# Questions about Proposed US Tax Plan



## lat19n (Aug 19, 2017)

I realize this is an international forum and not every expat here comes from the US. We are US citizens who live full-time in Mexico.For the first six months of this year my wife worked as an independent contractor - which she has done for the last 16 years or so. I am retired.

There is a lot of discussion in the news lately which seems to address, in the most general way, how the proposed US tax code changes will impact people - but for the most part that talk seems to be for people who reside in the US, work for someone else etc.

I do my own taxes and have for years. I do my best to be honest with the IRS - but sometimes I really have to go with my gut.

I am looking at last year's tax return. My wife's business (schedule C, Sole Proprietorship) - I guess that is now a 'Pass Through' and there are supposed to be advantages for them in the proposed plan. What these are I have no idea.

Given the Schedule C - other than a rate change - does everything else stay the same ? What about the $1500 deduction for business use of home ? 

As a self-employed person what happens to the 'self employed health insurance deduction' ? How about the 'self-employment tax' ? How about the 'foreign tax credit' ? 

I'd be surprised if we will now be able to file our taxes on a post card....


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## lat19n (Aug 19, 2017)

It just occurred to me that for us, at the moment, the self-employment aspects of my previous post are moot because even if Trump signed the bill in 2017, the changes would come into play on a 2018 tax return. So on our 2017 return things would be pretty similar to our 2016 return - with less business income. And I am pretty sure that we will both be retired from here on out - unless the unexpected happens.


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## Bevdeforges (Nov 16, 2007)

Yeah, I've been following all the hoopla from over on this side of "The Pond" (i.e. Europe) and to a certain extent I think we're only going to be hit with the changes that affect most of the plain old folks living back in the Old Country.

There had been some talk here on the forum and elsewhere that the Republicans might address FATCA, but I don't see anything about that in anything I've read on the latest version of the tax bill.

The main things will be the doubling of the standard deduction - which is going to mean that fewer folks will be able to take individual deductions at all. I don't think that someone filing a Schedule C sill be affected - that "pass through" thing (as I understand it) is for the Big Boys who take bonuses or earnings out of a corporation and will be able to use the lower corporate rates rather than the personal rates. Or something like that. If you're a sole proprietor, you're stuck with the personal rates as they will be (albeit someone lower).

Self employment tax is nothing but Social Security and, as far as I can tell it won't be affected at all by the changes under discussion.

The foreign tax credit is a matter of tax treaties, so should be pretty much untouched.

At the end of the day, not really much changed - other than elimination of the personal exemptions and no "additional" standard deduction when you hit age 65 (or are blind). 
Cheers,
Bev


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## Moulard (Feb 3, 2017)

FACTA and Residency based taxation were not included in either the House or the Senate version of the bill, and thus were never really on the table to be included in the reconciled version.

I haven't kept up, but I believe elimination of the AMT has made it into reconciliation. 

For me at least all that means fewer pages in my return (no 6251 and no 1116 amt-version) and a larger pile of tax credits that might help better offset the toxic US treatment of my pension distribution when I retire.


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## Bevdeforges (Nov 16, 2007)

Moulard said:


> I haven't kept up, but I believe elimination of the AMT has made it into reconciliation.
> .


The summary I saw of what finally made it through said that the AMT was not eliminated - but the threshold for it was raised by a good $20,000 or so.
Cheers,
Bev


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## JustLurking (Mar 25, 2015)

Bevdeforges said:


> The main things will be the doubling of the standard deduction ... elimination of the personal exemptions ...


This part of the things is a tax rise for some non-resident aliens who have to file US taxes for one reason or another. Non-resident alien US taxpayers qualify for personal exemptions but generally cannot -- and never could -- take any standard deduction.

It hits foreign students studying the US, foreigners working there for short-ish periods, and non-resident aliens who receive pensions or social security payments from US sources. All non-voters, of course.


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## Bevdeforges (Nov 16, 2007)

JustLurking said:


> This part of the things is a tax rise for some non-resident aliens who have to file US taxes for one reason or another. Non-resident alien US taxpayers qualify for personal exemptions but generally cannot -- and never could -- take any standard deduction.
> 
> It hits foreign students studying the US, foreigners working there for short-ish periods, and non-resident aliens who receive pensions or social security payments from US sources. All non-voters, of course.


Non-residents receiving US social security (or many forms of pensions) simply have 30% withheld on payment and basically can't do anything about reclaiming that. Exemptions can only be claimed on a non-resident return against income "effectively connected with a US trade or business" - which rules out pensions or social security. The same is true of the itemized deductions - i.e.they are limited to certain categories, and apply only to income from a US trade or business.
Cheers,
Bev


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## lat19n (Aug 19, 2017)

*Territorial taxation ...*

So apparently one of the benefits in the proposed tax plan is territorial taxation for corporations. As I understand it (and I am no expert) if Dell has profits in Mexico (say) after this plan is approved they will not have to report those earnings to the US. Apparently they will have to pay a tax on those funds down the road if they repatriate them. It is not clear to me why that will entice those corporations to move their monies back to the US. But someone smarter than I probably has a answer.

Do corporations need to comply with FBAR / FATCA ?

My life would certainly be easier if they considered Territorial taxation for individuals ... Of course I'm not sure I would ever repatriate the funds. Why should I (or the corporations for that matter) if I can earn 7%+ on a Mexican government CD (1 year), when I earn 1-2% on a 1 year US note ? The stability of the US over the stability of Mexico ?

Finally - the text for this plan is online. Close to 500 pages. I searched on the word 'foreign' in the pdf. Close to 400 occurrences. Pretty obvious this plan is not targeting the US middle class. I hope the reason there is no discussion on the US Sunday news shows about this plan is because they are all too busy reading the bill...


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## JustLurking (Mar 25, 2015)

Bevdeforges said:


> Exemptions can only be claimed on a non-resident return against income "effectively connected with a US trade or business" - which rules out pensions or social security.


Not so, I'm afraid. From IRS Publication 519 (italics are mine):


> *Pensions.* If you were a nonresident alien engaged in a U.S. trade or business after 1986 because you performed personal services in the United States, and you later receive a pension or retirement pay attributable to these services, _such payments are effectively connected income in each year you receive them._ This is true whether or not you are engaged in a U.S. trade or business in the year you receive the retirement pay.


If you look at form 1040NR you will see that line 17a '_Pensions and annuities_' is within the section entitled '_Income Effectively Connected With U.S. Trade/ Business_'. This section precedes line 40 where exemptions are (currently) deducted.

Now some -- perhaps many -- non-resident aliens will have no US tax liability on US pensions because the applicable treaty reserves sole taxing rights to their residence country. But for those that do, losing the personal exemption without being able to use the compensatory increase in standard deduction directly equates to a tax rise. The lowering of the 15% tax band down to 12% may help somewhat, but that won't benefit folk down in the 10% band at all.


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## Bevdeforges (Nov 16, 2007)

What I was trying to get at was whether or not there is any reference in the tax bill to non-resident taxpayers or non-resident returns - or if the only changes for us overseas residents/taxpayers are a form of "collateral damage" from the atrocities of the "big tax cut" aimed at corporations and the 1%.

The whole bill seems to have been slapped together without much regard for consequences - intended or not - and frankly, it seems to inflict the most damage on the rank and file taxpayer, whether they live in the US or elsewhere. Every senator or representative who votes for this mess should be ashamed of themselves.
Cheers,
Bev


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## Nononymous (Jul 12, 2011)

There is mounting concern over a proposed "transition tax" that could badly impact small businesses owned by US persons, even if they operate exclusively in the country of residence, with no US dealings.

As ever, this would only be a problem for those who choose to comply. But it could be an expensive problem. 

I'm too bored by it to dig into the details but this is being discussed at some length over at Isaac Brock Society and, increasingly, the rather anti-compliance US expats Facebook group.


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## Bevdeforges (Nov 16, 2007)

There has always been the "issue" about whether small businesses were included in the "certain foreign corporations" that were supposed to file that form 5471. As usual, to enforce the rules, the IRS has to have some knowledge of the existence of the business/corporate and it is still entirely unclear what they mean by "certain foreign corporations." 
Cheers,
Bev


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