Tax Reform and U.S. Expats: The Good, the Bad and the Same

Source: CPA Practice Advisor

Here’s what we know. The new tax reform bill called, Tax Cuts and Jobs Act (TCJA), is the first time in 30 years that the tax code has been fully transformed. While it is expected to ease tax filings and processing for Americans, the same can’t be said for American Expats. These are US Citizens who live abroad (whether for personal or professional reasons), and who are also required to file with the IRS annually. For years, this group of tax-paying Americans have raised concerns about changes they would like made but unfortunately, for the most part, their voices were ignored. Below is a look inside the new tax reform bill for US Expats:

What hasn’t changed:

The Foreign Information Reporting Requirements Expats are required to submit, in addition to their tax returns, are largely unchanged. The Foreign Bank Account Report, AKA FBAR or FinCen 114, the FATCA requirements - Form 8938, Form 5471 (Report of Certain Foreign Corporations), Form 3520 (Report of Foreign Trusts), and the Net Investment Income Tax, are still here and unchanged. This means that many Expats will continue having trouble banking abroad and face onerous penalties if they fail to file.

The two most important tax code provisions for Expats, the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit have also not been substantially changed. Expats can use the FEIE to exclude over $100,000 in earned income, from their US taxes each year and can use the FTC to reduce their US taxes dollar for dollar by the amount they have paid to a foreign government. This allows individuals to try to avoid double taxation and this has been largely unchanged in the Tax Cuts and Jobs Act. However, the way the FEIE will increase going forward has been changed, which brings us to what has changed.

What’s New:

The new tax reform changes the way inflation is calculated and will affect a number of tax-related issues. Inflation calculations had previously been calculated using the “regular consumer price index,” but going forward the IRS will use the “chained consumer price index.” The end result is a lower rate of inflation will be used to calculate the increase to the FEIE, which will increase taxes over time.

Modifications were made in tax brackets, exemptions, and deductions. Tax brackets are now larger, meaning you may now be in a lower bracket than you were previously, and the standard deduction has been nearly doubled. For those considering a move to or from the US, two new issues should be considered: 1) the moving deduction has been completely eliminated; 2) the individual mandate, as part of the Affordable Care Act has been eliminated. Unfortunately, the Net Investment Income Tax was not eliminated and will still impact Expats.

The corporate tax has been the most talked about change. This tax reform bill has transitioned the US to a territorial system of corporate taxation. Before, the US operated using worldwide taxation, meaning that corporations had to pay taxes on the income they earned abroad. This change will affect Expats who own corporations outside of the US, because they will face a one-time deemed repatriation tax of 15.5% of any previously untaxed overseas profits as the US transitions to a more territorial system for corporations instead of a worldwide system.

For US Expats, the new tax bill is pretty much the same tax bill with disappointments and frustrations for the nearly 9 million Americans living away from the United States. And, those who own small businesses abroad may actually find their situation is worse under the TCJA than under the old system! We at Zhong and Sanchez will help you sort through TCJA and advise on your international exposure under TCJA. We are dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at https://calendly.com/zhongsanchez

The New Employer 401(k) Match: How Generous Is Your Boss?

Source: https://www.forbes.com/ 

Between the corporate tax cut and the tight labor market, more companies are moving to increase pay and benefits, including their contributions to retirement plans.  In a January survey, one out of four employers told Willis Towers Watson that they have increased their 401(k) match this year or plan to do so next year.

But there’s a catch: If you don’t pay attention and pick the right percentage of salary to save, you could miss out on getting the full increase in the match.

Under the most common match formula, an employer contributes $1 for every $1 the employee saves up to some percent of salary---say 6%. Under the next most common arrangement, the employer contributes 50 cents for every $1 the worker puts away, up to some percent.

In a typical match increase, the employer raises the percentage of salary they’ll match—say from 5% to 7%. But to get that increase you’d have to save at least 7% of your salary. It’s called “stretching” the match in retirement-speak. “As an employee, you’ve got to put more skin in the game,” says Rick Unser, a retirement plan consultant in Hermosa Beach, California, who says he sees employers starting to make employees stretch to contributing 8% or 10% in order to get the full match.

Robert Lawton, a retirement plan consultant in Milwaukee, Wisconsin, has seen some radical employers moving to a 25% match on 12%, meaning workers would need to contribute 12% of pay to get the maximum employer matching contribution of 3% of pay. “You get the employees to contribute more even though the employer is contributing the same amount,” Lawton says. Usually, the employer is contributing more, and the employee is contributing more as well.

The rule of thumb is you should save 15% of your salary (including any employer match) each year for 40 years. The problem is that many workers haven’t saved anywhere near that much in the beginning of their careers, some have been in and out of the workforce, and others have been in the gig economy, where they don’t have access to a workplace retirement plan, Lawton points out, noting that a lot of workers need to be saving more than 15% of pay.

That said, here are two ways employers are trying to get their employees to at least 15% of pay saved (employee and employer contributions combined). Honeywell recently announced that in April, for workers currently getting a 75% match on the first 8% of pay, the match will increase to 87.5% (for a maximum employer match of 7%, up from 6%). For workers currently getting a 37.5% match on the first 8% of pay, the match will increase to 43.75% (for a new maximum employer match of 3.5%, up from 3%).

At Visa, employees will have to start saving 5% of salary to get the new, increased employer match, which can bring them to the 15% goal. Today Visa matches 200% of employee contributions up to 3% of salary, for a maximum employer match of 6% of pay. The new Visa match, effective in late February, will be 200% of employee contributions up to 5% of salary, for a maximum employer match of 10% of pay. In a paternalistic move, Visa will be changing its default employee pre-tax contribution from 3% to 5%—for workers who contribute less than 5%.

What if you work for a company—or are considering a job switch to one—that has a match that’s less than $1 for $1 on 6% of pay? Check if there's a profit sharing plan or a pension plan, says Rob Austin, director of research at Alight Solutions. “If not, maybe you’re behind the competition,” he says.

When in doubt, consult a trustworthy CPA! Zhong and Sanchez is dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at https://calendly.com/zhongsanchez

Picture credit: shutterstock

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