Update: With the new tax law now signed into effect, read our latest analysis of it here.
Recently the Trump administration revealed more details of its tax proposal. The nine-page framework still leaves many questions open. Just like the initial Trump tax plan published earlier, the framework does not address FATCA, the issue that affects expats the most.
Let’s go over the main items and how the tax plan could affect expats and their businesses.
Changes for individual tax filers
Fewer tax brackets
The plan collapses the tax brackets from seven to three. The lowest tax rate increases to 12% from 10%, and the highest decreases from 39.6% to 35%. The new proposal leaves open the option for a fourth, higher rate. However, the plan does not include specific income thresholds. This change affects expats and domestic filers the same.
No more personal exemptions
The plan calls for the elimination of personal exemptions. Those were worth $4,050 for each person claimed on the 2017 tax return. This would hurt families with many children.
Higher standard deduction
The Trump tax plan nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly.
This is good for expats who often do not itemize deductions. In general, this single deduction would be higher for most filers, except for those claiming multiple children. (A higher child tax credit may make up for this though.)
Most other deductions will be eliminated under the updated Trump tax plan. As the previous plan, this update is short on details and leaves it to Congress to agree on which deductions exactly will be eliminated. Since most expats don’t itemize, this may not affect them much.
The biggest deduction that would be eliminated is the tax credit for state and local tax expenses, which will hit taxpayers in high-tax rates states like California and New York the most. For expats, this gives even more reason to move away from high-tax states, before moving abroad.
Popular deductions like mortgage interest and charitable contribution deductions will likely remain untouched. Just like in the current system, those expenses would only be deductible if they exceed the increased standard deduction amounts.
There is no word how deductions and exclusions for expats could be impacted. We don’t expect changes to the Foreign Earned Income Exclusion, Foreign Housing Deduction, or other provisions beneficial to expats at this time. However, they could get affected in general attempts to simplify and reduce deductions.
Trump’s tax plan eliminates the estate tax, generation skipping transfer tax and Alternative Minimum Tax (AMT). Eliminating the AMT could benefit high earning expats that claim the Foreign Tax Credit (FTC) but do not have enough FTC to cover the AMT. It also significantly decreases the complexity of the tax return.
Increased and new tax credits
The child tax credit would increase, depending on the parents’ income. The amount of increase however is unspecified.
The plan also calls for a new credit of $500 for non-child dependents such as an elderly relative.
Changes for businesses
New tax rates
Pass through businesses such as LLCs, sole proprietorships, S Corporations and partnerships are currently taxed at the owner’s tax rate. The new proposal includes creating a new maximum tax rate of 25% for those pass through businesses, which is well below the individual maximum tax rate. This would be a large benefit for a high-earning pass through.
For corporations, the tax rate will be capped at 20%, well below the current 35%.
Both of these measures would potentially encourage more corporate structures in the US and hopefully tax revenue in this regard.
Territorial tax system
An important component of the Trump tax plan is moving to a territorial tax system, where income that businesses earn overseas is not taxed. Overseas losses however could no longer be used to offset domestic income.
The territorial system would incentivize corporations to bring money back into the United States, rather than keeping this money offshore, as they are currently doing. It might also keep companies from moving their headquarters overseas.
The tax plan also allows a one-time tax holiday on income earned overseas in the past. This would mean that anyone who has achieved tax deferral, whether an expat entrepreneur or Google, will be allowed to bring the money back onshore at a reduced tax rate, likely under 10%.
Other corporate tax changes
The plan allows businesses to immediately expense the cost of depreciable assets instead of writing them off over years.
C corporations would lose the ability to deduct interest expenses.
Most of the tax credits that business use would be eliminated. The current framework preserves business credits only for R&D and low-income housing although it leaves the door open for retaining other credits.
As more specifics become available over the next weeks and months, we will update you. Subscribe to our free newsletter to stay informed.
Photo by Tom Lohdan