Update: With the new tax law now signed into effect, read our latest analysis of it here.
Since president Trump released his tax plan, there has been intense discussion about the impact it will have. Of course US taxpayers living abroad are wondering about the impact of the Trump tax plan for expats.
In May the Trump administration released its tax plan, a one-page documents with bullet points. Needless to say that it didn’t flesh out many details. You can look at the bullet points as a wish list, that will certainly undergo many changes and clarifications during the legislative process before it can be approved by Congress. The administration released more details in late September in a 9-page framework. Read our update here.
Expats are usually not a priority on politicians’ minds. This means that tax breaks are typically not aimed at expats. Even the interpretation of how tax laws and proposed changes may apply to expats is lagging.
For all these reasons, deciphering the impact of the Trump tax plan on expats is rather speculative. Here is our read so far:
1. FATCA is not likely to go away any time soon
Most expats are painfully aware of the reporting requirements imposed by the Foreign Account Tax Compliance Act or FATCA. FATCA poses reporting burden on foreign banks that can make it difficult or even impossible for US citizens to open a bank account in a foreign country. But unlike many other regulations that the Trump administration is seeking to relax or eliminate, FATCA doesn’t seem to be on the radar screen.
2. The Foreign Earned Income Exclusion (FEIE) would remain unchanged
Again, since expats are not a primary focus for US politics, there seems no intent to change the FEIE. We expect it to remain at current levels, adjusted every year.
3. Repeal of Obamacare would eliminate the 3.8% investment income tax
The Trump administration plans to repeal the Affordable Care Act and eliminate the 3.8% investment income tax on long-term capital gains. This would affect US taxpayers at home and abroad alike. Many expats complain that their foreign tax credits paid on passive income in their home country do not count against this tax, so this will no longer be an issue.
While repeal of Obamacare is beyond the tax plan, it would also eliminate the tax penalty for not having mandated health insurance. This could be an advantage for expats who might not qualify to be exempted from mandatory health coverage but who carry international health insurance that is not compliant with the regulations.
4. International business tax changes may have little impact on most entrepreneurs abroad
The proposed changes to international tax law target import taxes and moving jobs overseas. Those changes are not likely to impact business owners that are not importing into the US.
5. No change to self-employment and payroll taxes
The tax plan does not mention a reduction in self-employment tax or in payroll taxes. That means that many business owners and entrepreneurs abroad will continue to benefit from offshore structuring.
6. Doubling the standard deduction may benefit expats more than domestic taxpayers
The plan calls for increasing the standard deduction and eliminating personal exemptions. The proposed significant increase in standard deductions may be more relevant for expats than for domestic taxpayers because expats are less likely to use itemized deductions.
7. Reducing the number of tax brackets from currently seven to only three
This proposed change would affect all US taxpayers. For expats using the FEIE, any earning above $102,100 will be taxed at 25%, and at 33% for earnings above $112,500 for single and $225,000 for married filing jointly.
8. Tax relief for families is rather vague
The proposed “tax relief” for families lacks details so far, which makes it difficult to anticipate its impact on expats. For expats that use the Foreign Earned Income Exclusion, there may be no tax savings because they can’t claim the Child Tax Credit. However, there are other ways to get the Child Tax Credit when living abroad.
9. Repatriation of profits overseas from foreign companies
Although not specifically mentioned in the released tax plan, Trump has talked about this in several speeches and the debates. As many people are aware, companies such as Apple and Google are holding billions of dollars of profit offshore due to the high tax implications of running these profits through their US entity. Trump has mentioned the possibility of a tax holiday, where these companies are allowed to bring profits back the US at a low tax rate. The last time this happened was 2004, when companies were allowed to repatriate overseas profits at a rate of 5.25%. This will likely happen again and most of the estimated One Trillion dollars will be brought back to the US at this tax rate.
As more specifics become available over the next weeks and months, we will update you. Subscribe to our free newsletter to stay informed.