GOP Tax Reform and its effects on the taxation of foreign students and other non-resident aliens

Monday, July 30, 2018

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At the end of 2017, the U.S. Congress passed the largest tax reform act in history. The act itself contains nearly 500 pages. Even the most experienced American tax accountants are needing to keep up with the constantly changes instructions to advise to clients. My suggestion for clients is: When you read articles about the U.S. tax reform, pay special attention to their sources, and confirm the content with your U.S. accountants/taxation attorneys, so that you can avoid economic loss caused by wrong information. This article will mainly include the effect of the new tax reform act as we know it today to U.S. tax residents and Non-residents. If you have additional questions, please contact me through wechat: harlessmin or Thanks!

  1. Personal exemption will be waived in full
    Effective date: 01/01/2018
    U.S. residents: In 2017, before the tax reform, U.S. resident’s income is lowered by personal exemptions of $4,050 and one for each qualifying family members, including dependent relatives. After the tax reform, regardless of your income, the personal exemption is eliminated for 2018 and 2019. In 2018, the standard deduction and personal exemptions were combined into one large standard exemption for U.S. citizens.

    Non-residents: All non-residents doing properties investment, stock, having business in America, as well as all other people who need to file form 1040 NR, including international students/scholars, will not be entitled to $4,050 exemption. However, you can still choose to work together with a professional accountant to make the best plan for your income in the U.S. based on U.S.-China tax treaty and the U.S. tax code.

  2. Standard Deductions increased significantly
    Effective date: 01/01/2018
    U.S. residents: Starting from 2018, the standard deduction for single will be increased to $12,000. It will be $24,000 for married couples. Please consult accountants about standard deduction for head of household or other filing status.

    Non-residents: Except for non-residents from few countries with U.S. tax treaty, all non-residents from other countries WILL NOT be entitled to standard deductions, including Chinese citizens.

  3. 529 plan will no longer be non-taxable
    Effective date: 01/01/2018
    U.S. residents: 529 plan was a mainstream tuition deposit plan with tax benefits in the U.S.. It will no longer be non-taxable starting from 2018. I suggest clients who are parents with this deposit plan investing money in other projects with higher and more stable earnings in time.

    Non-residents: Not applicable.

  4. SALT (State and Local Taxes) will be limited
    Effective date: 01/01/2018-12/31/2025
    U.S. residents: Before the tax reform, the property tax and all other types of state and local income taxes for home-based properties can be exempted in the federal tax return with no limitation. Now, the federal tax reduction is limited to up to $10,000 per year.

    Non-residents: It is only limited to all types of state and local income tax up to $10,000.

  5. Other Miscellaneous itemized deductions will be canceled
    Effective date: 01/01/2018-12/31/2025
    U.S. residents: Unreimbursed employee expenses (2106 form), investment expense, tax preparation fees, bank deposit box fee cannot be used to deduct income.

    Non-residents: The same as U.S. residents.

  6. Moving expenses incurred by work are not allowed
    Effective date: 01/01/2018-12/31/2025
    U.S. residents: Moving expenses incurred by work are no longer deductible from income, except for members of the U.S. Army Forces.

    Non-residents: Not Applicable.

  7. Expenses for personal casualty loss and theft-canceled
    Effective date: 01/01/2018-12/31/2025
    U.S. residents: Personal casualty loss was deductible from income before the tax reform. No deduction allowed now, except for the clients affected by natural disaster areas.

    Non-residents: The same as U.S. residents.

  8. Estate tax and gift tax
    Effective date: 01/01/2018-12/31/2025
    U.S. residents: The lifetime estate tax exemption is $11,180,000 for single, and times two for married couples. In 2018, the gift tax exemption amount among U.S. residents is $15,000. Consult us or your U.S. accountant if your estate exceeds the life time exemption amounts. The gift between husband and wife is exempted from tax with no limitation.

    Non-residents: The exemption for estate tax is $60,000 for single. It has no limitation for foreign citizens giving anyone oversee assets as gifts, and it is exempt from U.S. tax, except for giving U.S. assets as gifts. At the same time, if the gift receiver is a U.S. resident, the U.S. resident client will need to contact their U.S. accountants. In 2018, the exemption for gifts between U.S. resident and foreign couple is limited to $152,000. If the amount is exceeded, please consult accountants for details.

    An Example of foreign citizen estate tax: With the rate of Chinese citizens holding assets of U.S. property and stock increasing, it is becoming more and more important to plan U.S. estate tax in advance. I had a Spanish client owning two apartments in his name only in the Miami and New York area. Each was valued at around $1,800,000. If he died by accident or passed away naturally (he was 87 at that time), what would the cost be for his only grandson in Spanish and how can the inheritance tax be reduced to avoid it:

    Cost: Since these are U.S. assets, the first $60,000 value is tax-exempt when the child inherits them. The amount (less the first $60,000), which is over $3 million, will be taxed for estate tax purposes at least 40% (federal), not including state estate tax rate.

    How to avoid it: Please consult us for ways to avoid details. Our mission is to help clients make plans to avoid the risk of estate tax while receiving benefits from the U.S. investments.

  9. Summarization of 2018 income tax rate
    Effective date: 01/01/2018-12/31/2025
    The highest income tax rate will be lowered from 39.5% to 37%. The following rate includes the different situations for clients with different income:

    This form is the tax rate form for net income excluding all exemptions. The right way to read it is to find your marital status on the time of your filing, and look from the top to bottom, finding your tax rate using your annual net income. There will be other articles in the future. Thanks!