Now that the dust from Election Day has settled a bit, you may be wondering where we’re headed when it comes to taxes once President-elect Trump takes office in January 2017. How will a change in political party affect your US expat tax situation? What new proposals are coming down the pipeline? Get the facts here, so you’ll be prepared before a new year and a new presidency begin!
Tax Plan Highlights
- Reduce taxes across the board, with special focus on working and middle-class Americans
- Ensure the wealthy pays their fair share, but not so much that it’s detrimental to jobs or undermines the ability to compete
- Eliminate special interest loopholes, make business tax rates more competitive in order to keep jobs in the US, and create new opportunities to revitalize the economy
- Lower childcare costs by allowing families to fully deduct the average cost of childcare from their taxes
Lowering Income Taxes
One of the biggest proposals that will affect your US expat tax return is the lowering of taxes across the board. Under Trump’s plan, our current seven tax brackets will be collapsed into just three. Lower-income families will end up with an effective income tax rate of zero, and others will likely benefit from the change in tax brackets. In fact, according to the plan, a middle-class family with two children would see a tax cut of 35%. The proposed income tax rates for a married filing joint taxpayer are as follows:
- Less than $75,000 – 12%
- More than $75,000 but less than $225,000 – 25%
- More than $225,000 – 33%
Tax brackets for single filers will be half of the amounts listed above. While workers at every level will see decreased taxes under this plan, it’s likely that those who will see the biggest benefit are the very wealthy – households within the top 1% of income would see their after-tax income rise by 10.2% to 13%.
Additionally, the standard deduction would increase from $12,600 to $30,000 for joint filers, and would be $15,000 for single filers. Personal exemptions and head of household status would be eliminated.
The existing capital gains rate structure would remain at a maximum rate of 20%, and carried interest would be taxed as ordinary income. Additionally, Trump proposes to repeal the 3.8% Obamacare tax on investment income and the alternative minimum tax.
Changes to Business Taxes
Perhaps one of the biggest proposed changes to the US tax system is Trump’s plan to lower the business tax rate from the current 35% to just 15% – this would be available to all businesses, regardless of size, that want to retain profits within the business. It would also eliminate the corporate alternative minimum tax and provide a deemed repatriation of corporate profits that are held offshore at a one-time 10% tax rate.
Manufacturing businesses in the US would be able to expense capital investment and lose deductibility of corporate interest expense. This election can be revoked within the first three years, after which, election is irrevocable. If revocation is chosen at any point within the first three years, tax returns for prior years must be amended to show the revised status.
Also, when it comes to childcare, Trump has made several proposals. The annual cap for the business tax credit for onsite childcare would be increased from $150,000 to $500,000 and the recapture period would drop from 10 years to 5 years. Businesses that pay a portion of its employees’ childcare expenses would be able to exclude those contributions from income. Employees who receive direct employer subsidies wouldn’t be able to exclude those costs from their individual US tax return, and the costs of the direct subsidies to employees couldn’t be used as a cost eligible for the credit.
“The proposed rule changes for corporate business taxes have the potential to bring home billions of dollars, creating a type of stimulus program without incurring additional government spending,” said David McKeegan, Co-founder of Greenback Expat Tax Services. “However, the same changes may not happen for individuals, as the changes do not provide as clear of a benefit for the GOP.”
Don’t Forget Obamacare
Perhaps one of the biggest changes that could be realized by the Trump presidency is the repeal of Obamacare, or the Affordable Care Act (ACA). As part of his plan, he would like to repeal the ACA and instead offer Health Savings Accounts, the ability to purchase health insurance across state lines (the goal of which would increase competition between insurers and thus lower the cost of health insurance), and leave the management of Medicaid funds up to the states.
Repealing the ACA would bring big changes to many, US expat taxpayers included. Current regulations enforce US citizens to be covered for the calendar year, or be subject to a penalty tax of either 2% of income above filing threshold or a maximum of $2085, whichever is greater, though US expats who pass the Physical Presence Test or Bona Fide Residence Test to qualify for the Foreign Earned Income Exclusion (FEIE) are not subject to the penalty tax. Note that while a US expat would no longer have to worry about keeping track of travel time for ACA exemption, it’s still a necessary task in order to qualify for the FEIE. To learn more about the FEIE and other ways to save on your US expat taxes, download our tax guide for Americans working overseas.
While a number of Americans have defiantly stated they’d leave the country if Trump were elected, there are certainly considerations to be made about such a monumental decision. The thought of having to handle US expat taxes may be enough to change the minds of some. If you do decide to move abroad, we’ve got your back when it comes to filing your US expat taxes!
Have Questions About How Your Expat Taxes May Be Affected with these Proposed Tax Changes?
Our team of expat-expert CPAs and IRS Enrolled Agents can provide the insight and expertise you need when it comes to understanding your expat tax situation. Contact us today!