Happy New Year from CPAs for Expats! Now that the holidays are over, the lights have been put away, and we are settling in for a long, dreary winter (or a long, hot summer, for those US expats in the Southern Hemisphere), it’s time to start thinking about things that really matter:
The NFL Playoffs.
Of course, I’m talking about tax season. The IRS opens its “Modernized eFile” (MeF) system every year in January, and along with it begins the annual flurry of activity at CPA offices around the world—including here at CPAs For Expats—preparing for millions of US expats to file their annual income tax returns.
We will go into some more nitty-gritty detail in future blog posts, but for now, let’s go through some of the big changes that we will have to look forward to this year. While there was no grand overhaul of the tax system this year as there was for the 2019 tax season, there is still plenty of new stuff to get used to. Let’s start with the most obvious:
New Forms! (Again!)
Here we go again.
Last year, taxpayers were “treated” to the IRS’s “new and improved” forms, which took the neat, two-page Form 1040 we had all gotten used to and “simplified” it into a smaller form, which was allegedly supposed to fit on a postcard. I blame Ivanka Trump, who was giving speeches promoting the “postcard”-sized form, even after it became apparent that the Tax Cuts and Jobs Act (TCJA) did not provide for that in the new law.
In any event, the IRS redesigned the form so that many common forms of income appeared on the main form, while other information was relegated to one of six new numbered schedules. Practically speaking, most taxpayers needed at least one of the new schedules, especially the execrable Schedule 6, which was where you had to enter the foreign components of your address—kind of essential for most US expats.
The backlash against the new forms was enough to force a bit of a course correction at the IRS. The 2019 versions of the forms, while not returned to 2017 levels of normalcy (there is still quite a bit of empty space at the bottom of the page), are a vast improvement over the 2018 versions. This year, more information appears on the main form; and while extra income still appears on Schedule 1, all additional taxes (last year’s Schedules 2 and 4) are reported on Schedule 2 and all additional credits and payments (last year’s Schedules 3 and 5) are reported on Schedule 3. Schedule 6, mercifully, has been eliminated completely—your complete foreign address can now fit on the main form.
This year, Schedule 1 includes a new question at the very top of the form: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
This means that the IRS wants to know if you were party to any transactions (generating, giving, or receiving) involving virtual currencies, such as Bitcoin, Ethereum, or Litecoin.
This question is not directly connected to taxation (you can answer “yes” to the question and still not owe tax), but keep in mind that virtual currency is taxable like any other form of income. For example, if you bought Bitcoin and then sold it at a profit, you would have to pay capital gains tax on the earnings; and if you did a job and were paid in Ethereum, you would have to report the earnings as wages and pay tax accordingly. US expats who do work in multiple countries and who get paid in cryptocurrency need to pay extra attention here in order to avoid potential problems in the future.
If you were born before January 2, 1955, you can use the new Form 1040-SR, the US Tax Return for Seniors. The 1040-SR is essentially the same form as the regular 1040, but with larger print, so it fills up more of the page. In addition, the amounts for the standard deduction are shown as the default amounts for seniors, instead of the amounts for most taxpayers.
Speaking of the standard deduction…
Standard Deduction Goes Up—Slightly
In 2018, the standard deduction was doubled as part of the revamping of the tax system under the TCJA. This year (like in most years), the amount of the deduction is being adjusted upward to account for inflation. This means most married taxpayers will get a standard deduction of $24,400, unmarried taxpayers or married taxpayers filing separately will get $12,200, and heads of household will receive a deduction of $18,350.
The personal exemption remains at zero, having been suspended under the TCJA last year. This means that non-resident aliens filing Form 1040NR still have to pay tax beginning with their first dollar of income (more on Form 1040NR in a future post).
The Foreign Earned Income Exclusion
The most important number that many US expats care about is the amount of the Foreign Earned Income Exclusion—the amount of income Americans earning income abroad are allowed to exclude from income tax completely. This amount has gone up slightly, from $103,900 in 2018 to $105,900 in 2019.
Tax Brackets Also Adjusted for Inflation
The dollar amounts where tax rates change have also been adjusted slightly for inflation. The tax rates themselves remain unchanged from last year, divided into seven brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The actual amount on which you will be subject to taxation (as well as the bracket you will fall into) will depend on your filing status (married filing jointly gets the best rates, married filing separately gets the worst rates) and the amount of deductions you take to reduce your taxable income.
Well, not really, but close.
The TCJA essentially eliminated the tax penalty (the “Shared Responsibility Payment”) for not having health insurance as of 2019, so the IRS removed the checkbox affirming health coverage from the form, and also got rid of the requirement to file Form 8965 to claim an exemption from the tax penalty—especially useful news for US expats, who used to have to claim exemption “C” (“Citizens Abroad”) for every member of their family.
Obamacare (officially, the Affordable Care Act) still impacts taxpayers who purchased their health insurance through the online Marketplace or who received an advance payment of the Premium Tax Credit—an unlikely scenario for US expats, but not impossible.
Updates at CPAs for Expats
Of course, your favorite US expat CPA firm hasn’t been sitting still either. We have increased our workforce by more than 30%, and we just moved into new, spacious offices which can accommodate our growing firm.
More importantly, our prices have not increased at all. Most US expat returns will qualify for our best-in-the-industry pricing of $279 for the tax return and $75 for the FBAR. See the CPAs for Expats pricing page for details or contact us to get a custom quote.
In Conclusion, and Looking Forward
The beginning of 2020 does not bring with it a whole new understanding of the US tax code, in contrast to last year.
However, 2020 looks to be an eventful year for multiple reasons, not the least of which is the upcoming US presidential race: Primary contests to find the Democratic Party’s challenger to President Trump begin in February, with the general election in November.
Meanwhile, President Trump himself enters the new year with the specter of an impeachment trial looming in the Senate, and while it remains unlikely that he will be removed from office, the political situation in the US remains unstable.
CPAs for Expats will keep you updated with the latest developments, and please continue to watch this space for more US expat tax news.
Need to file US taxes? Wondering about the IRS’s amnesty programs? Click here and let’s see how CPAs for Expats can help!