calculation on the “regular consumer price index.” The new law shifts to a focus on the “chained consumer price index.” This is likely to result in a higher tax obligation for expats.

Corporate tax rate changes: Business owners could face a steep tax bill

Those who own businesses abroad will likely see an increase in tax obligations this year. The tax law changed the United States from a worldwide system of corporate taxation to a territorial system. This means expats who own a business outside of the United States will likely need to pay a one-time repatriation tax. This tax is basically calculated as 15.5 percent of any overseas profits that were not previously taxed.

Foreign assets: Reporting requirements basically unchanged

Unfortunately, the complex reporting requirements required for those who hold foreign assets remain essentially untouched. This means expats are still required to report using forms like the Foreign Bank Account Report (FinCEN 114), Foreign Account Tax Compliance Act requirements (FATCA) and the Report of Certain Foreign Corporations (Form 5471).

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