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Transatlantic Tax Updates: July 2020

A round-up of the recent US tax changes relevant to American taxpayers living in the UK.

IRS Processing Paper Filed Returns & Mail

The IRS have recently begun reopening their facilities in the US and their agents are beginning to process paper-filed tax returns, amended tax returns and approximately 11 million pieces of unopened mail. The IRS have advised taxpayers who paper-filed a 2019, or amended, tax return prior to lockdown, to expect severe delays.

Prior to lockdown, the IRS had generated around 20 million taxpayer notices which were not actually mailed. As IRS facilities reopen, and they work through the backlog, these notices will be mailed to taxpayers but are unlikely to be updated. Therefore, taxpayers may receive an IRS notice which is dated prior to the lockdown, and more concerningly, may request a taxpayer response by a date which has long since passed.

If you receive a notice from the IRS, or a state tax authority, please reach out to your Blick Rothenberg contact with a copy of the notices, including all pages, attachments and inserts so we can assist.

Don’t have a scanner at home? Why not try the Microsoft Office Lens app to convert paper documents to PDF using your smart phone.

Economic Impact Payments

Economic impact tax payments made to US taxpayers living in the UK are deemed not to be taxable income for UK tax purposes.

The economic impact payment is actually an advance payment of a 2020 tax credit which is available to all US taxpayers who are not claimed as a dependent on another’s return and with adjusted gross income below certain thresholds. A taxpayers 2020 tax credit is increased by $500 for each qualifying child. The amount of the tax credit available to be claimed on a taxpayers 2020 tax return will be reduced by the economic impact payment received.

The IRS has issued guidance and a series of FAQ’s to help taxpayers determine whether they qualify to receive the economic impact payment.

If you receive a notice from the IRS, or a state tax authority, please reach out to your Blick Rothenberg contact.

COVID-19 Medical Condition Travel Exception

As a result of the lockdown procedures implemented in response to the COVID-19 pandemic, many taxpayers may find themselves trapped overseas and at risk of acquiring a new tax residency.

The US tax residency rules for non-citizens considers the number of a days a relevant individual is present in the United States over a three-year period. A strict day limit is used to determine whether the individual is a US tax resident.

The IRS are allowing individuals affected by lockdown in the US an increased number of days in which they can be present in the US and not be treated as a US tax residency. However, like the residency rules themselves, this increase is not straight forward.

Additionally, the increase in the number of US-present days is not available to individuals who wish to claim the closer connection exception to avoid US tax residency.

These rules are complicated and can produce unexpected results. If you are a non-US individual who has spent time in the US, you may wish to speak to one of our experts about your exposure to US income tax.

IRS Foreign Trust-Based Pension Scheme Reporting Relief

You may have read that earlier this year the IRS has provided relief to US taxpayers from filing certain US tax forms in relation to non-US pension schemes. Although this relief applies to many foreign pension plans, the detail of the relief means that it is not relevant to the majority of UK schemes.

Given the substantial penalties the IRS can levy in relation to non-compliance in relation to foreign pensions it is important US taxpayers in the UK make an informed decision when it comes to preparing their 2019 US tax filings and any required Form 3520 & 3520-a returns.

The CARES Act contained a $2 trillion aid package designed to help the US economy deal with the consequences of the Coronavirus pandemic.

CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act contained a $2 trillion aid package designed to help the US economy deal with the consequences of the Coronavirus pandemic.

While the CARES Act included a number of policies which are only available to US-based businesses (such as the payroll tax and employee retention credits), many of the changes impact US Taxpayers around the world. US taxpayers in the UK are eligible to claim the economic impact credit and benefit from the policy changes in relation to retirement plan distributions, tax deductions for charitable donations, and the repeal to the 80% Net Operating Loss (NOL) limitations.

IRS Releases Final GILTI Regulations

On 9 July the IRS released the final tax regulations which determine how the new Global Intangible Low Tax Income (GILTI) tax rules will apply to US business owners living overseas.

These regulations confirmed the availability of the ‘Section 250 deduction’ to individual taxpayers making a Section 962 election, which allows a taxpayer to reduce their GILTI inclusion by 50% which also allowing the individual to utilize the lower US Corporate tax rates in relation to GILTI. These regulations also clarified that a taxpayer may make a Section 962 election using an amended tax return, allowing taxpayers to review their 2018 and 2019 tax returns.

The regulations released on 9 July were followed a couple of days later by additional unexpected final regulations in relation to a GILTI high-tax exclusion.

Generally, this exclusion should allow US taxpayers who operate a business overseas and pay foreign tax greater than or equal to at least 90% of the US Corporate tax rate of 21% to make the high-tax exclusion election and exclude the business income from the GILTI inclusion rules. However, the high-tax exclusion rules include a number of nuances and consequences which may mean that it is not appropriate for all foreign business-owning taxpayers.

Would you like to know more?

If you would like to discuss the relief introduced by the IRS, your filing obligations in relation to your non-US pensions schemes, or how you can utilise the changes implemented as part of the Cares Act, please speak with your usual Blick Rothenberg contact or one of the contacts to the right.