By Nancy Paustian, CPA, H&R Block Expat Tax Services

The H&R Block Expat Tax Services team includes tax attorneys, CPAs and Enrolled Agents. We are experts in U.S. taxation issues for Americans working abroad. We handle both simple and complex tax situations. Due to the complexity of U.S. tax reporting for expats and its highly fact-specific nature, this article is general in nature.

The Tax Cuts and Jobs Act (TCJA) includes many provisions that may impact the tax costs employers bear for their tax-equalized employees. Employers should be aware of these changes and ensure their budgets and tax accruals are adjusted accordingly. Policy and assignment planning may be available to help mitigate these costs.

Provisions which may reduce both hypothetical income tax and residual US income tax liabilities, resulting in no material change to the employer’s tax equalization cost

  • Marginal Tax Rates were reduced.
  • The amount of the Standard Deduction was nearly doubled. This could reduce the Assignee’s income subject to tax, if they use the standard deduction.
  • The amount of the Child Tax Credit was increased and additional credit for dependents over the age of 17 has been introduced.

Provisions which may increase both hypothetical and residual US tax liabilities, resulting in no material change to the employer’s tax equalization cost

  • The Personal Exemptions for the taxpayer and dependents were eliminated and will increase the Assignee’s taxable income.
  • The $10,000 Cap on State and Local Tax Deduction will increase the Assignee’s taxable income, if they itemize.

Provisions which increase residual tax liabilities, but have no impact on hypothetical tax liabilities, which are likely to increase the employer’s tax cost

  • The elimination of the Moving Expense Deduction
  • Inability to utilize the child and new family tax credits, if the foreign earned income exclusion is claimed

Summary of TCJA Provisions

The TCJA modifications will generally take effect for the 2018 tax year and sunset after tax year 2025. A summary of these changes can be found at https://www.hrblock.com/tax-center/irs/tax-reform/tax-cuts-and-jobs-act/

Example of Tax Equalization using Foreign Tax Credit

The Company will receive a refundable tax credit from the IRS but the employee will pay $650 less to the Company because their hypothetical tax decreased. Overall, the Company’s US tax expense decreased by $750.

Marital Status >Actual MFJ Hypothetical MFJ Impact to Employer
  • Assumptions – Foreign Country Tax Rate is greater than the US tax rate. There is no change to the actual foreign tax expense based on US tax reform. The company will not be able to monetize the foreign tax credit carryover amount.
# of Dependents (including self) 3 3
Regular Salary $110,000 $110,000
Assignment Allowances $50,000 $0
Moving Expenses $10,000 $0
Itemized Deductions $0 $22,000
Current Law
Box 1 wages $160,000 $110,000
Greater of Itemized or Standard Deduction $12,700 $22,000
Personal Exemptions $12,150 $12,150
Taxable Income $135,150 $75,850
Tax $25,265 $10,449
Foreign Tax Credit $25,265 $0
Nonrefundable Child Tax Credit $0 $1,000
Refundable Child Tax Credit $0 $0
2017 Liability under Current Law $0 $9,449
Under Tax Reform
Box 1 wages $170,000 $110,000
Greater of Itemized or Standard Deduction $24,000 $24,000
Personal Exemptions $- $-
Taxable Income $146,000 $86,000
Tax $23,999 $10,799
Foreign Tax Credit $23,999 $0
Nonrefundable Child Tax Credit $2,000
Refundable Child Tax Credit $1,400 $0
018 Federal Tax under Tax Reform $(1,400) $8,799
Summary $(1,400) $(650) $(750)

What are Your Next Steps?

  • Estimate the Additional Cost to Company due to the changes in the 2018 Tax Reform by recalculating cost estimates.
  • Recalculate hypothetical tax calculations to determine the correct withholdings are withheld from the Assignee.
  • Determine Whether Assignment Policies Need to Be Updated
    • Even though the moving rules of more than 50 miles, work more than 39 weeks and occur within 1 year are no longer mandated by the IRS, the Company can retain these rules from a policy perspective.
    • Now that Household Goods, Storage and Final Moves are taxable, the Company will need to gross-up these payments if excess foreign tax credits to offset the US residual taxes are not anticipated.
    • If Company policies specifically identify US tax provisions that have changed, policies may need to be updated.
    • Summary Documents and Letters of Understanding will need to be reviewed for changes.

Planning Opportunities

Employers may be negatively impacted by provisions that decrease hypothetical income tax, or increase actual US income taxes of tax equalized employees, as discussed above. To mitigate these potential costs, employers may want to consider the following actions:

  • Reducing policy provisions to offset tax costs
  • Altering provisions to provide taxable lump sums for relocation expenses, provide a tiered moving allowance based on Assignee’s position, and implement a discard and donate program
  • Localize employees
  • Repatriate and re-staff the position with a more cost-effective employee
Nancy Paustian, H&R Block Expat Tax Services, leads the expat team specializing in tax preparation for clients living abroad. She is a CPA with over 20 years of experience in tax accounting, compliance, planning, research and management experience in public accounting and private industry. A seasoned tax professional, she has experience in coordinating IRS tax audits, foreign tax audits and various state tax audits.
NOTE: Due to the complexity of US tax reporting for expats and its highly fact-specific nature, please contact an H&R Block Expat Tax Advisor at www.hrblock.com/expats for advice on your specific tax situations.