Big U.S. tax overhaul will mean savings - but there are pitfalls

Major tax legislation has been introduced by both the U.S. and Israel in recent months, most notably the “Tax Cuts & Jobs Act” (TCJA) which will principally affect your tax situation for 2018 tax returns to be filed in 2019.  This mammoth piece of legislation is the biggest tax overhaul of the Internal Revenue Code in the past forty years and potentially provides many tax savings opportunities for individuals and businesses alike.  There are some pitfalls however, which can cause your tax to increase.  For 2018, Specified Foreign Corporations can be subject to the new Global Intangible Low-taxed Income (GILTI) regime, that was created under section 951A of the Internal Revenue Code.  Israel likewise is continuing its Tax Amnesty Program for Israeli residents who have not properly complied with reporting past income earned from abroad.  It is therefore imperative that you familiarize yourself with the many recent changes to existing tax rules and regulations which permeate both the U.S. Internal Revenue Code and the Israeli Tax Ordinance.

The full update can be viewed online at www.ardcpa.com.

Foreign Bank Account Report (FBAR)

Under the Bank Secrecy Act, a Foreign Bank Account Report (FBAR) must be e-filed annually with the U.S. Treasury by April 15th of each tax year (which may be extended to October 15th if you have a valid extension for your current income tax return), if the following criteria apply:

I) The person has a financial interest, signature authority or other authority that is comparable to a signature authority over one or more accounts in Israel or another foreign country. Shareholders who hold more than 50% of a foreign company's shares are considered as having a financial interest in the company's accounts, and

ii) The aggregate value of all foreign financial accounts exceeds $10,000 or the equivalent amount in foreign currency (about NIS37,000 or more during 2018) at any time during the calendar year.

Foreign financial accounts include, but are not limited to, both checking and savings accounts, Israeli pension accounts, brokerage accounts, mutual funds, and unit trusts. Paper filings of FBARs (form TD F 90-22.1) are no longer accepted by the U.S. Treasury and have been replaced by online filing of form FINCEN 114.

U.S. Dependent Tax Credit

Foreign Accounts Tax Compliance Act (FATCA)

FATCA is an Intergovernmental Agreement (IGA) that the U.S. Department of Justice has signed with more than 120 partner countries.  The purpose of the IGA is to provide the U.S. with knowledge about the financial income and account balances of its citizens around the world.  In essence, these agreements create a two-way transfer of information between the foreign country and the U.S. and from the U.S. to the partner country.  In effect, the U.S. could demand income tax returns from delinquent taxpayers or non-filers based upon information received from a partner country since the U.S. taxes the worldwide income of its citizens.  FATCA requires filing IRS Form 8938 under certain circumstances primarily when there are large financial balances (see below).

Form 8938 (Statement of Foreign Financial Assets)

This form must be filed with your U.S. income tax return (in addition to your FBAR), if you live in Israel (or abroad) and

i) The value in your foreign financial accounts exceeds $400,000 (filing joint) or $200,000 (filing single) on the last day of the year, or

ii) Your foreign financial accounts exceed $600,000 (filing joint) or $300,000 (filing single) at any time during the tax year.

U.S. Child Tax Credit

A U.S. Taxpayer identification number (SSN) is now required by the due date of tax return. If you do not have a Social Security Number (SSN) for your dependent by the due date of your 2018 return (including extensions), you may not be able to claim the Child Tax Credit (CTC) or the Additional Child Tax Credit (ACTC).  This applies to your original or amended 2018 tax return, even if you get the SSN at a later date.  (i.e., a child born in March 2018 has until December 15, 2019 to receive a Social Security Number and still be eligible to claim the child credit.) Taxpayers who exclude earned income, currently up to $103,900 (per taxpayer) on their 2018 joint tax returns will not be eligible to receive a child credit even if only one taxpayer uses the exclusion. The credit may not be able to be claimed retroactively.  If you claim the CTC or ACTC, but you are not eligible for either credit and it is later determined that your error was due to reckless or intentional disregard of the CTC or ACTC rules, you will not be allowed to claim either credit for two years. If it is determined that your error was due to fraud, you will not be allowed to claim either credit for ten years. You may also have to pay interest and penalties to the IRS. We recommend applying for Social Security numbers immediately after your U.S. child is born, in order to avoid missing a year of child credit.

For 2018 tax returns, the child credit increases to $2,000 but the refundable portion is limited to $1,400.  The phase-out income level also increases significantly, which will allow more, higher-income earners to qualify for the credit.  Single taxpayers or those taxpayers whose filing status is married filing separately, can have adjusted gross income up to $200,000, and married taxpayers filing jointly can have adjusted gross income up to $400,000, and still be eligible for a refundable child tax credit.

If applicable, $2,000 per eligible child may be available to offset any potential U.S. income tax liability or be partially refunded. Taxpayers must have reportable earned income from wages (via Israeli Form 106 or similar foreign wage slip) or self-employment income in excess of $3,000. The earned income of both husband and wife can be combined even if one spouse is NOT a U.S. citizen. The non-citizen spouse requires a U.S. tax identification number (ITIN), which can be acquired by filing U.S. Tax Form W-7. Children must be U.S. citizens aged 16 and below and must possess a valid U.S. Social Security Number by the tax return due date (including extensions). Maximizing the child credit can be quite complicated since there are many factors to consider. In addition, the IRS has the ability to conduct income tax audits which may require verification of income and other pertinent information.

A new non-refundable credit was added by the new U.S. Tax Act.  Starting with the 2018 tax filing, if your child has passed age 16 there is still a $500 tax credit available to offset your tax liability for the tax year.  Any dependent on your tax return who does not qualify for the child tax credit may create eligibility for the dependent credit.

Alan (Avraham) Deutsch is a CPA, with over 30 years’ experience. Alan and his associates specialize in U.S. and Israeli income tax planning and compliance as well as in investment consulting. Alan has seven office locations. For more information see the website at www.ardcpa.com.