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THE TAX REFORM’S EFFECT ON THE CAPITAL GAINS TAX FOR US EXPATS

December 22, 2019

By Joshua Ashman, CPA & Nathan Mintz, Esq.

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As taxpayers continue to settle in fully to Trump’s Tax Reform, confusion still remains for some as to how the tax reform will affect their overall tax liability in years moving forward.

While the Tax Reform made a number of changes to the US Tax Code, it also left a number of basic provisions untouched.

In the blog, we review how the capital gains tax works under US tax law and clarify to what extent, if any, the Tax Reform affects the US capital gains tax.

CAPITAL GAINS TAX FOR US EXPATS

As a general rule, US expats, who are subject to federal income tax on their worldwide income, are required to pay US federal income tax on the net total of all their capital gains.

Capital gain on a sale of an asset (for example, property, investments, etc.) is calculated as the excess of the sale price over the cost basis of the asset. The cost basis of the asset is generally the amount paid to acquire the asset. Cost basis can be increased, for example, by improvements made to the asset, and can be decreased, for example, by depreciation of the property, if relevant.

CAPITAL GAINS TAX – US RATES

The key factor in determining the capital gains tax rate is the amount of time the asset was held by the taxpayer. Short-term capital gains, which apply to the sale of assets held for a year or less before being sold, are taxed at the investor’s ordinary income tax rate. Long-term capital gains, which apply to the sale of assets held for more than one year before being sold, are taxed at lower rates (0, 15, or 20%), depending on the taxpayer’s income tax bracket.

There are a number of exceptions or reductions to the capital gains tax in the US, which can significantly reduce the ultimate effective rate. Expats might be familiar with the exemption on certain gain from the sale of a personal residenceForeign tax credits may also be available to reduce the amount of capital gains tax in the US.

CAPITAL GAINS TAX UNDER US TAX REFORM

While the Tax Reform did not change the capital gains rates per se, the Reform’s revisions to the ordinary income tax rates (reducing the top rate to 37%) indirectly affected the application of the capital gains tax in the US.

First, while long-term capital gains rates in the US remained the same (0/15/20%), the brackets were adjusted to correspond with the new ordinary income tax brackets.

The long-term capital gain tax rates for the upcoming tax year are as follows:

 RATE    For Unmarried Individuals    For Married Individuals Filing Joint Returns    For Heads of Households
       Taxable Income Over
0%    $0    $0    $0  
15%    $40,000    $80,000    $53,600  
20%    $441,450    $496,600    $469,050  
 

Second, since short-term capital gains in the US are taxed as ordinary income, the changes to the ordinary income tax rates translated equally to short-term capital gains.

We will continue to stay on top of the U.S. tax reforms that affect expat tax compliance and provide you with the latest tax news affecting your expat tax filing obligations.

Happy holidays everybody!

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