US Expat Tax Reforms- How Does the US Expat Tax Affect You?

Although tax reform was a hot topic a while back, very little of the media coverage dealt with US expat tax. In fact, if you had searched for articles written on this topic, you would have found they weren’t current.

So let’s see how the US expat tax affects you under the Trump administration.

US Expat Tax – The Basics

Before we get into details, let’s review the basics of the US expat tax. As a US citizen or a green card holder, you’re subject to US tax on your income earned worldwide. It doesn’t matter where in the world you live, thus living outside the country isn’t different from residing in the US when it comes to paying taxes. You don’t get to forget about your US taxes when you board the plane.

A Brief History of US Expat Tax Law

The US is unique in that it requires all American citizens to report their worldwide income, even if they live overseas. Most other countries have different types of laws. The US expat tax began during the Civil War because many landowners fled to Canada, but until 2010, the IRS had limited means to enforce the requirement for them to pay taxes.

During the 2008 financial crisis, the Obama administration changed this when they passed the Foreign Account Tax Compliance Act (FACTA). This obligated foreign banks and other firms to give up their American account holders’ details to the IRS—and this included account balances. This gave the government the reach it needed globally to enforce US expat tax.

When it comes to US expat tax, there are special rules allowing you to reduce how much you owe the IRS. These rules may allow you to pay very little or zero US tax while you’re living in another country.

For Most Expats the US Expat Tax Won’t Affect you

Some provisions that apply to Americans living in the states also apply to you as an expat. Thus, it’s possible that you might lose certain itemized deductions. But tax reforms aren’t going to make changes to the main provisions that apply to expats—such as the foreign housing deduction/exclusion, foreign tax credit (applied to individuals), or the foreign earned income exclusion. The above slight changes don’t apply, though, if you own your own business and are an expat. Everything you’ve loved about it up to now, as far as legal structuring for expat entrepreneurs and US expat tax for self-employed individuals, might be confusing.

How Does the US Expat Tax Affect you if You’re an Entrepreneur?

Self-employed and entrepreneur expats may have to pay US social security taxes, depending on if they’re also paying foreign social security taxes, and if they live in a country with which the US has a Totalization Agreement. As an expat entrepreneur, the best way to structure your business is to operate it as a non-US corporation, provided you don’t have people actually in the US running your business operations. As a non-US corporation, you get US expat tax benefits.

US Expat Tax Benefits for Businesses Set up as a Non-US Corporation

On the initial $100,000 of net income you get from your business, your non-US corporation allows you to not have to pay anything for US tax. Your non-US corporation gets rid of these following three items as well:

1. The self-employment US expat tax – about 15% on the first $118,000.

2. Businesses where “capital is a material income producing factor,” the 30% US expat tax rule applies.

3. The scaleback rule. This reduces the effectiveness of the foreign earned income exclusion for persons who are self-employed with a gross income of over $100,000.

With the amount over $100,000, you would pay US expat tax as if you were living in the United States.

US Expat Tax – What to do if You’re Behind

If you’re an expat and haven’t filed a US tax return because you didn’t know you had to, you can catch up. You can back-file missing tax returns if it’s only been a couple of years. If you’ve missed three or more years, you can catch up without penalties under the Streamlined Procedure – an

IRS amnesty program. However, if you’re behind, we would advise you to catch up as soon as possible. If the IRS contacts you, you won’t be able to claim the Foreign Earned Income Exclusion. If you’re unsure of how to do this, you can get advice from a US expat tax professional.

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