HTS Newsletter 2019 (U.S. and French)
February 25, 2019
We are halfway through the perfect tax storm that began in 2018 and continues through the remainder of 2019. The good news is that we foresee smooth tax sailing in 2020. We repeat many of the changes announced earlier, with emphasis being made on the economic impact to you in 2019.
Major U.S. and French tax law changes announced in 2017 and 2018 impact the management of your cashflow in the coming months and next year. The effect of these revisions on your finances will vary greatly depending on your specific situation. Here is a high-level summary of Winners and Losers:
– Wealthy persons who live in France and whose wealth consists mostly of financial securities
– Individuals with significant professional earnings (say more than $200K)
– U.S. persons who own a majority interest in foreign corporations (i.e. non-U.S. companies) such as SARLs, SASs and EURLs having elected to be taxed as corporations.
– U.S. persons who pay significant state income taxes, real estate taxes and/or expenses that formerly qualified as U.S. 2% itemized deductions.
The French government has implemented a “pay as you earn” tax collection system effective January 1, 2019. There will be no 2018 income taxes imposed on 2018 recurring income such as pensions and regular professional earnings. From January 1, 2019, French professional earnings and pensions will be subjected to withholding taxes. When you read about the “année blanche” this refers to the year 2018, following the decision of the French government to NOT collect taxes on 2018 recurring income. You will still need to file a 2018 French income tax return in 2019 so that the tax office can identify non-recurring 2018 income, such as capital gains, and assess taxes on that slice of income. We ask that salaried employees provide us copies of all 2018 French payslips to allow us to identify “exceptional “income which should be subject to income taxes.
The French tax administration has done an excellent job of implementing the complicated pay as you earn tax collection system, and you can view the administration’s dashboard and control, to some degree how taxes are collected on your online account. If you do not already have access to your online French income tax account at impots.gouv.fr, it is imperative that you initiate this account at your earliest convenience.
We have included in our tax toolbox a resource entitled “Understanding Prélevement à la Source” which may be a useful resource in helping you understand how 2019 taxes will be collected on different types of income, and determining what action you should take to revise payments, as required. We have also posted a link to a video (in French) which explains also how this works.
U.S. Citizens and Non-Resident Aliens living in France may be harshly affected by the “année blanche” since the U.S. tax system does not make concessions for the French Government’s decision to implement the withholding reform. All 2018 income received by a U.S. person will be subject to U.S. income taxes even if that income is not subject to French income taxes, since there will be no foreign (French) tax credit to claim. If your 2018 professional earnings are higher than the Foreign Earned Income Exclusion amount, $103,900, they will be subject to U.S. income taxes. If you have not paid French income taxes on this income, you probably will owe more 2018 U.S. taxes than usually. Generally speaking, U.S. income taxes on 2018 income should be settled by April 15, 2019 to avoid interest charges. For existing clients for whom we prepared 2017 U.S. income tax returns, we should have already addressed the approximate payment that should be made by April 15, 2019. If we did not, or if you believe the payment amount was insufficient, please provide us complete tax information by mid March 2019 to enable us to make a computation of taxes due by April 15, 2019.
We expect an imminent conclusion to the long running U.S. Tax court case, Ory Eshel v. Commissioner of the Internal Revenue Service. We believe there is currently substantial authority for claiming CSG/CRDS as qualifying taxes on the general limitation Form 1116. We will issue a special communication once the U.S. Tax Court opines.
On December 20, 2018 (11 days before the other party took charge) Congressman Holding (Republican, North Carolina), a member of the U.S. House Ways & Means Committee, introduced a tax bill proposing a transitioning from the current citizenship-based taxation system to a system that provides residence-based taxation for individuals – sometimes referred to as territorial tax for individuals. Under the Tax Fairness for Americans Abroad Act (H.R. 7358), nonresident U.S. citizens who make an election to be taxed as a qualified nonresident citizen, will exclude from income, and therefore be exempt from taxation on their foreign source income. All nonresident U.S. citizens, however, will remain subject to tax on any U.S. source income. We are not optimistic that this bill will be passed into law, but stranger things have happened.
Many of our clients have contacted us about their French bank’s request to complete either the “Form W-9” or “Form W-8”. The banks’ request for this information is the direct consequence of the institutional implementation of the FATCA legislation and protocols that took effect from 2014. If you are a U.S. citizen or Green Card Holder, you should complete Form W-9 when requested. If you are not a U.S. person, you should complete Form W-8 when requested.
Information sharing agreements implemented by the governments of developed countries mean that taxpayers need to report their financial accounts in order to avoid imposition of penalties (or worse). Often, the penalties for failing to disclose an account exceed the income taxes due on the corresponding income. Contact us if you discover you are out of compliance and we can help resolve and/or refer you to competent legal counsel.
Our Website & SmartVault
The contents of our toolbox found in the “Clients Only” section of our website will keep you informed and enable you to effectively analyze and share tax information with us. You’ll find videos, “cheat sheets”, and excel workbooks to help you organize your information. We continue to improve these tools and add new ones, so please check back regularly.
Details of changes to both the French and U.S. income tax laws follow. (If you are reading a hard copy of this text we encourage you to access the “live” version posted on the clients only section of our website at: www.hortontaxservices.com). The password is “confiture”. Rest assured that we do not post confidential client information on our website.
You may book an appointment directly on the calendar posted on the clients only section of our website.
New clients are invited to watch our welcome video that shares information about our practice and provides ideas for communicating information with us in an effective manner.
Due dates for filing the U.S. and French declarations are posted on our website, and will be updated when new information becomes available.
We remind you that our clients have the ability to exchange confidential tax information with our office using a trusted internet portal service, www.SmartVault.com. If you want to establish a SmartVault account or would like us to resend an invitation to establish an account, please send us an email and we will get you set up.
Key exchange rates can be found on our website and are as follows:
– For converting 2018 income and deductions to be reported on the 2018 U.S. income tax return, please use 1.1792 USD/EUR. This is the rate suggested by the IRS and as best as we can decipher represents the interbank rate less 4%.
– For the 2019 IFI, FinCEN Form 114 (explained later), and Form 8938 (if applicable)please use the year end exchange rate of 1.1468 USD/EUR.
– For converting 2018 income and deductions to be reported on the 2018 French income tax declaration, please use 1.181 USD/EUR (this is the rate provided by the Banque de France).
For U.S. income tax returns ready to submit before the IRS e-file cutoff date (last year this was mid-November 2018) we will e-file the declarations unless you advise us not to. You may opt out of e-filing by signing and returning the last page of our checklist (available in the ‘Clients Only’ section of our website). You will be asked to review the tax return before we submit it to the IRS. If you have registered for a SmartVault account, we will provide your tax return(s) using the Smartvault.com internet portal. Alternatively, we will e-mail you your tax return as a password protected Adobe file. If you are in agreement with the return, we will then submit it on your behalf upon receiving your signed authorization form. If you do not trust the integrity of these proposed methods of transmitting sensitive information, please provide us the signed e-file opt out form.
We offer to send U.S. income tax returns by registered mail or by FedEx if the returns cannot be e-filed. We don’t charge for this service. We maintain a permanent record of registered mail receipts and will share a copy with you on request.
If you would like us to mail you a copy of your income tax return, please let us know by crossing off the box at the top of the second page of the checklist. We no longer charge for this service.
Please select from our client “Tax Toolbox” the appropriate tax checklist that should be used depending on your situation. Clients who are impacted by the provisions of the U.S. FATCA legislation (see annex attached) will need to continue to provide us documentation so that the 2018 U.S. “Form 8938” can be properly completed as part of the 2018 U.S. income tax return. If you are affected by FATCA, please agree with us the methodology for communicating the necessary information. We are flexible and want to be as efficient as possible.
Our Tax Toolbox includes a video and an excel workbook that will allow you to determine if you are subject to the FATCA disclosure rules. You may also use the workbook to organize your information for preparing the FinCEN Form 114 (see next).
FinCEN Form 114 (or “FBAR”)
The deadline for filing the FinCEN Form 114 is aligned with the U.S. tax return filing date of April 15, 2019 and benefits from an automatic 6-month extension. The final deadline for the 2018 FinCEN Form 114 is therefore October 15, 2019. There is no additional two-month extended deadline for filing this form.
The Banking Secrecy Act of 1970 included a provision that requires U.S. persons to report their foreign financial accounts each year if the cumulative balances of those foreign accounts exceeds $10,000 at any time during the year. The form name and the penalty provisions associated with this form have changed over the years. Since the 2013 tax year, this form is called ‘FinCEN Form 114’ and must be submitted on the Financial Crimes Enforcement Network’s website.
Our Tax Toolbox contains a guide, video, and an Excel template that explain how to prepare and submit the form. A person who willfully fails to report an account may be subject to a penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation. Willful violations may also be subject to criminal penalties.
Services We Provide
We prepare U.S. income tax returns, gift tax returns, and in some situations the FinCEN Form 114, and other information returns. We also prepare French income tax returns, which for some clients will now include the modified French wealth tax, Impôt sur la Fortune Immobilière (IFI). If clients choose to send their own tax returns, we encourage the use of a registered mail service so that you have substantive proof that the tax office received the tax return. A few euros paid to La Poste could save thousands of euros in late filing penalties.
We need to invoice for our investment in assisting with responding to tax notices. We will endeavor to provide a fee quote for our assistance with these replies before commencing work.
Services We Do Not Provide
We do not routinely assist with matters related to “taxe d’habitation, taxes foncières, redevance audiovisuelle” or other administrative concerns. We can provide follow-up on such matters, but we will bill for the extra time spent. This type of assistance is not included in our regular service or fee.
Our General Office Procedures
The IRS continues its international compliance initiative, and some U.S. taxpayers will be selected for examination. Typically, these examinations focus on the foreign tax credit. Our hourly rates apply in assisting with such examinations and we will do our best to provide an estimate of the expected time for assisting with each examination.
Our fee quotes are based on the assumption that you will provide us with complete, clear information, and that only routine follow-ups will be required. If we have to follow-up with multiple phone calls and e-mails to obtain missing data and explanations, it will result in more time spent by us and thus a higher fee.
We generally process files on a “first in, first out” basis. Upon receipt of complete information, we log your file into our database. We will do our best to notify you if the information you have provided is insufficient to commence work.
We issue our invoices with the tax returns (or letters) and we request that clients settle their accounts timely so that we can limit the administrative time dedicated to our accounting. Clients who habitually pay late may be asked to provide a retainer fee the following year.
We do not share your information with any third party and we do not accept or pay referral fees.
Steven R. Horton, CPA
2018 U.S. Income Tax Update
The Tax Cut and Jobs Act, Pub. L. No. 115-97, created substantial tax reform for tax years beginning January 1, 2018, notably the following:
$ There are seven federal tax brackets for 2018: 10%, 12%, 22%, 24%, 32%, 35%, and 37% (down from 39.6%). For instance, below is the income threshold for each filing status at the 37% bracket:
– Married Filing Jointly or Qualifying Widow(er): $600,001 or more
– Head of Household: $500,001 or more
– Single : $500,001 or more
– Married Filing Separately: $300,001 or more
$ The standard deduction is almost doubled. It increases to $24,000 for Married Filing Joint taxpayers, $18,000 for Head of Household filers, and $12,000 for all other individuals, and is indexed for inflation. However, the Act repeals personal exemptions.
$ The child tax credit will be increased to $2,000 per qualifying child (up from $1,000). In addition, there will be a $500 nonrefundable credit for qualifying dependents other than qualifying children.
$ For mortgage interest related to debt acquired after December 31, 2017, the mortgage interest deduction is limited to acquisition debt of $750,000 ($375,000 in the case of married taxpayers filing separately). For acquisition indebtedness incurred before December 15, 2017, the new law allows current homeowners to keep the current limitation of $1 million ($500,000 for married taxpayers filing separately). The additional deduction of interest on Home Improvements Loans up to $100,000 is repealed.
$ The Act limits the combined deduction for state and local sales, income, and property taxes to a cap of $10,000 ($5,000 for married taxpayers filing separately). Foreign non-business property taxes can no longer be deducted.
$ The percentage limitation for charitable donations increases from 50% to 60%. Taxpayers are no longer entitled to deduct payments made to a college in exchange for college athletic event ticket or seating rights at a stadium.
$ The contribution limit for Roth and traditional IRAs remains at $5,500 for 2018. For those aged 50 or over, the limit is $6,500. The contribution deadline is April 15, 2019.
$ The Foreign Earned Income Exclusion increases to $103,900.
$ The new Tax Cuts and Jobs Act lowers the threshold for deduction of medical expenses to 7.5% of adjusted gross income for tax years 2017 and 2018 (down from 10% for those under 65 years of age).
$ Miscellaneous deductions such as unreimbursed employee expenses and tax preparation services which exceed 2% of AGI (“adjusted gross income”) are no longer deductible.
$ The annual gift exclusion limit for 2018 increases to $15,000. However, the federal estate and gift tax exemption will increase to $11.18 million per individual in 2018. A married couple will be able to protect up to $20 million from federal estate and gift taxes. However, these new limits will sunset on January 1, 2026.
$ The exemption amount for the alternative minimum tax (AMT) has been temporarily increased to $109,400 for joint files, $70,300 for single or head of household filers, and $54,700 for married filing separately filers. The new Act also raises the exemption phase-out levels so that the AMT will apply to an income level of $1 million for joint filers ($500,000 for others).
$ Prior to 2018, owners of “pass-through” entities such as partnerships, S-Corporations and sole proprietorships, paid tax at the individual rates. However, beginning in 2018, a temporary 20 % deduction may be allowed on qualified business income (except specified service trades or businesses). A 20% deduction will also be allowed on qualified real estate investment trust dividends, qualified cooperative dividends, and qualified publicly traded partnership income. A limitation applies to taxpayers with income over the threshold amounts ($157,500 for single filers, $315,000 for joint filers, with any potential deduction phased out over the next $50,000 or $100,000 of taxable income, respectively).
$ Net operating losses will be limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.
$ Beginning in 2018, the corporate tax rate is reduced to 21% (down from the current maximum corporate tax rate of 35%).
$ Recipients of gifts from foreign corporations or partnerships may be required to report if the total amount of gifts received in the year exceeds $16,076 (or $100,000 if received from foreign individuals or estates).
$ The U.S. social tax rate for employees and employers is 6.2% up to $128,700 of earnings. The Medicare withholding rate for employees and employers is 1.45%, with no ceiling. Employees are subject to an additional 0.9% withholding rate on wages in excess of $200,000. The self-employment tax rate is 15.3% (16.2% on income above $200,000 [$250,000 if Married Filing Jointly]).
$ Form 1065 (Partnerships) and 1120-S (S Corporations) are due on March 15 with a 6-month extension available to September 17.
$ Form 1041 Trust returns and Form 1120-C returns will be due April 15 however the extension available will only be for 5 1/2 months (to October 1) for trust returns and 6 months for 1120-C corporate returns (to October 15).
$ FinCEN Form 114 (commonly known as the “FBAR”) will be due April 15 with an automatic 6-month extension available to October 15. Specific requests for this extension are not required.
$ Current year income recognition on results of foreign corporations: The Tax Cut and Jobs Act which was signed into law on December 22, 2017 requires that U.S. persons who own an interest in a foreign corporation that is controlled by U.S. persons, include as taxable income their share of the current year corporate earnings under “GILTI” rules. The rules for computing the taxable income are complicated and elections might be made to diminish the taxes. Please schedule a meeting with us if you own an interest in a corporation that is controlled by U.S. persons.
2019 U.S. Income Tax Update
$ There are still seven federal tax brackets for 2018: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Below is the income threshold for each filing status at the 37% bracket:
-Married Filing Jointly or Qualifying Widow(er): $612,351 or more
– Head of Household: $510,301 or more
– Single : $510,301 or more
– Married Filing Separately: $306.176 or more
$ The standard deduction increases to $24,400 for Married Filing Joint taxpayers, $18,350 for Head of Household filers, and $12,200 for all other individuals, and is indexed for inflation. There will be no personal exemption for 2019.
$ The foreign earned income exclusion increases to $105,900.
$ Alimony: For divorce decrees issued after January 1, 2019, alimony will neither be deductible by the payer, nor taxable to the recipient.
$ The portion of medical and dental expenses which exceed 10% of AGI can be counted as itemized deductions.
$ Small business owners of certain “pass-through” entities receive a 20% deduction against business income. A limitation applies to taxpayers with income over the threshold amounts ($160,700 for single filers, $321,400 for joint filers, with any potential deduction phased out over the next $50,000 or $100,000 of taxable income, respectively).
$ The annual gift exclusion limit for remains unchanged at $15,000. However, the federal estate and gift tax exemption will increase to $11.4 million. Though, these new limits will sunset on January 1, 2026.
$ The exemption amount for the alternative minimum tax (AMT) has been temporarily increased to $109,400 for joint files, $70,300 for single or head of household filers, and $54,700 for married filing separately filers. The new Act also raises the exemption phase-out levels so that the AMT will apply to an income level of $1,020,600 for joint filers ($510,300 for others).
$ The Affordable Care Act (ACA), starting in 2014, imposed a penalty on taxpayers with no health insurance coverage. Please note that this provision has been repealed under the Tax Cut and Jobs Act for tax years beginning January 1, 2019.
For more information about French taxes, please see our newsletter: