September 27, 2017
The Trump administration unveiled their plan for comprehensive tax reform in the US. For Americans living in Canada, or other nations with higher tax rates than the US; the decrease of the tax rate will make no real impact to us, as we are able to use the Foreign Tax Credit to eliminate any US tax obligation.
There is one area which may create a favourable impact for certain expats. The Child Tax Credit.
If you have US children under 17, you may be able to claim a refund of up to $1,000 per child on your US tax return. The proposed changes were light on details, but would increase the credit from $1,000 to an unspecified amount.
As the bill currently will add to the US deficit, it is facing an uphill battle to pass as currently proposed. Keep posted to see how the tax reform bill evolves.
October 26 update:
Today the US Congress passed budget legislation paving the pathway forward to the Senate taking up a vote on comprehensive tax reform. Vox.com provided some interesting insight from Representative Barton's (R-Texas) perspective, as he is one of the few members of congress who was present for the 1986 tax reform proceedings, led under president Regan. This was the last time comprehensive tax reform in the US was undertaken.
Here are his thoughts below:
“I am one of the few people that was here in 1986 and we had the president of the United States strongly committed — Reagan — and the speaker of the House strongly committed, Tip O’Neill, and the Senate leadership strongly committed, and it barely passed and it took a year and a half, and it took several meltdowns,” Barton said.
How can something come together and get his vote this year?
“Well, you do a lot of praying,” Barton said.
Absent any details from the Whitehouse, Senate, or Congress- I am worried that comprehensive tax reform will not pass before the end of the year.
November 5 update:
Last week the House Ways and Means committee unveiled their 400-page plan for tax reform. I have looked at it and here are my findings:
As was expected, the doubling of the standard deduction was included in the plan.
Although the child tax credit was expanded from $1,000 to $1,600 per child, the amount which could be paid out as a refund remains at $1,000.
Good news is the phaseout of the benefit is increased by $120,000 from $110,000 to $230,000- meaning that more expats will be able to claim refunds on their US tax returns. As this legislation is still in draft form, these numbers are subject to further change before they become law.
November 23 update (Happy American Thanksgiving!):
Last week the bill passed the House, where it went onto the Senate for discussion. As I have mentioned above, I worry that this bill may not pass. I was confident it would pass the house, but the Senate is where I am worried.
There is not a lot of wiggle room for opposing Senators. According to CNN, The Senate can only afford to lose two republican votes, and there are presently seven senators who are either opposed, or could easily oppose the bill as written. (http://www.cnn.com/2017/11/20/politics/tax-bill-senate/index.html)\
The man who is at the helm of the tax law changes is Senator Orrin Hatch (R-Utah), who is the Chairman of the Senate Finance Committee.
I have had the opportunity to meet Senator Hatch, when I was in University. My impression of Senator Hatch from back then runs true with his actions thus far. He is tough, but fair in advancing agendas he believes in. Tax reform is absolutely an agenda he believes in, and as he is coming up on retirement, I sense this bill has more meaning, more impact to him as the outcome of this bill will define his legacy.
One of the changes Senator Hatch has brought forth that impacts US citizen families abroad is that he is playing with the Child tax Credit in a favourable way. He is proposing that the eligibility for the refundable credit be available to incomes up to US$ 500,000 for persons who are married, filling jointly. This means that most expats could be getting checks of up to $1,000 (or cheques for everyone outside the US ;))if you have qualifying children under 18. Presently, the law begins to restrict the amount of the credit when you earn over US$110,000, and the children need to be under 17.
The current summary by section of the bill in the Senate can be accessed from the link below:
Please see the article titled "How to get free money from the US government as an American living abroad" for more information regarding the credit.
Alternatively, feel free to contact us, and we can see if you qualify.
December 14 update
From our last update, I am happy to admit that I am wrong. Above, I have stated that I worried that the tax bill would not be able to pass. The Senate was able to pass the tax bill, and as of this writing it looks like the House and Senate are agreeing on the major terms of the tax bill. Once the differences are finalized, the bill will go to President Trump's desk for signature.
For my fellow expats- the biggest difference comes from two areas:
The standard deduction is doubled to USD $12,000 for single persons, and USD $24,000 for married couples. This is important as more people will not need to file compared to before. Typically, if you earn less than the Standard deduction amount, you do not need to file a tax return. There are exceptions to this rule, so please contact us to see if you would need to file under these new rules.
The maximum amount expat families can earn to get refundable child tax credit will increase from USD $55,000 to USD $500,000. This is subject to limitations, please contact us for more details to see if you qualify.
Once the bill is signed by President Trump, I will add a final update.
December 28 update
The bill passed, and was signed by president Trump! So here's the update with respect to the child tax credit. This amount did change from my last post, and there were some changes with respect to the additional child tax credit.
Bottom line: The refundable portion (the amount of money you could receive as a cheque from the IRS) has increased from US$1,000 to US$1,400. The other piece of good news is that if you have children under 18 eligible for a social security number, this credit is available to you if you earn less than CDN$240,000 (if filling single) or CDN$500,000 (if filling jointly) you are eligible for the credit.
For expats with kids- this is a big deal. Another US$400 per child per year can make a large impact.
If you have any other questions regarding the new tax law, (Tax Cut and Jobs Act), feel free to contact us.
About the author: Ian Davis is currently Canada’s only former IRS auditor; and Founder and President of US Tax Resources Inc. A Canadian firm whose mission is to provide stress relief from US tax through simple and affordable tax preparation and advisory services.
Ian is a dual US/Canadian citizen living with his family in Canada.