October 2021 - Monthly Newsletter
In this month's newsletter, we include informative FAQs about the net investment income tax and its relevance for U.S. expats.
Key Upcoming Federal Filing Due Dates:
Expat taxpayers who filed a tax return extension by June 15, 2021 have until October 15, 2021 to file their federal income tax return.
The FBAR filing deadline is the same as for a federal income tax return. However, taxpayers are granted an automatic extension to file the FBAR until October 15, 2021.
This Month's Top 3 Tax FAQs
Question #1 – What is the Net Investment Income Tax (NIIT)?
Answer – If an individual has income from investments, the individual may be subject to a 3.8 percent Net Investment Income Tax (“NIIT”) on the lesser of their net investment income (such as interest, dividends, capital gains, rental and royalty income, among others), or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status. The NIIT was enacted under the 2010 health care legislation in order to fund then President Obama’s health care reform.
For U.S. expats, the NIIT can be particularly cumbersome because, if applicable, it is assessed on top of taxes already paid.
Question #2 – Can foreign tax credits be used to reduce the NIIT?
Answer – No. Recently finalized Treasury regulations make clear that the foreign tax credit cannot be used to reduce the NIIT. Consequently, a U.S. expat who otherwise has 100% foreign source income and sufficient foreign tax credits to credit against such income, can still end up paying U.S. federal income taxes because of the NIIT.
Interestingly, in a very recent U.S. Tax Court case, Toulouse v. Commissioner, 157 T.C. No. 4 (Aug. 16, 2021), the Court addressed whether the foreign tax credit provision of an income tax treaty can be used to override the U.S. domestic law on this issue. The Court ultimately decided that the treaty does not allow this and therefore the foreign tax credit cannot be used even by someone living in a treaty country.
Question #3 – Will the NIIT be repealed any time soon?
Answer – While Trump’s tax reform at the end of 2017 brought about many changes to the U.S. tax code, it did not, to the surprise of many, repeal the NIIT. Over the past several years, there have been some who have speculated that the NIIT might be indirectly repealed if litigation attempting to overturn Obamacare (technically known as the "Affordable Care Act" or ACA) would prove successful in the U.S. court system.
However, in the most recent case U.S. Supreme Court case addressing the validity of the ACA, California v. Texas, No. 19-840, the suit was dismissed due to a lack of standing to bring the challenge in the first case. Obamacare, now having survived this latest trip (as well as two others) to the Supreme Court and intense congressional repeal efforts, seems more than ever solidly entrenched in American law, along with the NIIT.
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This month's expat tax blogs.
- US EXPATS AND THE TAXATION OF CRYPTOCURRENCY (Oct 06, 2021) – We give an overview of how cryptocurrency works and a summary of the guidance that the IRS has thus far published to help taxpayers properly report and pay tax on their crypto transactions.
- ADVANCED CHILD TAX CREDIT PAYMENTS FOR US EXPATS (Aug 19, 2021) – The 2021 expanded child tax credit, including the increased amount, is fully refundable, but only for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S. for more than one-half of the tax year.
- FILING THRESHOLDS FOR US AND NON-US PERSONS (Aug 04, 2021) – Is filing required when you have a low income and no special international form attachments? The answer depends on your tax profile.