TAX MATTERS Recent US Tax Developments For The American Expatriate Community The Tax Cut and Jobs Act of 2017 (TCJA) brought about sweeping tax reform that significantly impacted the American expatriate community. Additional assistance channeled to expatriate parents through expansion of the child tax credit was largely offset by fresh tax compliance aggravations for expatriate entrepreneurs with the new Global Intangible Low Tax Income (GILTI) regime. The international tax landscape has remained dynamic since and several new developments over the past year continue to have relevance for American expatriates. Fortunately, the changes since the TCJA have been overwhelmingly favourable and continue to signal an understanding of the burdens Americans living abroad have faced with respect to tax reporting back home. Importantly, several less prominent provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 27, 2020, may also have the potential to provide some assistance to American expatriates. And much of this assistance will lapse at the end of 2020. Additionally, while many business owners abroad were ineligible to take advantage of the CARES Act business provisions, recent changes to the GILTI regime create a new tool to efficiently manage this tax exposure. Finally, a new relief programme was launched for American owners of foreign retirement vehicles and certain savings arrangements that will eliminate a challenging annual tax reporting obligation.
COVID-Related Relief
The $1,200 Economic Impact Payments issued by US Treasury earlier this year provided much needed support to eligible members of the American expatriate community who had been impacted by the pandemic. In addition to the cash payments, several lesser-known elements of the CARES Act may also have the potential to help expatriates who have needed to tap into savings or have incurred losses from their business during the shutdown. Changes to Qualified Retirement Plan Access. During the 2020 calendar year, qualified individuals may access up to $100,000 from their US retirement accounts under preferential rules. The 10% penalty on early distributions is waived and income tax exposure can be spread across the year of distribution and the two following years. 10
AMERICAN IN BRITAIN
In order to qualify for this relief: 1. The taxpayer, a spouse, or dependent must have been diagnosed with COVID-19 by a test approved by the CDC; or 2. The taxpayer must have experienced adverse financial consequences as a result of: a. being unable to work due to lack of child care; b. being quarantined; c. being furloughed or laid off; d. having work hours reduced; or e. closing or reducing hours of a business due to COVID-19. These provisions also allow any qualified plan distributions to be returned to the arrangement within three years without adverse tax consequences. Any tax paid on distributions that had been included in income, but later recontributed back to the plan within the three-year window, can be reclaimed by filing an amended return requesting a refund. Note that while tax relief on such retirement distributions may be offered in the United States for eligible individuals, it will be important for American expatriates to determine how such a distribution would impact their UK tax exposure. The US-UK Income Tax Treaty does contain a provision that is designed to coordinate tax exemptions on pensions between the two countries; however, the exact language of the treaty may not be broad enough to encompass this specific treatment. Taxpayers living in the United Kingdom and claiming CARES Act-related retirement distributions will need to discuss UK tax implications of any distribution with their tax advisor.
Changes To Net Operating Loss (NOL) Rules
The TCJA changed the rules for personal NOLs, eliminating the two-year carryback provision and allowing for an unlimited carryforward. The new CARES Act unwinds the TCJA treatment for NOLs incurred in 2018, 2019, or 2020. The carryback mechanism has been reinstated and expanded to five years from the two-year provision in place prior to the TCJA. NOL planning may not create much opportunity for American expatriates who are using foreign tax credits or the foreign earned income exclusion to manage their
US tax exposure; however, if the move abroad has been recent, this may still be a very valuable option. If a loss is incurred following the move, it could potentially be carried back to a year when income was fully taxed in the United States. Of importance, when claiming the foreign earned income exclusion, expenses are disallowed to the extent attributable to excluded income. Taxpayers who have been claiming the foreign earned income exclusion may find that their net operating losses are reduced or eliminated by application of the exclusion. If the foreign earned income exclusion is revoked, it cannot be claimed again for five years without IRS consent. Additionally, the TCJA had created a cap on NOLs, limiting the amount that can be claimed in any year to 80% of adjusted gross income for the year the loss is applied. The CARES Act relief also removes this restriction, allowing NOLs applied in years prior to 2021 to offset 100% of income reported in a carryback or carryover year. Any losses carried over beyond the 2020 tax year will be subject to the TCJA 80% limitation.
New Rules for Charitable Contributions
For 2020, Taxpayers who will be itemising deductions are permitted to deduct charitable contributions up to 100% of their income, instead of the 60% limitation that would have otherwise applied. Taxpayers who do not itemise will be permitted to claim a deduction of up to $300 in addition to the standard deduction for contributions to certain public charities with their 2020 tax return. Typically, in order to claim a benefit for charitable contributions, Taxpayers must elect to itemise deductions, thus losing the standard deduction ($12,200 for single taxpayers in 2019).
Changes to the Foreign Earned Income Exclusion
Ordinarily, the foreign earned income exclusion will require that a taxpayer meet either the physical presence test, requiring 330-days of foreign presence during a 12-month period, or the bona fide residence test, which requires a full calendar year of presence in a foreign country along with strong connections. In Revenue Procedure 2020-27, the IRS indicated
