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How will the TCJA Impact Cross Border Mobility?

September 07, 2018

Do you have employees working overseas? The Tax Cuts and Jobs Act introduces some unique challenges and opportunities for you and your overseas workers…learn more

Do you have employees working abroad? Wondering how the Tax Cuts and Jobs Act will impact them, and your business, too? There are a few provisions in the TCJA that will impact cross border mobility—make sure you’re aware of how business may change.

Cross border mobility…what is it?

Cross border mobility refers to the process of assigning employees to work in locations around the world. How common is this practice in 2018? Currently, the trend is for non U.S. businesses to send workers to the U.S. for training and have them return home after training. Nevertheless, if you have workers assigned abroad, here’s what you need to know.

How does the TCJA impact these employees?

Increased standard deduction- The TCJA nearly doubles the standard deduction for singles and separate filers (now $12,000), and joint filers, too (now $24,000). This could impact employees’ net pay…in a good way. This increase is good news for expatriates, as expats don’t often itemize.

Repeal of personal exemptions- This may result in increased income tax costs for companies sending employees with families on business travel or assignments to the U.S. or outside the U.S...

Changes to itemized deductions- Under the new tax law, the standard deduction nearly doubles for taxpayers, thus making itemizing less likely for a large number of taxpayers. For expatriates, this will impact hypothetical tax calculations.

What is a hypothetical tax calculation? When an employee goes abroad for an assignment, he/she will most likely become subject to a new tax regime in the new host country. To promote mobility and equality between assignees globally, 80% of companies use a home based approach tax equalization policy. This allows for employees on assignment to effectively pay the same amount of tax they would have paid had they remained at home, thus, making them tax neutral.

Charitable Deductions- Making charitable contributions has long been one of the popular ways for expats to decrease their tax liability. Now that the standard deduction is double what it used to be, it is less likely that expatriates will itemize. This could mean that fewer taxpayers will pursue charitable deductions as they are less impactful on their bottom lines.

State and Local Taxes- Taxpayers are no longer allowed to deduct wealth taxes imposed by foreign government and foreign taxes (other than income tax) including property taxes. This will have a significant impact on taxpayers that reside in countries with a wealth tax such as Switzerland, Spain, and the Netherlands amongst others. When purchasing a new home overseas employees will need to pay attention to the lost deduction of property tax if they itemize along with the updated mortgage interest deduction limitations.

2% Floor for Miscellaneous Itemized Deductions- All miscellaneous 2% deductions, including investment, tax, and legal advice fees have been eliminated. Previously, employees were allowed to deduct unreimbursed business expenses incurred but these are also gone.

Moving Expense Deduction- Some expats move around quite a bit, which means moving expenses can add up. Under the TCJA, moving expenses are no longer deductible. Also, U.S. based employers will no longer be able to pay for your moving expenses tax-free. This extra burden might put a damper on your tax savings and make you reconsider life choices, like saving more, starting a business, or perhaps moving permanently.

While it may make sense to pursue opportunities to send workers abroad, take time to consider how this will impact your employees’ taxes keeping in mind that all of these provisions will sunset on December 31, 2025.

Questions on the TCJA and how it will impact your overseas workers? Reach out to me or any member of our Global Tax Services Practice.

For more tax reform updates, be sure to visit our Tax Reform Center- your “one stop shop” for all things Tax Cuts and Jobs Act (TCJA) related.

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