If Congress pursues tax reform this year, it should consider allowing inflation adjustments for the items discussed below.
Each year, the IRS publishes inflation adjustments that modify the tax law as originally enacted. We regularly post about the inflation adjustments in the international tax arena. However, there are some significant values in the international tax area that are not adjusted for inflation. In one case, the value has remained unchanged for over eighty years.
FBAR (FinCEN Form 114)
The FBAR first became required in 1970. Below is an image from the top of Page 2 of the 1970 Form 1040, asking about foreign bank accounts:
The filing threshold of $10,000 has never been adjusted for inflation (in fact the original threshold of $10,000 was lowered to $1,000 in 1978, increased to $5,000 in 1983, and increased to $10,000 in 1985). Using an inflation calculator, $10,000 in 1970 is the equivalent of approximately $65,000 today. The effect of not adjusting the FBAR filing threshold for inflation is that each year more and more people will need to file the FBAR.
When FATCA was enacted in 2010, it created the requirement to file Form 8938 (which reports interests in foreign financial assets). A single individual living in the U.S. only needs to file a Form 8938 if his or her foreign assets are valued at over $50,000 at the end of the year or $75,000 at any time during the year. The creation of those thresholds implies that foreign assets under the thresholds are not significant enough to be reported. The $50,000 / $75,000 thresholds roughly approximate the inflation adjusted FBAR threshold of $65,000. However, given that the FBAR filing requirement is not indexed for inflation, an individual may have to file the FBAR but not have to file a Form 8938. For forms that report essentially the same information, this does not make sense.
U.S. Estate Tax for Nonresident, Noncitizen Individuals.
Nonresident noncitizen individuals ("NRNCs") are subject to U.S. estate tax on their U.S. situs assets. NRNCs can generally invest in the U.S. stock market and avoid U.S. tax on their capital gains. However, many NRNCs are unaware that if they die while owning stock in U.S. companies (or other U.S. situs assets), the stock is subject to U.S. federal estate tax at rates of up to 40%.
While U.S. citizens and U.S. domiciled individuals enjoy an effective exemption on the first $5.49 million of their estate, NRNCs only have an effective exemption of $60,000 on their U.S. estate. Thus, if an NRNC has over $60,000 of U.S. situs assets, he or she will owe U.S. federal estate tax. The $60,000 threshold was established in 1966, over 50 years ago, and has never been adjusted for inflation. That $60,000 threshold in 2017 dollars is approximately $462,000!
Nonresident Aliens Performing Services in the U.S. for a Foreign Employer
In general, a nonresident alien can perform personal services in the United States as an employee of a foreign employer (that itself is not engaged in a U.S. trade or business) and not be subject to U.S. tax as long as the nonresident alien is in the U.S. for less than 90 days and the pay for the services is not more than $3,000. The $3,000 threshold was established in 1936, over eighty years ago, and has never been adjusted for inflation. That amount in 2017 dollars is approximately $57,000.
U.S. Exit Tax
U.S. citizens that give up their U.S. citizenship and long-term green card holders that give up their green cards can be subject to a U.S. exit tax. One way that an individual can be subject to the exit tax is if the individual has a net worth of $2 million or more. This threshold was established in 2004 and has not been indexed for inflation. The $2 million threshold in 2017 dollars would be approximately $2,642,000.
Another way that an individual can be subject to U.S. exit tax is if the individual’s average annual net income tax for the five years prior to expatriation is greater than $162,000 (for 2017). Interestingly, this value is indexed for inflation for each year, whereas the net worth test is not indexed for inflation. This must have been intentional and not an oversight, because the two tests are in consecutive paragraphs of Code §877(a)(2).
Other Miscellaneous Non-Adjusted Values
Several other items that are not adjusted for inflation include:
- $1,000,000 de minimis exclusion for Subpart F income, set in 1962. In 2017 dollars, the threshold would be approximately $8,200,000.
- Exemption from FIRPTA withholding on acquisitions of a personal residences for $300,000 or less, set in 1984. In 2017 dollars, the threshold would be approximately $720,000.
- $100,000 threshold for reporting gifts from nonresident aliens on Form 3520. The value was set in 1997 (Notice 97-34). In 2017 dollars, the threshold would be approximately $154,000.
If Congress is planning to update the Internal Revenue Code this year, it should consider updating (and then adjusting for inflation) these antiquated values.