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Tax Reform for US Expats

Tax Reform for US Expats
Ines Zemelman, EA
18 September 2019

For many years, virtually everyone recognized the look of the iconic tax return form - the Form 1040. It was complicated, yet consistent. But that changed with the passage of the Tax Cuts and Jobs Act - the most significant tax reform to occur in over 30 years.

The 2018 tax season introduced the postcard sized Form 1040 for some taxpayers, but for others this new form only moved questions from the Form 1040 to new attachments and schedules. Many taxpayers and tax professionals were upset that it didn’t get simpler, only different.

The 2019 Tax Draft

The IRS has released a draft of the 2019 Form 1040, and it is once again different. While some of the 2018 changes to the form remain, you will notice that it has returned to a more familiar look and feel. Some of the changes for 2019 include:

  • Income and tax deductions are on the first page
  • Capital gains and losses are on the first page rather than on a schedule
  • Better description of the requirement to name the spouse who is filing separately or a non-dependent child if filing as head of household

  • The Earned Income Credit and the Additional Child Tax Credit sections are highlighted. Incidentally, if you are an expat be sure to claim your Additional Child Tax Credit.

  • Foreign addresses are now entered on the main form instead of in Schedule 6
  • The checkbox to note your health insurance coverage is not on the form since it is not required any longer

Expat Deductions and Exclusions

The Foreign Earned Income Exclusion will increase to USD 105,900 in the 2019 tax year. Changes to the standard deductions are:

Filing Status

Standard Deduction

2019

Standard Deduction

2018

Standard Deduction

2017

Single

12,200

12,000

6,350

Married Filing Separately

12,200

12,000

6,350

Married Filing Jointly

24,400

24,000

12,700

Qualifying Widow

24,400

24,000

12,700

Head of Household

18,350

18,000

9,350


Note that married filing separately is the most frequently used status for expats whose spouse is not a US citizen.

Elimination of Form 2555-EZ

Form 2555-EZ could be the most frequently used tax form for US expats. Beginning with the 2019 tax year, the IRS has announced that this form will no longer be used. From this point forward, only Form 2555 will be used.

New Tax Form for the Elderly

All US citizens, even seniors retired abroad, must file their taxes accurately and on time. The IRS will be releasing Form 1040-SR, a simplified return meant for seniors to use. Form 1040-SR is only two pages long and makes it easy to report social security, pension, IRS distributions, and annuity income.

For elderly US expats, they can also enter other income, interest, and dividends directly on the simplified two page form.

It is not known yet whether senior expats with foreign tax credit on the retirement or foreign wages may use this form. The instructions to the form are not available and it is not known whether this form may be incorporated in one file with forms 2555 for the foreign earned income exclusion or form 1116 for the foreign tax credit. We will provide the update once the IRS issues the finalized version of the form.

Most likely, the simplified form 1040-SR will be useful for the senior with the simple income structure (US Social Security benefits,  pension and annuities). The retirees with more complicated income structure will be better off using the standard form 1040.

The IRS is Focusing on Tax Compliance for US Expats

In July of 2019, the IRS issued a statement making it clear they will be focusing on US expat tax compliance.

A primary area of focus in on FATCA compliance. If you happen to receive a compliance notice from a foreign bank or the IRS, you do have options. You can provide a Form W-9 to the foreign bank, and you can take advantage of the IRS Streamlined Filing Compliance Procedure.

If you find yourself in a situation of non-compliance, or simply want help navigating the new forms, contact a tax professional to help guide you through it.

Ines Zemelman, EA
founder of Taxes for Expats