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French Tax Reform

An interview with Eliane Rakotonoel | CEO & Senior Tax Expert

The American way seems to be far reaching.

In France, until end of December 2018, income from any given year was declared during the following year, and income tax was paid four months after the income tax return submission.

As of January 1, 2019, the French government has introduced Withholding taxation – le Prélèvement à la source (PAS).

It means that income earned from January of this year 2019 will be taxed at source, on a monthly basis.

To avoid the payment of 2018 and 2019 income tax during the year 2019, the French tax administration has decided to grant all taxpayers in France a tax credit called Crédit d’Impôt de Modernisation de Recouvrement (CIMR).

The CIMR will allow the neutralization of the 2018 income tax and social security levies.

It is what is called “L’Année Blanche” (the White Year).

 

To avoid any windfall effect of the “White Year,” whereby some categories of taxpayers might excessively increase their income of the year 2018 (which is the non-taxable year), the French tax authority decided that the “exceptional income” will remain taxable (any income which is not supposed to be earned each year). So, for some taxpayers the 2018 fiscal year will rather be a “Grey Year” since only the following non-exceptional income will be tax-free:

  • Salaries, pensions and life annuities
  • Professional income (self-employment and business income)
  • Rental income

 

The following exceptional income will remain taxable:

–      income related to one or several years before or after 2018 (which should have been paid before or after 2018, but was paid in 2018)

–      any other income that, by its nature, is not likely to be derived annually

–      interest, dividends and capital gains

–      list of income in the category of salary or wages qualified as exceptional income (see annex 1)

The specific rules defining the non-exceptional income provided for the calculation of the CIMR also apply for the CIMR of social security contributions.

 

General rules of taxation in the US:

The taxation rules for a U.S. citizen or resident alien are generally the same whether that person is in the United States or abroad. His/her worldwide income is subject to U.S. income tax, regardless of where he/she resides.

 

When to File

The  U.S. citizen or resident alien residing overseas, or in the military on duty outside the U.S., is allowed an automatic 2-month extension on the regular due date to file a return without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15.  Nonetheless the income tax should be paid by April 15.

 

Who should file

 

Only those whose yearly income have surpassed the amounts below.

 

If your filing status is… And at the end of 2018 you were… Then you must file a return if your gross income was at least…
Single Under 65 $12,000
65 or older $13,600
Married filing jointly Under 65 (both spouses) $24,000
65 or older (one spouse) $25,300
65 or older (both spouses) $26,600
Married filing separately Any age $5
Head of household Under 65 $18,000
65 or older $19,600
Qualifying widow(er) with dependent child Under 65 $24,000
65 or older $25,300

 

The foreign income earned income exclusion

That person can benefit from a maximum foreign earned income exclusion adjusted annually for inflation. For 2018, the maximum exclusion has increased to $103,900.

Foreign earned income is the following:

  • Wages and salaries
  • Commissions
  • Bonuses
  • Professional fees received for personal services performed in a foreign country.
  • Tips

It excludes the pensions, annuities, social security benefits, dividends, interest, capital gains, alimony, plus the wages paid by the U.S. government to its employees.

 

The effect of this White Year on your US tax return

 

In the U.S., taxpayers can deduct up to $103 900 foreign earned income. If you cannot exclude the totality of your foreign earned income, and even if the part in excess of the $103 900 has been tax exempted in France due to the White Year, you won’t be able to claim a tax credit on this part in excess (amount of income tax in France being €0)  and income tax will be due in the U.S.

So, for a person who has earned exceptional income in France during the year 2018 – that person will be taxed on this income despite the White Year – it is a “Grey Year.”

Moreover, if the non-exceptional income earned in France – totally exempt thanks to the “White Year” – is above the ceiling of the U.S. foreign earned income of $103 900, income tax will be paid in the U.S. on the excess – the “Darker Grey Year.”

 

Elitax can help to manage all your tax issues

Elitax offers a 30 minutes free consultation.

If you need a professional assistance on your income earned return, please contact us!

Annexe 1

* Exceptional income

a)      Salary Income

Exceptional income – No CIMR tax credit Non exceptional income – CIMR tax credit
Compensation paid on the occasion of the termination of the duties of corporate officers and directors (1) Compensation paid or benefits granted as a result of taking up the position of corporate officer  Compensation paid on the occasion of the termination of the duties of corporate officers and directors  Clientele benefits, end of work activity and allowances and compensation received in exchange for the transfer of the customer value Compensation, benefits and bonuses for change of residence or place of work Aid and capitalized allowances in case of conversion or reintegration or for the resumption of a professional activity Amounts received in respect of the participation or profit-sharing and not allocated to the realization of employee savings plans (PEE, PEI, PERCO) (1) Company investment in the employee savings plans mentioned in article 81, 18.a of the CGI (1) Are withdrawn by the taxpayer from a savings plan (1 –          Annual leave compensation allowances

–          End of term notice compensation

–          End of assignation compensation

–          End of fixed term contract allowances

 

Amounts resulting from the monetization of rights registered on a time-saving account for those corresponding to rights exceeding 10 days Amounts resulting from the monetization of rights registered on a time-saving account for those corresponding to rights not exceeding 10 days
Benefits provided by the provident scheme for professional football players (CGI art 80 decies)
Signing bonuses and benefits related to transfers of professional athletes

 

b)     Directors’ remuneration

  • The exceptional nature of this income is determined over a multi-year period.

For the calculation of the tax credit, only the lowest amount of the net taxable income paid for the years 2015 to 2018 is retained. The lowest amount being capped at the maximum of the income perceived during the three preceding years.

c)      Pensions and annuities

Are considered as an exceptional income in this category:

  • Retirement benefits paid as a lump-sum

d)     Rental income

Are considered as an exceptional income for this category:

  • The arrears of rent received in 2018 for 2017 renting
  • Rents that would be, by agreement between the tenant and the leaseholder, paid in 2018 instead of 2017
  • The amount on top of the 12 months, under a contract covering a period of more than 12 months,

e)      Business income : Bénéfices Industriels et Commerciaux (BIC), Bénéfices Non Commerciaux (BNC) and Bénéfices Agricoles (BA)

  • The exceptional nature of this revenue for 2018 is assessed by comparison with the profits for 2015, 2016 or 2017.
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