After a crazy week in US politics, we look at Donald Trump's proposed tax changes. Amongst all the tax cuts, the new tax system should benefit American expats abroad by lowering their overall tax bill.
o Provide tax relief for the middle classes
o Simplify the tax code
o Maximise the growth of the American economy without adding debt or deficit
What tax changes will he make? (‘Pro-growth Tax Plan’)
Individual Income Tax:
· Increase the standard deductions to $15,000 for a single filer from $6300.
o This increases exempt income for these individuals by $8,700
· Increase the standard deductions to $30,000 for married jointly filers (MFJs) from $12,600
o This increases exempt income by $17,400 for MJFs.
By increasing the standard deductions the number of filers will be significantly reduced, estimated by the Tax Policy Centre that approximately 60% for the 45 million filers would normally have to itemise in 2017 would opt out of the standard deduction.
· Personal and dependent exemptions will remain unchanged at $4000.
· Simpler tax code brackets with three brackets (12%, 25% and 33%) instead of the current seven:
o This eliminates the marriage penalty and individual Alternative Minimum Tax (AMT)
o Cuts the current highest tax rate band of 39.6% by 6.6%
o Low income Americans will pay no income tax at all (effectively 0%)
o Brackets & Rates for Married-Joint filers:
§ Less than $75,000: 12%
§ More than $75,000 but less than $225,000: 25%
§ More than $225,000: 33%
*Brackets for single filers are ½ of these amounts
· Greatest percentage reduction in their tax bill goes to the working and middle taxpayers:
§ A married couple earning $50,000 per year with two children (dependents) and $8,000 in childcare expenses will save 35% from their current tax bill.
§ A married couple earning $75,000 per year with two children and $10,000 in childcare expenses will receive a 30% reduction in their tax bill.
§ Married couple earning $5 million per year with two children and $12,000 in child care expenses will get only a 3% reduction in their tax bill.
- For non-itemisers the ‘Trump plan’ would reduce taxes throughout the income distribution
- Plan will cap the total amount of itemised deductions at $100,000 for single filers and $200,000 for married filers, eliminating many tax loopholes while simulating growth.
· Reduce the corporation tax rate to 15% (the current business rate is 35% - 38.9%) to make the USA more attractive to domestic investment and making America’s tax rate one of the best in the world.
o Rate is available to all businesses, both small and large that want to retain profits within the business.
o Provides a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%.
· Owners of businesses such as sole proprietorships and partnerships could possibly elect to be taxed at a flat rate of 15% o their ‘pass through income’ rather than their individual income tax rates.
· The distribution from large pass-through businesses received by owners who elected the 15% flat rate would be taxed as dividends
· Hedge funds and private equity partnerships would now qualify for the 15% business tax rate so will retain a tax advantage on the income compared with wage earners
· Repeal the corporate Alternative Minimum Tax
· Tax the future profits of foreign subsidiaries of US companies each year as profits are earned.
· Businesses that pay a proportion of an employee’s childcare expenses can exclude these contributions from income.
· The annual cap for the business tax credit for on-site childcare would be increased to $500,000 per year (from $150,0000 and recapture period would be reduced to 5 years (down from 10 years)
Estates and Gift Taxes:
- Eliminate the federal estate, gift and generation-skipping transfer taxes.
- Capital gains will be taxed until death with an exemption of $5 million ($10 million for married couples)
- Eliminating the estate tax eliminates many economic distortions (such as the incentive to spend down asset balances below the threshold for taxation).
- The contribution of appreciated assets into a private charity established by the decedent or their relatives will not be allowed to prevent abuse.
ACA (Affordable Care Act) Taxes:
- Trump has proposed repealing the ACA in its entirety including all of the ACA taxes.
o However, the plan will only specifically repel only the 3.8% tax on net investment income.
For US expats in the UK, the proposals all seem positive and should help to ease the expat tax filing each year.