February 1, 2018
Impacts of U.S. tax reform on Global Mobility Taxation
2018 started out with a big tax splash! On Dec. 22, 2017 the “Tax Cuts and Jobs Act” (aka US Tax Reform”) was signed into law; this is the most significant US tax overhaul passed in the last 30 years!
The Tax Cuts and Jobs Act makes sweeping tax changes that impact virtually all taxpayers. For individual taxpayers and their families, changes include a decrease in the tax rates, repeal of the personal exemption, increase in the standard deduction, modification to itemized deductions, and doubling of the child tax credit. These changes require our immediate attention due to their varied impact.
Recommended Global Mobility Key Action Items:
- Tax Cost Projections and Gross-up Estimates– Review all projections as the tax costs may have changed due to tax reform.
- Tax Accruals – Communicate changes in expected tax costs with your finance team.
- Hypothetical Tax Calculations – Recalculate hypothetical taxes for equalized assignments.
- Tax Gross-up and Equalization Policy Review – Consider modifications for the new tax landscape affecting both employees and companies.
The most relevant US tax reform provisions impacting individual taxpayers and therefore Global Mobility Programs are:
Repeal of Qualified Moving Expense Deductions – Beginning in 2018, previously qualified moving expenses are neither deductible nor excludable. Expenses previously deductible included airfare, lodging, shipment and storage of household goods. Employers have to decide whether to have the employee bear the tax burden related to moving expense paid for by the company or whether the company will gross-up these expenses. Regardless, the additional “wages” (with or without gross-up expense) may affect phase out limits for items such as Roth IRA’s and American Opportunity Credits.
Lower Federal Tax Rates – There are still seven individual federal income tax brackets, however the brackets are wider and the progressive tax rates lower. The rate change could benefit individuals as they may have a reduced tax burden, dependent on individual circumstances. A potential benefit for the employer is that tax gross-ups will now likely be at lower US rates. However, for tax equalized US outbounds, this could lower the employees’ US hypo tax and therefore increase the employers’ total tax equalization cost.
Exemptions Repealed, Standard Deduction Nearly Doubled – Under the Tax Cuts and Jobs Act, personal exemptions are repealed ($4,050 in 2017) for 2018 through 2025. Instead, the Tax Cuts and Jobs Act provides for a near doubling of the standard deduction. For tax year 2018, it increases the standard deduction from $13,000 to $24,000 for married individuals filing a joint return; $9,550 to $18,000 for head-of-household filers; and $6,500 to $12,000 for all other individuals. These standard deduction amounts are indexed for inflation for tax years beginning after 2018. The additional standard deduction for the elderly and the blind ($1,300 per each married taxpayer, $1,600 for single taxpayers) is retained.
Itemized Deductions Strongly Curtailed
Mortgage interest deduction. The Tax Cuts and Jobs Act limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), for tax years beginning 2018 through 2025. For acquisition indebtedness incurred before December 15, 2017, the Tax Cuts and Jobs Act allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately). Taxpayers may continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.
State and local taxes. The Tax Cuts and Jobs Act limits annual itemized deductions for all nonbusiness state, local and foreign taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return) for 2018 through 2025. Sales taxes may be included as an alternative to claiming state and local income taxes.
Miscellaneous itemized deductions. The Tax Cuts and Jobs Act repeals all miscellaneous itemized deductions for tax years 2018 through 2025 that are subject to the two-percent floor under current law.
Medical expenses. The Tax Cuts and Jobs Act lowers the threshold for the deduction to 7.5 percent of adjusted gross income (AGI) for tax years 2017 and 2018.
Casualty losses. For tax years 2018 through 2025, a casualty loss will only be allowed to the extent it is attributable to a federally declared disaster.
The phaseout of itemized deductions is suspended for tax years 2018 through 2025.
The doubling of the standard deduction and modifications to itemized deductions effectively eliminates many individuals from claiming itemized deductions other than higher-income taxpayers. For example, for the vast majority of married taxpayers filing jointly, only those with total allowable mortgage interest, state income and local income/property taxes (up to $10,000), and charitable deductions exceeding $24,000, would claim them as itemized deductions (absent extraordinary medical expenses).
Child Tax Credit Increased but with New Requirements – In contrast, the enhanced child credit has been highlighted as one of the provisions that will lower overall tax liability for middle-class families. The Tax Cuts and Jobs Act temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount is refundable. The child tax credit is also expanded to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. More U.S. families will be able to take advantage of the credit due to an increase in the adjusted gross income phaseout thresholds, starting at $400,000 for joint filers ($200,000 for all others). However, in order to claim the child tax credit, each qualifying child is required to have a Social Security Number, generally eliminating the child tax credit for US inbounds with non-US citizen children leaving as the only option the $500 nonrefundable credit for qualifying dependent for such children.
Fewer Individuals will be Subject to Alternative Minimum Tax (AMT) – due to increased AMT Exemption amounts and phase-out threshold, as well as fewer adjustments due to limited or eliminated deductions such as personal exemptions, state income tax deductions, real estate tax deductions and miscellaneous deductions. This will give renewed importance to the exercise of incentive stock options as an adjustment to the taxable AMT income. Additionally, AMT credit carryovers that were unlikely to be used in the past are more likely get freed up.
Because these tax provisions are interrelated, estimating the impact of these changes to the tax liability for any particular family is challenging. However, as with any tax reform, there will be winners and losers.
Example 1: Married Couple (both 45); AGI $100,000; 2 children (ages 8 and 12); mortgage interest $6,000; property tax $5,000; state income tax $3,000; charitable contributions $500.
Example 2: Married Couple (both 45); AGI $200,000; 2 children (ages 19 and 22, both in college); mortgage interest $10,000; property tax $18,000; state income tax $6,000; charitable contributions $1,000
Example 3: Married couple (both 45); AGI $400,000; 2 children (ages 10 and 12); mortgage interest $12,500; property tax $25,000; state income tax $8,000; charitable contributions $7,500
|Addtl Med Tax||1,350||1,350|
|Child Tax Credit||2,000||4,000||1,000||4,000|
|Tax impact on employee||Decrease||-2,727||Increase||+822||Decrease||-16,542|
- Total itemized deductions in 2018 would remain the same at $14,500 which is less than the new standard deduction of $24,000.
- Deduction for total amount of property tax and sales tax would be limited to $10,000 in 2018. Therefore, total allowed itemized deductions of $21,000 would be less than the standard deduction of $24,000.
- Deduction for total amount of property tax and sales tax would be limited to $10,000 in 2018. Total allowed itemized deductions of $30,000 are not phased out and is more than the $24,000 standard deduction.
Keep in mind that many of the changes to the Internal Revenue Code in the Tax Cuts and Jobs Act are temporary. This is true especially with respect to the provisions impacting individuals. This decision was made in order to keep the tax reform within budgetary parameters, but with no guarantees that a future Congress would extend them. In future years, as the tax reform provisions expire, tax liability for individuals may be negatively affected.
Summary of Impact on Global Mobility and Domestic Moves:
- Assignments: US outbound more expensive and US inbound less expensive – due to lower US tax rates (lowering US hypo tax for outbounds and lowering actual tax for inbounds).
- Transfer Years’ Costs may increase – due to fewer itemized deductions.
- Moving Expenses paid by the company – to gross-up or not to gross-up?
Due to the new tax legislation highlighted above, an analysis and probable revisions of tax cost projections, tax accruals, and hypothetical taxes all should be considered at this time. Employees may have too much hypo withholding and employers may find their tax equalization costs are higher than expected. GMT can analyze and calculate these costs for your company and its international mobile employees.
For employee transfers to the US who are not tax equalized, they may find their overall tax liability to be less than expected from 2018 forward. However, companies may also find that due to the new tax treatment on moving expenses that their tax costs on these benefits will rise. As such, companies should analyze ways to reduce possible uplift costs or relocation benefits for an employee coming to the US. GMT can complete net pay calculations and tax gross-up estimates to analyze these new tax costs for the transferring employee and the net tax effects to their company.
As with any major tax legislation, companies should review their tax equalization policies for any tax impacts to limitations built into the policy (such as on equity). GMT can assist with how these legislative impacts might affect your Tax Equalization Policy and if any modifications need to be considered for the new tax landscape affecting both employees and companies.
The final implications on U.S. tax reform are still being analyzed. A review of the relevant situation with GMT would help determine your tax consequences in this area. Please consult us today if you need any help with the issues discussed above.
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For 15 years, Global Mobility Tax, has been assisting startups and early growth companies to navigate the tax implications of a global workforce. We provide strategy, consulting, and tax services to organizations and individuals that relocate internationally.
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