The Tax Cuts and Jobs Act (TCJA) led to many changes in the tax code. One example: changes to how the Internal Revenue Service (IRS) considers taxes paid to foreign countries. In the past, the agency has generally allowed individuals and businesses to take a tax credit for certain taxes paid while overseas. Although still allowed, the TCJA impacted how this credit works.
The credit, referred to as the Foreign Tax Credit, is still available. However, three changes that may impact those who pay foreign taxes include:
- Dividend distributions. The TCJA repealed Section 902 of the Tax Code. This section allowed taxpayers to take credit for “dividend distributions that were based on foreign subsidiaries’ cumulative pools of earnings and foreign taxes.” These deemed-paid credits are no longer available.
- Limitations. The law also created limitation categories that impact certain foreign income under the Global Intangible Low-Taxed Income (GILTI) provisions.
- Calculation changes. The regulations also change how the government calculations international income. For example, the calculation now includes GILTI which results in the taxation of foreign earnings that, in the past, may have been deferred.
A failure to follow these new regulations could trigger a federal tax audit and lead to potential penalties. As a result, it is important for those who have foreign earnings to become familiar with these and other changes to the law and seek professional assistance when necessary.
It is also important to note that these changes are not likely the end. The IRS is taking additional proposals into consideration. We will provide updates as they become available.