With the signing of the “Tax Cuts and Jobs Act” on December 22, 2017, many tax rules affecting expats have been modified. This article lists the main law changes, their potential impact on American citizens living in Israel and my take on the new law.
Reduction of Tax Rates & Higher Standard Deduction
Most tax rates have been modified temporarily for tax years 2018-2025 (after which they will revert back to the prior rates). The lowest rate remains 10%, while the following tax brackets have been reduced: 15% to 12%, 25% to 22%, 28% to 24%, 33% to 32%, and 35% to 33%. In addition, the highest rate falls from 39.6% to 37%. While the taxable income brackets are also slightly decreased, the new tax rates will reduce the tax imposed on ordinary income in most cases.
Under the new law, the personal exemption is suspended, but the standard deduction is increased from $6,350 to $12,000 for single individuals and from $12,700 to $24,000 for married individuals filings jointly. These changes will also expire in 2025.
What this means for Americans living in Israel is that deferred compensation funds (such as Israeli keren hishtalmut, bituach menahalim and keren pensia) will be subject to lower taxes. In addition, taxpayers who sell PFIC securities (such as Israeli karnot neemanut) during tax years 2019 through 2015 will be subject to the lower 37% rate. A good way to take advantage of these provisions is to meet with your U.S. CPA to go over the PFIC securities in your foreign portfolio and discuss whether to liquidate these investments in the near future. In addition, you may want to discuss your keren hishtalmut situation and set up a plan for yearly distributions at the lowest possible rates.
The Child Tax Credit is increased to $2,000
The tax reform raises the child tax credit from $1,000 to $2,000, of which only $1,400 will be refundable. The increased child tax credit will expire in 2025.
Repatriation tax on U.S. citizens who own foreign corporations
If you own at least 10 percent of the shares of a foreign corporation, most of whose shares are owned by U.S. persons, you will be subject to a one-time repatriation tax on the accumulated foreign earnings and profits (essentially, the accumulated profits) of your foreign corporation as of 12/31/2017 or 11/02/2017, whichever is higher. The rate for this tax will be 15.5% on accumulated profits held in the form of cash or cash equivalents and 8% on all other earnings. The new law also calls for the inclusion in taxable income of the net profits of these companies after certain adjustments starting 2018. I will discuss the full extent of the new tax rules in a separate.
Net Investment Income Tax remains in place
U.S. taxpayers will still be subject to a 3.8% minimum tax on their net investment income. This tax is imposed on the lesser of the taxpayer’s investment income (such as dividends, interest, capital gains etc.), or their modified adjusted gross income in excess of $200,000 for single individuals ($250,000 for married individuals filing jointly).
This tax is especially relevant for Americans living abroad who take distributions from their foreign corporations in the form of dividends. Corporate distributions must be planned taking this tax into account.
Estate & Gift Tax Exemption is increased to $11.2 million
The new law increases the life-time estate and gift tax exemption from $5.6 million to $11.2 million. This tax benefit is especially important for tax planning involving gifts and retirement planning of expats with U.S.-situs property.
My take on the new law:
Despite high initial hopes, the panorama still looks complex for U.S. expats after the passing of Trump’s tax reform. The new law creates several opportunities for tax planning and some exposure to higher taxes which can be mitigated through qualified tax planning. As always, I cannot overemphasize the importance of getting professional advice. The variables are endless depending on the situation and they go beyond the scope of this article.
The content of this post is intended to provide general information on the subject and does not constitute legal or tax advice. You should consult with a tax professional where appropriate.