2018 TCJA vs. 2017 Tax Code: Case Study Comparisons, by Jean Mammen, EA

How do Maria De Lima (Case Study I) and Carlos W. Masaryk (Case Study II) Fare?

The case studies are found both on my website http://www.1040nror1040.com  and in my book, “1040NR? or 1040?   U.S. Income Tax Returns for Visa Holders   +   International Organization and Foreign Embassy Employees”  https://www.amazon.com/1040NR-1040-Income-Returns-Holders/dp/1986498603/ref=sr_1_1?s=books&ie=UTF8&qid=1535673889&sr=1-1&keywords=Jean+Mammen

The bottom line of each case study has Maria and Carlos coming out slightly better in 2018 than in 2017. The loss of the personal exemption and the small amount of itemized deductions that Carlos could no longer take were slightly outweighed by the lowering of the applicable tax bracket from 15% to 12%.

Case Study I – Maria De Lima

2017                           2018

Wages on W-2                                                                      $ 39,560                     $ 39,560

AGI                                                                                         $ 39,560                     $ 39,560

Itemized Deductions                                                           $  1,400                      $  1,400

Exemptions                                                                           $  4,050                      0

Taxable Income                                                                    $ 34,110                     $ 38,160

Tax                                                                                          $  4,653                      $  4,389

 

Case Study II – Carlos W. Masaryk

2017                           2018

Wages on 1042-S                                                                $ 42,400                     $ 42,400

Treaty Exclusion                                                                  $  5,000                      $  5,000

AGI                                                                                         $ 37,400                     $ 37,400

Itemized Deductions                                                           $  3,532                      $  3,000

Exemptions                                                                           $  4,050                      $  0

Tax                                                                                          $  4,008                      $  3,938

Small Changes on Draft 2018 Forms 1040NR-EZ and 1040NR, by Jean Mammen, EA

There are few changes in the IRS draft forms 1040NR-EZ and 1040NR published on August 22, 2018.

The most important changes reflect the suspension of the personal exemptions  for tax years 2018-2025, in TCJA (Tax Cuts and Jobs Act), and the changes in filing status available and the new “credit for other dependent” (Form 1040NR only),

Schedule OI of Form 1040NR has a new question, Item M, about the 871(d) election. A filer declaring income from real property can treat that income in the usual manner, as investment income that is Not Effectively Connected to the taxpayer’s own U.S. trade or business, or elect to declare it as ECI, effectively connected income. Item M has two check boxes, which state in (1) that this is the first year you are making this election, or, (2) you have made this election in the past and not revoked it.

Dependents: The remaining possible  benefit from entering a dependent on Form 1040NR would be if either the child tax credit or the credit for other dependent could be claimed.

The non-resident alien taxpayer must qualify to claim a dependent – i.e. meet qualifications as a resident of Canada, Mexico, South Korea and the dependent resided in the same household for part of the tax year,  or is a student or business apprentice with residency in India.

By TCJA, the dependent must:

  • Be a U.S. citizen, a U.S. resident alien (SPT or green card) or a U.S. national
  • Have an SSN or ITIN before the due date of the return

(If an ITIN application will accompany the return, be sure to file early enough for the ITIN to be processed before the due date of the return)

Form 1040NR-EZ Draft 2018

First change comes at Line 12.

The heading, filing status, and Lines 1-11 are the same for the 2017 form and the August, 2018 draft forms.

For 2018, the 2017 1040NR-EZ lines 12 and 13 have been dropped

2017 Line 12 was a subtraction line

2017 Line 13 was Exemption

For 2018, the lines after Line 11 are simply moved up two line numbers from what they were on 2017 Form 1040NR-EZ.

For 2018, Line 12 is Taxable Income. On the 2017 form, Taxable Income was line 14

For 2018, the final line number on the first page is Line 24, estimated tax penalty. In 2017, that was Line 26.

Schedule OI remains the same on Form 1040NR-EZ.

https://www.irs.gov/pub/irs-dft/f1040nre–dft.pdf

Form 1040NR Draft 2018

Most changes here are  layout adjustments. Also, one line was dropped, on Domestic Production Activities Deduction (from Form 8903). Item M, on an IRC 871(d) election was added.

Line numbers on Page 1 are essentially unchanged from Line 1 through Line 33

Filing Status section

Checkboxes 1, 3, and 4 are greyed out and those lines are marked “Reserved”.

2017 Box 1 was single resident of Canada or Mexico or single U.S. national

2017 Box 3 was married resident of Canada or Mexico or married U.S. national

2017 Box 4 was married resident of South Korea

Dependents is the new 2018 name of the next section, instead of Exemptions

Line 7 Dependents is now the only line in this section. In 2017 this was 7(c).

Columns (1), (2), (3) are unchanged.

Column (4) is split in half, between “Child tax credit” and “Credit for other dependents”

Adjusted Gross Income 2018 section drops the 2017 line 34 Domestic Production…

The Adjusted Gross income amount is on Line 35 for 2018, not the 2017 Line 36

Tax and Credits section for 2018 now starts on Page 1, not the 2017 Page 2

2018 Line 40 is now an addition line, not the 2017 exemption line

Line 41 is Taxable Income in 2018, just as it was in 2017.

The 2018 and 2017 Form 1040NR page 2 are identical from Line 41 through the end of page 2.

Schedule A – Itemized Deductions Page 3

The TCJA changes are reflected on the NR Schedule A

Taxes You Paid Now has :

  • 1a Taxes
  • 1b smaller of line 1a and $10,000 ($5,000 if married)

The “$5,000 if married” reflects the fact that a Married Non-resident is filing as Married Filing Separately, and so the deduction is limited to ½ of the $10,000.

Line 7 “Other Itemized Deductions” does not include miscellaneous job expenses. They are not claimable in 2018, under TCJA.

Be sure to read the instructions for this line, when they are issued.

Schedule NEC (Page 4) is unchanged

Schedule OI (Page 5)

Item M is a new item on Form 1040NR. It concerns the 871(d) election

  • M1 should be checked if this is the first year the taxpayer is making the 871(d) election (net election) to treat income from U.S. real property as ECI – income effectively connected to the taxpayer’s own U.S. trade or business.
  • M2 should be checked if the taxpayer made this election in a previous year and it has not been revoked.

This election is made by attaching a statement to the Form 1040NR that the election is being made for a real property and lists all real property owned by the taxpayer. It is revoked in similar fashion.

https://www.irs.gov/pub/irs-dft/f1040nr–dft.pdf

Au Pair Income Tax Filing, by Jean Mammen, EA

An au pair in the U.S. on a J1 visa is participating in a cultural exchange program sponsored by an organization authorized by the State Department Bureau of Educational and Cultural Affairs. The au pair experiences life in an American family while providing child care for up to ten hours a day, not to exceed 45 hours a week.

The au pair must be enrolled in at least six semester hours of classes at a post-secondary institution. The au pair is not a full-time student. The DS 2019 issued by the sponsor is for a cultural exchange program participant (or trainee), not a student.

The au pair must receive a cash stipend.

The au pair will need to file a U.S. income tax return reporting the stipend, even if they do not receive a W-2 reporting the stipend amount. The tax and filing rules are the same for all J visa holders.
The usual au pair income tax reporting form will be a non-resident tax form. A non-resident form must be filed if a non-resident has any U.S. source income, whether or not any income tax will be due. ( IRC 1.6012-1(b)(1)(i)). Often the two-page Form 1040NR-EZ is suitable. The first page is the tax return. The last page, Schedule OI, or Other Information, asks about the foreign status of the filer.
The new tax law effective 2018 – 2025, the Tax Cuts and Jobs Act, eliminates the personal exemption and some deductions that a non-resident might have claimed. Thus, an au pair who files for 2018 on an amount of income similar to the 2017 income will have more taxable income, and likely pay higher taxes, even when the tax brackets and tax rates are more favorable in 2018.

The IRS has stated that Form 1040NR-EZ and Form 1040NR will not be updated for 2018. Thus, there may be lines on the income tax filing form that cannot be used, such as the personal exemption line.

Filing a State tax return. Check to see which filing form to use for the state, a non-resident form or a resident form. Some state rules say anyone who files a non-resident federal tax form also files a non-resident state form, if their income meets the filing requirement. Other states use their own residency rules to determine which form a foreigner should use. When you know which state form would be appropriate, check to see if taxable income by state rules meets the state filing requirement.

First Ever Visit to the U.S. by the J1 Visa Au Pair
A J visa holder who is a first-time visitor to the U.S. will file on a form for non-residents, Form 1040NR-EZ or Form 1040NR, for the first two calendar years. They will be a tax non-resident of the U.S. because they will not meet the Substantial Presence Test (SPT). They are eXempt from counting days spent in the U.S. as days of presence for SPT purposes for any period during those first two calendar years in the U.S. on a J visa. An au pair‘s placement might span two successive calendar years. It might run from June through May of the following year.

Preparing the forms: Gather the information and documents that will be needed
-Income information
-Passport
-Visa or visas
-Form DS-2019 issued by the sponsor agency
-Dates you were physically in the U.S. in the tax year and the two prior calendar years
-Print from the I-94 website all available information, especially the dates you entered and departed the U.S.

Form 8843 (Statement for Exempt Individuals…) is completed and attached to the Form 1040NR-EZ, or Form 1040NR, for each tax year where any days are eXempt from being counted for the SPT. Treas. Reg. 301.7701(b)-8(a)(2); 301.7701(b)-8(b)(2)

Form 8843: Complete it before starting on the income tax return itself. Its results show whether the correct income tax filing form is a non-resident or a resident tax form.

Find Form 8843 on the IRS website, https://www.irs.gov  , by searching Forms and Instructions. The instructions print out with the form.

Heading: on Form 8843: Since the au pair would attach Form 8843 to the non-resident income tax return, it is not necessary to enter the address in the U.S. on Form 8843 or to sign the form. Only the first page of Form 8843 will be required for a J1 visa au pair.

Questions 4a and 4b
4a – for the tax year and the two prior years enter the number of days ( Z ) you were actually physically present in the U.S.
4b – for the tax year, enter the number of days ( X ) that were eXempt from being counted for the Substantial Presence Test (SPT) because you were within the eXempt period on a J visa (or an F, M, or Q visa).

As stated above, the Z and X numbers are entered on Form 8843
The Y number will be entered on Schedule OI, Line H

X = eXempt days, not countable for SPT
Y = ‘present’ days that do count for SPT
Z = actual total days physically present in the U.S.

X + Y = Z, or, Z- X = Y

Form 8843 Part II Teachers and Trainees
Line 6 – An au pair cultural exchange participant would be treated like a Trainee. Enter the information for the person who signed your DS-2019.
Line 7 – complete
Line 8 – check ‘yes’ or ‘no’. The Line 8 information states that if you answer ‘yes’, you cannot exclude actual days in the U.S. for the tax year, unless you meet an exception. That exception could apply only to an individual on a student visa, not to a cultural exchange participant.

Third year, in U.S. on a J1 visa: A visa or program renewal year:
This situation will occur for a first-time visitor to the U.S. as a J1 au pair, only if they have renewed and are now in their third calendar year in the U.S.

A third calendar year au pair calculates whether or not they have met the substantial presence test (SPT) in the third year, to see if they should still file on a non-resident form, or if they have become a tax resident of the U.S.

Look at the Substantial Presence Test (SPT) before deciding whether to complete Form 1040NR-EZ or Form 1040 for the third year:

Substantial Presence in U.S. requires1 a Form 1040. The substantial presence test (SPT) is met when someone has 183 days of countable presence in the U.S., full or partial days, over up to three years, including arrival and departure days. 1Possible ‘student exception.’
If 31 day minimum in the U.S. in the tax year is met, count all tax year days present, plus
1/3 of days present in the U.S. in the immediate first prior tax year, plus
1/6 of days present in the U.S. in the second prior tax year. Add all fractions to the total.   IRC 7701(b)(3)(a)(i) and (ii)

If the J1 visa holder leaves the U.S. by the first few days of July of the third calendar year, likely they will not meet the SPT and will use the non-resident filing form.
But if the individual leaves the U.S. later in the year, their days present will be greater than 183, they will have met the SPT, and they will use the tax resident form (Form 1040).

Completing Form 1040NR-EZ, Page 1
Some online software does not include a Form 1040NR-EZ, Form 1040NR, or Form 8843. You might need to use a fill-in the forms feature and even have to calculate the tax due yourself. You might be unable to file electronically and have to print and mail in the forms.

Getting Ready
On the IRS website, https://www.irs.gov , search Forms and Publications, search for Instructions for Form 1040NR-EZ. Look through the instructions. Print out any pages you want to have at hand.

Choose a data entry method: online software, fill-in the forms, print forms and complete by hand, or, consult a tax professional.

Gather the information you will need on income, deductions, passport and visa, dates…

Complete the heading information, then
On Line 1, check either single or married.
Line 3, enter the total stipend received during the tax year
Line 10 – enter the appropriate number. Probably the same as the number on Line 3
Line 11 – Itemized Deductions: If you paid any state tax during the year, whether by withholding, making estimated payments to the state, or, in your second calendar year, paying the balance due on the first-year state or local income tax return, enter that amount here. No other type of itemized deduction may be entered here. (Use Form 1040NR instead if you want to claim other itemized deductions)
Line 12 – follow the instructions
Line 13 – enter -0- if this line is still available on the 1040NR-EZ tax form.
Line 14 – Taxable Income
Line 15 – Tax : Calculate this using the tax table in the instructions that applies to your personal status, single, or, married.
Lines 18 and 19, 20 and 21 – enter any tax payment already sent to the IRS
Determine if you are due a refund (Line 21) or you owe the IRS (Line 25)
If you owe more than $ 1,000, you may also owe a penalty, Line 26, which you include in the Line 25 amount.

Completing Schedule OI
Complete Lines A, B, C, D
Line E – Enter J if your visa is still valid for entry into the U.S. If your visa expiration date had passed and it could no longer be used to enter the U.S., enter “no immigration status”.
Line F The question says “ever”. If you changed visa type during the calendar year, the three-year SPT period, or the prior six-year period, check ‘yes’ and describe the change and date of change.

Line G – Enter in the boxes only dates within the calendar year.
If you need help, with the dates, visit the I-94 website, enter your passport number, and print out whatever pages are available to you. One of them will show the dates you entered and departed the U.S.

If you were in the U.S. on or before January 1, enter January 1. If you departed before December 31, stop after you enter your last departure date.

Line H – Enter the number of countable days of presence for meeting the SPT for each of the three years listed, the tax year and the first two prior years. If you were not in the U.S., enter -0-. If you only were in the U.S. on a J visa in either the first or second calendar year of eXemption from counting days in the U.S. as days of presence, enter -0-. If you also were in the U.S. on countable days, such as a 15-day tourist visit, enter the number (!5).

Remaining Lines – answer any yes/no question as required. Questions 2 and 3 likely are ‘no’.

Earlier visits to the U.S.
As a tourist only, not on an F, J, M, Q Visa
Apply the Substantial Presence Test (SPT)
On an F, J, M, Q visa, as either the principal or a dependent
See blog post on Second Visit to the U.S.  http://blog.1040nror1040.com/2015/07/03/second-visit-or-multiple-visits-to-the-u-s-changing-statusvisa-u-s-tax-obligations-by-jean-mammen-ea/

FICA and Tax Resident Filing
If the au pair will file as a tax resident because the SPT has been met, the employer must pay / withhold FICA – social security and Medicare tax – on the wages
The employer pays through
–Withholding, or,
–Schedule H attached to the employer’s own tax return

Leaving the U.S.
The au pair may need to obtain a sailing permit from an IRS TAC office to leave, if the employer has not withheld income taxes and provided a W-2. See blog post on Sailing Permit. http://blog.1040nror1040.com/2018/06/04/not-a-u-s-citizen-leaving-the-u-s-returning-before-filing-a-current-year-u-s-tax-return-not-planning-to-return-by-jean-mammen-ea/
The income tax form for a given year is filed the following year. The au pair probably will have left the U.S. before it is time to file the final U.S. income tax return. They should file whether or not they owe taxes. It can be important to demonstrate that they do not owe taxes.

Why the 7th is Classic, by Jean Mammen, EA

The 7th edition of “1040NR? or 1040?    +   International Organization and Foreign Embassy Employees” is Classic because:

There will always be people living and working outside their home country

Formats or laws may change, but they don’t all change at once

The 7th Classic introduces the tax law changes TCJA (Tax Cuts and Jobs Act) puts into effect for 2018 U.S. income tax returns.

Personal exemptions are “suspended”.  The 7th Classic is annotated (2018 n/a) where personal exemptions are mentioned.

Will this suspension of personal exemptions mean the 2018 Form 1040NR will no longer have boxes for qualifying dependents and spouses for residents of Canada, Mexico, South Korea, and Indian students and business apprentices? We won’t know until later. Maybe much later. But we do know that for 2018 and on, NR filers, like 1040 filers, will not be able to subtract the personal exemption amount from their gross income to lower their taxable income.

Filers of original and amended returns for 2017 and earlier will continue to apply the Classic rules, the pre-TCJA rules.

People who move to a new job location, post-TCJA, will not be able to deduct moving expenses, unless they are military with orders for a permanent change of station. That too is noted in the 7th Classic.

Is there or will there be an exception carved out for foreign service personnel, as usually is done?

For sure, an arriving J-1 teacher will not be able to deduct the expenses of moving themselves and their possessions to the U.S. in 2018 to take up that job.

The 7th is classic for all the things that were not changed by TCJA.

For Form 2555 – Foreign Earned Income Exclusion.  For Form 1116 – Foreign Tax Credit.

For using the best tax strategy to meet  the FIRPTA requirements when a foreign individual sells U.S. real property,

For determining what is taxable and what filing form, 1040NR? or 1040? should be used by an employee of an international organization or a foreign embassy located in the U.S., looking at the immigration status of the employee: U.S. citizen, U.S. tax resident by green card or by substantial presence test, an A visa holder (Vienna Convention), treaty, comparable treatment, or a G visa holder, full year or part year.

The 7th Classic sports its evergreen rosette in the lower right hand corner of the cover.

The 7th Classic helps taxpayers anticipate how TCJA will affect their 2018 tax returns, as well as providing guidance for 2017 and earlier income tax returns.

It will be available indefinitely.

The 8th edition will be published as soon as possible in 2019. And of course it will present  2018 forms and rules. When “as soon as possible”  will be is unpredictable.

The 7th Classic presents the basic tax information, if not the form detail, that will be needed in 2019 to complete 2018 tax returns.

 

 

AWAY-FROM-HOME BUSINESS EXPENSES C A R E F U L !!!

Most people who come to the US on a work visa (example H, L), or on a student or exchange visitor visa (ex. F, J) expect to stay longer than one year. They changed their tax home when they entered the US and do not qualify to take away-from-home business expenses.

Home for the purpose of claiming a tax deduction means your Tax Home – the area where you normally work and earn the money which will be taxed on your income tax return.

When you are temporarily away from your normal work location, you may claim some ‘ordinary and necessary’ business expenses if your employer does not reimburse you for them.

If your employer does not have an accountable plan, or if it does not include common business expenses, urge your employer to set  up or expand an accountable plan.

These deductions can be taken against wage income only through December 31, 2017. The Tax Cuts and Jobs Act of 2017 ended this type of miscellaneous deduction (subject to the 2% of adjusted gross income (AGI) floor, on Schedule A and Form 2106 through the year 2025.

Of course, on Schedule C or E, similar deductions may be business expenses.

Temporary has a time limit. Less than twelve months.

The rules are exactly the same on all the income tax forms, the 1040 forms, and the 1040NR forms.

To keep your original tax home when you leave it temporarily for a different location where you will have taxable income, you must realistically expect to spend less than one year working in that temporary location. You must either return to your original tax home (the first work location) or go to a different work location within a year’s time.

A visiting scholar coming to a university for a one or two semester program may be temporarily away from the tax home.  This scholar may claim the normal expenses that someone on a business trip might have:  lodging for one person (with receipts), one-half of meal expenses if there are receipts, or one half of the standard USG meals allowance (M) included in the standard per diem rate for that location, plus the incidental expenses amount. Plus other ordinary and necessary business expenses that are helpful and normal in that work situation.

The visitor may have rented a room, or, share an apartment with a colleague or a family member.  Only the pro-rated share of the rent and the utilities for one person may be claimed, and only if the visitor has receipts, or other proof of all payments, such as cancelled checks, and so on.

If the visitor has a cellphone on which he makes a mix of business and personal calls, or a mix of business and personal web searches, the visitor may claim a  ‘business percentage’ of the phone and data costs. This is based on actual total cost, and a careful analysis of how much of the total usage is business related and how much is personal. Again, receipts are necessary to claim a deduction.

Perhaps the visitor attends professional conferences and pays registration fees that are not reimbursed. These may be business expenses when away from home just as they would be when at home.

Someone who comes to the US with the realistic intention of spending more than a year in the US has changed their tax home.  They do not qualify to claim away-from-home expenses for lodging and food.

They do qualify to claim other business expenses, such as registration fees for professional conferences.

All types of itemized business expenses are claimed on Schedule A.  The amount that is claimable is the amount that is more than 2% of the adjusted gross income.

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