Starting with the 2025 tax year, the One Big Beautiful Bill Act (OBBBA) introduces several important changes that will affect U.S. taxpayers living abroad.  Here is a concise summary tailored for expats:

Key Individual Tax Changes Affecting Expats (Effective 2025):

  • Permanent Extension and Increase of Standard Deduction:
    The increased TCJA standard deduction is now permanent and further increased for 2025 to $15,750 for single filers and $31,500 for joint filers. These amounts will be adjusted annually for inflation going forward. This benefits expats who are unable to itemize deductions.
  • Temporary Senior Deduction of $6,000 (2025–2028):
    Temporarily add a senior deduction of $6,000 for each qualifying individual for both itemizers and non-itemizers that phases out when modified adjusted gross income exceeds $75,000, available from 2025 through 2028.
  • State and Local Tax (SALT) Deduction Cap Raised Temporarily:
    The SALT deduction cap is increased to $40,000 for joint filers (and $20,000 for married filing separately) through 2029, then reverts to $10,000 in 2030. The deduction phases out for taxpayers with modified adjusted gross income (MAGI) over $500,000. While many expats pay foreign taxes, this change mainly affects those with U.S. state tax liabilities or those who file jointly with U.S.-based spouses.
  • Child Tax Credit Increased and Made Permanent:
    The child tax credit is increased to $2,200 per child starting in 2025, with inflation adjustments beginning in 2026. This is relevant for expats with qualifying children.
  • Mortgage Interest Deduction:
    The TCJA’s limit on mortgage interest deduction for acquisition debt remains permanently capped at $750,000.
  • No Personal Exemption:
    The elimination of the personal exemption deduction is now permanent.
  • New Temporary Above-the-Line Deductions for Tips and Overtime Pay:
    From 2025 through 2028, individuals can claim above-the-line deductions for qualified tips (up to $25,000) and qualified overtime pay (up to $12,500 for individuals, $25,000 for joint filers), phasing out at higher income levels i.e., more than $150,000. This is less relevant for most expats but may benefit those working in tip-based or overtime-paying jobs.

Estate Tax Changes (Effective 2025):

Permanently increase the estate and lifetime gift tax exemption to an inflation-indexed $15 million for single filers and $30 million for joint filers beginning in 2026. Note, however, that for Non-US Citizen, the estate tax exemption remains at $60,000.

International and Foreign Corporation Considerations:

  • While the bill focuses heavily on domestic tax provisions, it also includes international tax changes affecting foreign corporations controlled by U.S. persons, including updates to:
    • Global Intangible Low-Taxed Income (GILTI) rules
    • Base Erosion Anti-Abuse Tax (BEAT)
    • Controlled Foreign Corporation (CFC) rules
    • Remittance Tax

These changes may affect the taxation and reporting of foreign corporations owned by expats, potentially increasing compliance requirements and altering tax liabilities. Expats with foreign corporations should carefully review these international provisions, as the bill tightens anti-abuse rules and may impact how foreign income is taxed in the U.S.

Summary of Practical Impact for Expats:

  • The increased standard deduction, temporary senior deduction and higher child tax credit provide direct tax relief for many expats.
  • The temporary SALT cap increase may benefit expats who maintain U.S. state tax obligations.
  • Foreign-owned business owners should prepare for possible enhanced international tax compliance and possible changes in effective tax rates on foreign income.
  • No direct changes were made to the Foreign Earned Income Exclusion or basic foreign tax credit rules, but increased IRS enforcement funding may lead to greater scrutiny of foreign income and assets. So, make sure you have been keeping appropriate records of your income and assets!

 

Disclaimer: This information has been prepared for informational purposes only, and is not

intended to provide, and should not be relied on for, tax, legal or accounting advice. Expats should consult with tax professionals to optimize their tax planning, ensure compliance with updated international rules, and take advantage of enhanced credits and deductions.