At the end of each year, the IRS adjusts certain tax items to account for inflation. The 2019 inflation adjustments were recently announced for more than 60 tax items. Of those, here are some of the adjustments related to international tax items:
Inflation Adjustments Relating to Expatriates
For federal tax purposes, expatriates are U.S. citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their U.S. resident status. Those deemed as “covered expatriates” may be subject to mark-to-market tax (i.e., a tax on net unrealized gains) upon expatriation or termination of residency.
One of the criteria used to deem an individual as a covered expatriate is the average annual net income tax. If an individual has an average annual income tax liability of more than $168,000 for the five years preceding expatriation, they will be deemed a covered expatriate. The $168,000 amount for 2019 was increased from $165,000 in 2018.
Although covered expatriates are subject to the mark-to-market tax upon expatriation or termination of residency, they may exclude a certain amount from the mark-to-market gain. For 2019, this amount was bumped up to $725,000 from $713,000 in 2018.
Inflation Adjustments Relating to U.S. Citizens Living Abroad
U.S. citizens and green card holders, no matter where they live or work in the world, are subject to U.S. taxes on their worldwide income. However, the law does allow those who meet certain requirements to exclude a certain amount of foreign earned income from being taxed. The foreign earned income exclusion for 2019 increased to $105,900 from $104,100 in 2018.
Inflation Adjustments Relating to Gift Tax
Transfer of property between spouses who are U.S. citizens is not considered a taxable event. However, gifts or transfers of property to a non-citizen spouse may be taxable. There is an annual gift tax exclusion in this case. For 2019, gifts of up to $155,000 to a non-citizen spouse may be made tax free. This amount is an increase from $152,000 in 2018.
When a U.S. person receives a gift of money or other property from a foreign person, they may be required to disclose these gifts to the IRS on Form 3520. This form is an information-only return, not a tax return. Although there is no tax liability associated with this form, there are penalties for not filing. For gifts received from foreign partnerships and corporations, the threshold for filing increased to $16,388 for 2019 from $16,076 in 2018. For gifts from nonresident individuals or foreign estates, the threshold amount remains at $100,000.
If you have any questions about how the 2019 inflation adjustments might affect you, please reach out to us.
By Amina Ahmad, CPA