Early this year upon being sworn in, President Biden and his administration proposed a significant overhaul to the US tax regime, much of which reverses the 2017 Tax Cuts and Jobs Act. Many of the proposed modifications will have a significant impact on the expat taxpayer community, if and when they are signed into legislation. But, if and when were the lingering unknowns creating uncertainty and finally, on September 13, more information was provided.
With the US tax system in limbo, many Americans living abroad, who are required to file US taxes every year and report their global income, are wondering how this could impact their tax liability.
Proposed Changes US Expats Should Know About
The proposed tax plan calls for a number of individual tax policy changes, as well as increases to corporate tax rates and expanding global intangible low-taxed income (GILTI) taxation. Here are some highlights of what the recently released tax plan could mean for US expats:
- Income tax rates for the highest earners will increase from 37% to 39.6%.
- The top long-term capital gain rate for individuals will increase from 20% to 25%. Coupled with a 3.8% net investment income tax on high earners, this could increase capital gains taxes on both inbound and outbound US investments.
- Net investment income tax could be further extended to cover ordinary, as well as investment income, for high-income taxpayers.
- The introduction of a new 3% tax on certain taxpayers with gross income in excess of $5 million.
- Carried interest investments would be impacted through the increase of the holding period from three years to five years on partnership interests to qualify for long-term capital gain treatment.
- The temporary increase in the lifetime estate tax exemption of $11.58 million will be terminated, returning to its 2010 level of $5 million, adjusted for inflation.
- Corporate tax could increase from 21% to 26.5%. High-tax exceptions related to controlled foreign corporations (CFCs) may have additional side effects from this change. Today, if a foreign company is subject to non-US tax at an effective rate higher than 90% of the highest US corporate tax rate, then CFC taxation may be avoided. With the changes in place, the non-US tax threshold would increase to 23.85% from the current 18.9%.
- GILTI tax rate would be calculated on a country-by-country basis and would increase from 10.5% to 16.5625%, while also repealing the Subpart F that allows for the subtraction of at least 10% tangible assets.
It is noteworthy that the House plan did not remove the “step-up in basis at death” which allows individuals to inherit appreciated assets at their fair market value with no taxes applied to the unrealized gain. There are however some Democrats who would like to remove this current provision and appear unwilling to let this one go, so it may not be the last we hear of it.
There are several other provisions in the House tax plan, to see them please click here.
The ultimate outcome of the House tax plan is still unknown, but one thing is certain – change is ahead. Be prepared to make adjustments to your tax planning strategies to accommodate for these proposed tax provisions in the event they become legislation.
Moore DM’s US tax advisors can help you as an expat assess your unique situation and the impacts of potential changes. Contact us today!