Tax Reform for US Expats

The look and feel of iconic tax return form, the Form 1040 has been virtually recognized by everyone for many years. Although the form is complex yet consistent. With the passage of time it changed through Jobs act and tax cuts which recognize as the most significant tax reforms over a period of 30 years.

In 2018 tax season the size of this form 1040 changes to postcard for some taxpayers who don’t have to fill requirements not applicable to them, but for others this is only shifting of the questions to other forms which need to be attached with this form. Many taxpayers and tax professionals are not happy with this change as it did not simplify the form rather split the information to multiple forms.

The 2019 Tax Draft

In 2019 the IRS released a draft of Form 1040 which introduced some modifications to returned it to more familiar look while preserving some of the changes of 2018. Some of the changes for 2019 include:

  • Income and tax deductions are now available 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, an expat can claim his Additional Child Tax Credit.
  • Foreign addresses section from schedule 6 are also moved to main form.
  • Health insurance coverage checkbox is removed from form, since it’s no longer required.

Expat Deductions and Exclusions

In 2019 tax year foreign earned income exclusion limit increased to USD 105,900. Standard deduction changes are as under:

Filing StatusStandard Deduction 2019Standard Deduction 2018Standard Deduction 2017
Married Filing Separately12,20012,0006,350
Married Filing Jointly24,40024,00012,700
Qualifying Widow24,40024,00012,700
Head of Household18,35018,0009,350

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

From the beginning of 2019 IRS has announced that Form 2555-EZ used for expats will no longer be used. From this point forward, only Form 2555 will be used.

New Tax Form for the Elderly

All U.S. citizens, even seniors retired abroad, must have to file their taxes correctly and timely. The IRS will be releasing a simplified two pages Form 1040-SR to make it easy for seniors 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 clear that whether senior expats with foreign tax credit on retirement or foreign wages may use this form. The instructions to the form are not available right now and it is not known whether this form will be incorporated in one file with forms 2555 for the foreign earned income exclusion or form 1116 for the foreign tax credit. We will update once the IRS finalized and issued revised version of the form.

For the seniors with the simple income structure (US Social Security benefits, pension and annuities), it is most likely the simplified form 1040-SR will be used. While it will be better for retirees to use the standard form 1040 in case of more complex and complicated income structure.

The IRS is Focusing on Tax Compliance for US Expats

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

A primary area of focus in on FATCA compliance. If you have received a compliance notice from a foreign bank or the IRS, you have option to 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 understanding the new forms, contact a tax professional to help and guide you through it.