2020 Tax Planning for US Individuals Living Abroad 00 2020 Tax Planning for US Individuals Living Abroad | Contents Contents Introduction 1 Chapter 1: Filing Requirements 2 Chapter 2: Special Foreign Exclusions 5 Chapter 3: Moving and Travel Expenses 14 Chapter 4: Principal Residence 15 Chapter 5: Alternative Minimum Tax 19 Chapter 6: Foreign Tax Credit 20 Chapter 7: Tax Equalization Policies 25 Chapter 8: Payroll Taxes and Special Situations 28 Appendix A: Key Figures 32 Appendix B: Sample of the Increased Section 911 Housing Exclusions that have been published by the IRS 34 Appendix C: 2020 US Federal Rates 35 Appendix D: Decisions Checklist 37 Appendix E: Forms and Statements Location Information 38 Appendix F: US Income Tax, Estate Tax, and Social Security Treaties and Agreements 39 2020 Tax Planning for US Individuals Living Abroad | Introduction Introduction US citizens and resident aliens living On December 22, 2017, President • Under prior law, moving expenses abroad must file a US tax return and, Trump signed into law U.S. tax reform were excludable from income. with several important exceptions, legislation (P.L. 115-97, commonly However, starting in 2018, these must use the same forms and must referred to as the 2017 Tax Reform expenses are now includable in compute tax by referring to the same Act). This bill represented the largest gross income. tax rules as their stateside change to the U.S. tax system in over • Alimony payments are no longer counterparts. The main exception is 30 years. Though initially enacted in deductible by the payer or special rules that allow taxpayers to 2017, updates to this legislation are includable in income by the exclude all or part of their foreign ongoing. This guide considers the recipient spouse if the divorce earned income if they meet statutory provisions of the US tax reform agreement was executed after foreign residence or physical presence legislation. The following summarizes December 31, 2018. Alimony abroad tests. While these provisions some key changes effective for tax payments made under divorce may allow significant tax benefits, it is years 2018-2025: agreements executed before this important to remember that income date are still eligible for treatment earned abroad is frequently subject to • Reduction of individual tax rates under the former rules. foreign income taxes. In turn, credits or and revision of tax brackets. deductions for these foreign taxes may • Increase of the standard provide an additional measure of US deduction. tax relief. • Repeal of Personal exemptions. This publication combines a general • Combined deduction for state explanation of the rules with an and local income taxes and real analysis of the tax issues and decisions estate taxes is limited to $10,000. to consider in preparing for, and during the course of, a foreign • Foreign real property taxes are no assignment. It is not intended to longer deductible. answer all questions but only as an • Mortgage interest is deductible introduction to the many issues facing only up to the interest on US taxpayers living abroad. When $750,000 (previously $1 million) of specific advice is necessary or acquisition indebtedness for appropriate, consultation with a indebtedness incurred on or after professional adviser who specializes in December 15, 2017. expatriate taxation is strongly recommended. • Interest on home equity indebtedness is now only Deloitte professionals in member deductible if the loan is used to firms throughout the world are buy, build, or substantially improve prepared to help US taxpayers abroad the home secured by the loan. plan for their specific US and foreign tax issues. 1 2020 Tax Planning for US Individuals Living Abroad | Chapter 1: Filing Requirements Chapter 1: Filing Requirements Who Must File? See Appendix A for current year While no formal request for this While residing in foreign countries, US amounts. additional time is necessary, the citizens and aliens considered US taxpayer’s return must include a residents must continue to follow the Joint Versus Separate Returns statement that his or her tax home standard rules for filing US income tax A US citizen or resident alien may file a and abode were outside the United returns. A single taxpayer must file if joint return with a spouse. If the States and Puerto Rico on the regular his or her gross income is in excess of spouse is a nonresident alien, due date. If a joint return is filed, only the standard deduction, and married however, the couple can elect to file a one spouse must reside outside the taxpayers who are entitled to file a joint return only if the nonresident United States in order to obtain the joint return must file only if their spouse agrees to be subject to US tax automatic two month extension. This combined gross income is at least as on his or her worldwide income for postponement of the due date does high as the value of the standard the entire year. The election to be not relieve taxpayers from paying any deduction for a married couple. A treated as a US resident may be interest due on the unpaid portion of child who is claimed as a dependent advantageous as long as the their ultimate tax liability. The tax on the parents’ return must file his or nonresident alien spouse has little or liability is still due on 15 April, and her own return if the child’s unearned no income or has foreign-source interest is calculated from such date or investment income exceeds certain income that is taxed at a higher rate (without extension) until payment is amounts or if the child has any earned overseas than in the United States. The received by the Internal Revenue income. See Appendix A for the use of a standard deduction for Service (IRS). current year amounts. In determining married individuals filing jointly may these amounts, all compensation also make the election beneficial. This An additional automatic extension of earned abroad is included in gross election can later be terminated by four months, to 15 October, is income; income that is excludable for death, revocation, or separation. In available by filing Form 4868, other reasons, such as interest on tax- considering this election, the Application for Automatic Extension of free municipal bonds, is not included nonresident spouse should also be Time To File US Individual Income Tax in gross income. A tax return must be aware that, as a US resident, US Return. This extension will not excuse filed even when the taxpayer’s foreign income tax treaty benefits that might the taxpayer from interest unless he exclusions or deductions equal or otherwise be available could be lost. or she has paid at least 100% of his or exceed gross income or when credits, her ultimate US tax liability by the time If the election is made, the such as the foreign tax credit, the extension is filed. nonresident alien spouse is taxed on completely eliminate US tax liability. worldwide income and may be entitled If the due date for filing a return Tax Rates to the special foreign earned income (including the automatic extension) There are seven tax brackets. For exclusions. falls on a Saturday, Sunday, or national 2020, the tax brackets are: 10%, 12%, holiday, the due date is the next 22%, 24%, 32%, 35%, and 37%. When to File business day. A federal return mailed Tax returns for individuals are due on from a foreign country will be The brackets are applied at different the fifteenth day of the fourth month accepted as filed on time if there is an levels of income to each of the four following the close of the tax year (15 official postmark dated on or before categories of taxpayers: single, married April for calendar-year taxpayers); the last day for filing, including filing jointly, married filing separately, however, taxpayers who are US citi- extensions. Tax returns filed by a and head of household. Children under zens or residents and whose tax private mail service must reach the IRS age eighteen at year-end are taxed on home and abode are outside the office by the required due date; unearned income in excess of certain United States and Puerto Rico on the however, returns filed with certain amounts at the trust and estate tax regular due date have an automatic designated delivery services will be bracket/rate. extension of two months (to 15 June considered to have been filed when for calendar-year taxpayers) for filing. 2 2020 Tax Planning for US Individuals Living Abroad | Chapter 1: Filing Requirements they are given to the delivery service. bona fide foreign residence test or The exclusions may be elected on a See Appendix A for a list of currently physical presence test is expected to return that has been filed by either its designated private delivery services. be met. regular or properly extended due date, or on a timely filed amended If a return is mailed after its original or The extension application is filed using return. They may also be elected on a extended due date, it is not Form 2350, Application for Extension of late return, if the return is filed within considered filed until actually Time To File US Income Tax Return, and one year of its original due date. received by the IRS. may be filed with the IRS Center in Austin, TX, or with an IRS office located Th e exclusions may also be elected on Interest and Penalties on Balance in a major US embassy in another a late return filed after one year of its Due country. A copy of the approved original due date, provided one of the A properly filed extension relieves the application should be attached to the two following conditions is met: taxpayer from a late filing penalty on return when it is filed to help reduce • The taxpayer owes no federal the net tax due (4.5% per month for IRS processing delays.