The Impact of the Tax Cuts and Jobs Act (TCJA) on U.S. International Tax
Since the Tax Cuts and Jobs Act of 2017, effective January 1, 2018, the US moved towards more of a hybrid territorial system. This “hybrid system” has components of both a worldwide and territorial system.
Some of the changes included in the TCJA are the one-time transition tax on untaxed earnings of some foreign corporations, exemptions on foreign dividends (using 100% Dividends Received Deduction or DRD), and Global Intangible Low-Taxed Income (GILTI), Foreign-Derived Intangible Income (FDII), Base Erosion and Anti-Abuse Tax (BEAT), and disallowance of deductions related to hybrid instruments and transactions.
Individuals in the U.S. are still generally taxed on this citizen-based tax “CBT” with a foreign tax credit for certain taxes paid on that income as well are foreign earned income deductions available. In other words, if you are a U.S. citizen and you earn income overseas, the U.S. will require you to report that income on your U.S. tax return.
A special election will allow a US individual to take advantage of paying income tax at corporate rates, indirect foreign tax credits available to corporations, and claiming the 50% GILTI deduction. The corporate federal tax rate was lowered to 21% with the TCJA and is lower than the top individual tax rates and therefore this election can be beneficial.
To learn more, please visit our international tax page: https://abfinwright.com/international-tax-services/