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TII SPECIAL
Trump Tax - in User-friendly English - for (primarily) Americans abroad as well as anyone else required to file a U.S. Tax Return
By Laurence E. Lipsher
Jan 27, 2018

Laurence E. 'Larry' Lipsher, American by birth, has been a practicing accountant, specializing in taxation, for 49 years. Over half of that time, Lipsher has worked in Asia. He has resided in Guangzhou, China since 1997 where, prior to his retirement in China, he was licenced to practice as a CPA in China. He is the only non-Chinese author ever to have articles translated and published in The Chinese Accountant, the official publication of the Chinese Institute of CPAs.

He is a highly regarded author of six books on taxation.  He is featured guest speaker at international tax conferences.  He views himself as a tax entertainer.

I wrote a November article for Offshore Investments……….taxhaiku'd through out…..
O.K. I was wrong.
Bi-partisanship? Bull bleep!
G.O.P tax bill.

That, my friends, is the only haiku I will do this essay. True, I toyed with the idea of doing limericks this time but got seriously hung up without a printable taxation alternative for a word that rhymes with Nantucket.Thus, I gave up on that idea.

I was wrong. I thought there would be little chance of an act passing in 2017 - I anticipated sometime around March,2018 and I thought it would be bi-partisan with repatriation of a whole lot of offshore, untaxed income coming back at a very attractive rate, specifically earmarked for infrastructure. Nope, didn't turn out that way at all.

Between the time that the U.S. Senate passed their version of the tax bill early in December and the approximate 2-week interval between that date and both houses of Congress passing the Conference Committee version, Trump Tax went from just under 500 pages (479 pages, to be exact) to just under 1,100 pages(with its official explanation included) added on. 1,100 pages - I wouldn't exactly call that tax simplification. Trump Tax obviously is not the name of the new law. The formal name of the law is actually H.R.1, ‘An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018' but everyone is calling it the Tax Cuts and Jobs Act. Me? For purposes of this article, I will be calling it Trump Tax - simply because calling it that is so much more fun!

This wasn't participatory legislation, one of cooperation; it was partisan politics with back room dealings ONLY by the Conference Committee members. Even the rank and file Republican members of Congress didn't get to see what went into those additional pages - but to get the vote, so many, many Republican legislators got the sweet deals they wanted with much of the new writing done with the help of lobbyists - the fifth estate of American participatory democracy. Trump Tax supporters claim that this new act will help the economy and create jobs. As per the Conference Committee, the average family of four earning median family income of $US73,000 will receive a tax cut of $US2,059. Yes indeed, this will generate a short-phased economy jump as an extra couple of thousand dollars in middle class pockets will likely be spent on consumer products.

In 1986, corporations be damned - the tax breaks permanently went to individual income tax payers at the expense of corporations. That's no longer the prevailing mood of the Republican legislators. Corporate tax cuts are permanent and the individual tax cuts meet their demise in 2025, reverting back to the individual tax rates that Americans have been filing under for the past several years. That reversion ain't going to go over well come 2025! As far as tax reform is concerned, reversion from 2025 back to 2017 sounds far more like a delay tactic than reform.

I know of no one who thus far has read this new law (and ‘explanations') in full. I doubt if I will ever personally meet someone who'll have read it in full. Yet I have no doubt that there are passages contributed to the writing of those nearly 1,100 pages that are beneficial to the various and sundry special interest groups who paid a worthwhile amount to get that favorable little thing into law. Some of these newfound tax loopholes will eventually be discovered. Of course, there will also be those loopholes never to be discovered. It's not really tax transparency but then at my age and after having worked in this vocation for as long as I have, all I can cynically ask is ‘when is any national government, anywhere, truly tax transparent?'

I have downloaded my copy from the US Government Printing Office - yes, my friends, H.R.1 is free for the asking and has a heretofore unfound additional purpose - load it on your tablet; any given night you have trouble sleeping, start reading H.R.1 on your tablet - you just might discover that this is a fantastic holistic sleeping pill! Yet I am a glutton for punishment and welcome the challenge of starting to read through and see how long it takes me to determine that the damned thing is unintelligible. Will I read the whole thing? Absolutely not! I'll rely upon others to find and write about those ‘goodies of the new' law that will direct my future reading. To paraphrase Charles Dickens:there are far, far better things for me to do with my life than read nearly 1,100 pages of law!'Truth be told: there are only around 70 pages (raw law, not the explanation part) covering international provisions (more modifications than changes) and those pages I will definitely read…..I may not understand them but I'll read them!

Remember when Trump campaigned for tax law change? I seem to recall his campaign based upon the concepts of simplification and reform. To summarise the above:

1,100 pages for a new law…..in no way, shape or form can this large a document ever be considered to be simplification!

And once again let us give mention to the concept of reform. Change/reform should be considered as permanent, right? Well it isn't in Trump Tax insofar as individual income tax changes - whatever is set up as brand spanking new only lasts until 2025. Then the individual tax law reverts to the law exactly as it is today………It ain't reform, either!

Frankly I think this is a lousy piece of legislation that will need to undergo many technical corrections as the years go on - bigger corrections if the Democrats recapture both houses of Congress. Remember Trump's ‘drain the swamp' rhetoric? It looks as if swampland has expanded. The Tax Policy Center, a liberal leaning yet (to the chagrin of the right) highly regarded and basically non-partisan think tank produced a chart showing that the tax cut for the middle quartile of the US population will average $US930 next year but that the top 1 percent of income earners in the States will get a tax cut averaging $51,140. And after those individual income tax cuts expire post-2025, Tax Policy Center estimates that that middle-income quartile will be paying $US20 more in tax while their top 1 percent brethren will only be seeing a $US20,000 annual tax cut. It looks like these figures are not being disputed - they are not fake news! This does not appear to be an equitable law - income inequality and the growing wealth divide get worse under this law.Yeah, I realize that some income inequality is necessary - it does serve as incentive to work hard and reap rewards for the effort. Is Trump Tax too inequitable - only time will tell.

Likewise, the new law appears to be one that was primarily made by the lawmakers of Congress, not the President: It is not simple, it is not truly reform. For example, while Trump campaigned vowing to eliminate the carried interest tax break hedge fund and private equity managers took advantage of sufficiently to make it appear abusive, Congress kept it intact - lobbyist funding proving to be more potent than Presidential campaign promises. The oil industry also got its opening of the Arctic National Wildlife Refuge and the evangelicals got 529 plan revisions such that these plans can be used for tax advantaged payment to private religious secondary school education in the future.

And yet, for all the bad things I can say about Trump Tax, I LOVE THIS NEW LAW! Trump Tax will fund my retirement plan for several years to come!! The Congressional Budget Office (supposedly neither left nor right of center!) estimates that the Tax Cuts and Jobs Act will increase the deficit nearly 1.5 trillion dollars over the next decade. The Republican party, Trump and the legislators dispute this, predicting that the tax cuts will spur both economic growth and a jobs bonanza. Trickle down economics has never ever worked in the past - why assume that it will work now? The White House is predicting economic growth to increase substantially asa result of Trump Tax, with GDP growth accelerating to 2.9 percent and with average American wages increasing by $US4,000 or more. This is a pipe dream - it'll never happen!

So here's what you really need to know in far fewer words than those contained in that 1,100 page law. And the following will be far easier to read and understand…..I guarantee it!

EXECUTIVE SUMMARY FOR AMERICANS LIVING OUTSIDE OF THE U.S. AND NON-RESIDENT ALIENS REQUIRED TO FILE U.S. TAX RETURNS - WHAT CHANGES WERE MADE TO THE BASIC TAX RULES? NOTHING, ACTUALLY…..and yet………!

Let us use as an example an American living and working overseas for a foreign company - we'll call him Charlie Expat. Let us also assume that Charlie Expat does not own any portion of the foreign company he works for. Charlie Expat is still going to be filing under foreign earned income and foreign housing exclusion guidelines. Residency based taxation? Not yet even close to happening. Both FATCA and FinCEN114 will still be part of Charlie's tax filing obligations. And of course,Charlie is still going to have difficulty opening up a new bank or brokerage account outside of the US. Some things will never change…..

What happens though if Charlie purchased a home overseas and has been deducting interest and property taxes on Schedule A, the Itemized Deductions form of his tax return? Well there is no change on the expat 2017 tax return for these deductions. Come a year from now, Charlie will find that neither foreign mortgage interest payments nor property taxes are eligible for deduction (until 2025 when the sunset provisions of Trump Tax as they apply to individual tax matters will cause a reversion to the current law making foreign interest and property taxes deductible once more).

A year from now, when our Charlie starts to gather the necessary information for his or her bean counter (except in China where we are ‘rice counters' - no kidding - that's what the Chinese translation of CPA means!), medical deductions will still be available (but with a 7.5% non-deductible portion of adjusted gross income, down from the last year's 10%) and charitable contributions will still be allowed but virtually nothing else. If Charlie is married and filing a jointly filed tax return, the standard deduction goes up to $US24,000, an amount not likely to be exceeded by allowable itemized deductions.

There'll still be seven brackets you can fall into for tax filing purposes (how many did Trump promise?) but the percentages and income ranges falling into each bracket have changed, necessitating a ‘retooling' of the IRS system to account for withholding in 2018 and hence, a delay in when that average expat will be permitted to file his or her 2017 tax return. The IRS will not accept tax returns until 29 January 2018.

Alas, all is not a bed of roses, there are thorns, too - regarding deemed distributions!

Do you own a portion of the company you work for? Is it a foreign corporation? If Charlie Expat does, he might be facing a serious problem about a year from now. Here is the one area you had best be concerned with if you are a foreign corporate owner…..

Trump Tax starts a ‘conversion' from a worldwide tax system to a participation exemption system that will now give domestic U.S. corporations a100% dividends received deduction for dividends received from a controlled foreign corporation. A controlled foreign corporation, in essence, is a non-U.S. - foreign - corporation that is owned by more than 50
% by U.S. shareholders. Both that foreign corporation and its U.S. shareholders fall under specific provisions of U.S. tax law.Yet what if you are an individual owning over 10% or more of a controlled foreign corporation and that foreign corporation distributed dividends? While your friends who owned their foreign corporation through a U.S. corporation will now be tax-free on the same dividend distribution method you've gone through, you will be taxable! Not only that, for all foreign corporations this new system will impose a one time deemed repatriation tax, payable over 8 years on unremitted earnings and profits. The foreign corporate results to be reported for 2018 will impose a deemed earnings tax that can be paid out over an eight-year period. 15.5 % is the tax of these earnings held in cash or cash equivalents while non-cash equivalents, other earnings, will be taxed at 8%

How will this be reported? What additional forms and current form changes will the IRS have to make, accompanied by intelligible instructions, to determine all of this. The IRS, anticipating, perhaps, a sizable amount of last minute changes of ownership from individual to corporation, snuck through (how the hell can I call this anything but a sneaky procedure when no one knew about it?) a ‘stipulation' mandating that for this type of ‘situation' November 2, 2017 is the date that determines the Earnings and Profits accumulated that would be subject to a repatriation tax. I'd love to find out the real reason that November 2d was chosen - I have absolutely no doubt that some lobbyist paid very well for that specific date……..!

As I said, I am quite likely to read the entire section of the law devoted to participation exemptions and a deemed repatriation tax. I was hoping that there would be some more writings on the subject but no one seems to have come forth and ventured to analyze this veritable can of worms.

Ever hear of the Caplin & Drysdale law firm? The are based in Washington, DC and have what I consider to be the best ‘connections' with the IRS of any law firm/lobbyist functioning. If I had a client with a case that even I would not want to handle, I'd refer them to Caplin & Drysdale as the best chance of salvaging their life through IRS negotiations. Thus, I read quite seriously H David Rosen bloom of C&D and his 2 January 2018 article “International Aspects of U.S. ‘Tax Reform' - Is This Really Where We Want to Go?”

Referring to the international provisions as well as to a ‘participation exemption system', Rosenbloom states: “The statutory language of the new provisions is dense, and rife with rudderless jargon, bewildering cross-references, and new and unfamiliar terminology. Heroic efforts of staff to explain the provisions in declarative sentences have been helpful to some extent, but the lack of transparency that has consistently characterized the development of the legislation has not.” This is simply an area that needs close scrutiny over the next several months and those of you reading this who own a percentage of a foreign corporation and who are obligated to report this to the Internal Revenue Service should also follow this one as it can potentially upset your proverbial apple cart in a severe manner.

Yet it is not Trump Tax that worries me as much as a drastic reduction in the IRS budget that has been transpiring over the past several years. With a budgetary drop not only does compliance suffer but communications between the IRS and taxpayers seems to have broken down and quite possibly are entering an irreparable phase. The IRS needs funding to operate properly. It isn't getting the funding necessary. The New York Times, in a 2 January 2018 editorial “Don't Cheer as the IRS Grows Weaker” stated that:

- A 1 percent drop in compliance equates to a 33 billion loss of revenue. Since 2010 Congress has reduced IRS budget by nearly 1 billion US$, an 18 percent overall budgetary reduction. Budgetary reduction has also led to IRS staff reduction. Since 2010 total IRS staffing has decreased by: 21,000. The IRS Compliance staff has shrunken by approximately 1/3.

- The IRS computer system still uses Cobol, a fifty + year old computer language that is subject to hacking attacks - the cost of upgrading is prohibitive and is primary reason why FinCEN114 has to be virtually duplicated on the Form 1040 as Form 8938 - because the IRS computers really are limited in their ability to communicate with one another.

- Retooling for the new year with a new law requiring both tax bracket and withholding rate changes, the IRS is under pressure and has delayed acceptance of new 2017 tax filings far longer than for any prior year. When this last happened with the Tax Reform Act of 1986, the IRS hired 2,100 part time employees to make the changes. No temporary employees will be added this time.

So what does all this mean? Good question! As the year goes on and more hidden tax goodies/loopholes in the new law are uncovered/discovered, hidden within those nearly 1,100 pages, those of you who own 10% or more of a CFC obviously need to be concerned and should watch this closely. Those professional service providers working with persons obligated to file U.S. tax returns also have got to follow closely as their advice is going to be sorely needed not only for working with the 2019 filings of 2018 U.S. taxes but for planning whatever can be done beneficially during 2018 prior to having those 2019 tax filings! And yeah, this will likely generate another article from me a few months hence, well before 2019!

 
 
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