Most of New Zealand is on holiday this week so the last thing they are watching with bated breath is the unfolding developments with the fiscal cliff. That is unless they are US expats with substantial income or investments, residing or holidaying here.
The corollary of the fiscal cliff is that in 2012 end of year tax planning became a whole lot more important for US taxpayers.
US tax practitioners will be busy making last-minute contingency plans for recommendations to their clients as the lack of progress brings America to the brink of the cliff. Inevitably they are now preparing for the worst-case outcome in this nail-biter situation, which will include an across-the-board hike in tax rates and a lift in the estate tax.
Should the US go over the cliff, tax implications extend beyond tax hikes. It is predicted there will be a delay in the processing of US returns by the Internal Revenue Service due to fewer resources available to cope with the aftermath of the fiscal cliff, and a delay in refunds issued by the Treasury. Additionally, the Internal Revenue Service has warned lawmakers that if increased Alternative Minimum Tax for middle-income taxpayers is not deal with as many as 100 million taxpayers may not be able to file their returns until late March 2013.
No doubt worldwide stock markets are, putting it mildly, nervously watching developments unfold with the threat of the dumping of stocks on the last business day of the US tax year, 31 December. This is predicted should the long-term capital gains rate for stocks increase from 15% to 20%, and dividends from a maximum rate of 15% to ordinary income tax rates.
The extent to which the outcome of the fiscal cliff crisis will affect US expats will vary. If tax rates go up many US expats will probably experience no effect on their back pocket. Irrespective of having to file a US tax return annually, many US expats have their entire tax liability zeroed out by use of techniques such as the foreign earned income exclusion, to wipe out US taxable income and thus any US tax liability. It is timely to mention that use of this method does not eliminate the need to file.
However, US expats will be affected by the government cuts in respect of their tax returns, by way of the Internal Revenue Service’s additional workload dealing with the fiscal cliff fallout.
The Internal Revenue Service offers tips for year-end planning, the majority of which unfortunately do not apply to US expats. In any case, limitations apply to most if not all deductions and credits making this appear to be a band-aid on a broken leg should any of these tax planning tips be successfully employed. Donations may qualify for a tax break if they are made to qualified charitable organizations which must be organized under the laws of the United States. One more relevant example is to consider divesting of non-performing stocks to take advantage of the long-term capital gains top tax rate that may expire on 31 December of 15%.
Another consideration which applies to US expats is the child tax credit. Six criteria apply for a child to be a qualifying child for the child tax credit, two of which include that the child needs to have a Social Security Number and be under the age of 17 at the end of the year. The nice thing is that the child tax credit is refundable to qualifying taxpayers both inside and outside the US, unlike other refundable tax credits.
Should the US go over the cliff and hit most Americans with tax hikes it seems there will be a common denominator with FATCA – Americans with increased motivation to relinquish their citizenship or rather firstly, re-domicile to another country if they haven’t already done so and then expatriate.
Already some countries are predicting that the number of Americans expatriating will rise as a result of FATCA, with an international tax conference in Tel Aviv this month covering the predicted increase in the expatriation of US citizens who live in Israel.
The ‘gotcha’ mechanisms of FATCA are galvanized with new laws requiring US citizens to be in compliance with their Federal income tax filing obligations in order to renew their passports.