2018 IRS Income Tax Deduction and Exclusion Rates – What US Expats Need to Know

2018 us income tax deduction rates

The IRS has announced the annual inflation adjustments for over 50 tax provisions for the 2018 tax year.

In this article we’ll look at how some of those provisions will affect expats.

It’s worth bearing in mind though that some of the new adjustments announced may never happen, assuming that the Trump Tax Reform Plan is passed before it’s time to file 2018 tax returns. Assuming that they do though, in this article we look at what the changes would mean for US expats.

Standard Deduction and Personal Exclusion

American expats find themselves in the almost unique position of having to file US taxes even if they live abroad. This is because the US taxes based on citizenship rather than on where someone lives. As such the Standard Deduction and Personal Exclusion Rates are as relevant to expats as they are to Americans living Stateside.

The standard deduction for married expats filing jointly will rise from $12,700 in 2017 to $13,000 for tax year 2018. For single taxpayers and married individuals filing separately, the standard deduction will rise from $6,350 in 2017 to $6,500 in 2018, and for heads of households, the standard deduction will rise from $9,350 in 2017 to $9,550 for tax year 2018.

The personal exemption for tax year 2018 will rise from $4,050 to $4,150. The exemption is subject to a phase-out that begins with adjusted gross incomes of $266,700 ($320,000 for married couples filing jointly). It phases out completely at $389,200 ($442,500 for married couples filing jointly.)

It’s worth noting though that the Trump Tax reform plan proposes scrapping the personal exemption altogether and increasing the standard deduction to compensate, so it may well be that the figures currently proposed for 2018 never actually happen.

The Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is one of the primary exemptions that expats can claim to prevent them paying US taxes on their income earned abroad, assuming they can prove that they live abroad by using either the Bona Fide Residence Test or the Physical Presence Test.

“The IRS changes are based on current federal law and are set based on economic and actuarial projections. Keep in mind that the provisions could shift as the Trump administration seeks approval of the largest federal tax overhaul in decades.” – USA Today

It is normally a good option for expats who earn less than around $100,000 and who pay a lower rate of income tax (or no income tax) abroad.

The exact amount of earned income that expats can exclude though rises a little each year in line with inflation, and the 2018 amount will rise from $102,100 in 2017 to $104,100 in 2018 .

Retirement plan limitations and estate tax exclusion

Retiring abroad has never been more popular, however expats who have retired abroad or are thinking about retiring abroad should remember to consider the tax implications, both US and foreign, as part of their planning.

In 2018, employees who participate in 401(k), 403(b), most 457 plans will see the annual contribution limit rise from $18,000 to $18,500.

The basic estate tax exclusion will also rise in 2018, to $5,600,000 (from $5,490,000 in 2017).

Expats who need to catch up with their US tax filing

More and more expats who weren’t aware that they were required to file US taxes from abroad are choosing to catch up by using the Streamlined Procedure IRS amnesty program. The Streamlined Procedure requires expats to file their last 3 tax returns and last 6 FBARs (as appropriate), and self certify that their previous failure to file wasn’t willful evasion.

The Streamlined Procedure offers expats a way to catch up without facing any IRS penalties.

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