Joe Biden was sworn in as the 46th President of the United States on January 20th 2021. As with any administration, Biden’s term is likely to come with changes, some of which are bound to include the tax policy as Biden has recently unveiled a brand new Made In America tax plan. If passed, US Taxpayers, both those living in the US and abroad are likely to encounter changes to their tax returns.
Biden’s administration have confirmed that this proposal has been made following a set of principles, which include:
- Collecting sufficient revenue to fund critical investments.
- Building a fairer tax system that rewards labour.
- Reducing profit shifting and eliminating incentives to offshore investment.
- Ending the race to the bottom around the world.
- Requiring all corporations to pay their fair share; and
- Building a resilient economy to compete.
Most US citizens are required to file a tax return every year, regardless of whether they live in the US or abroad, so long as their worldwide income exceeds that of a specific filing threshold. Many US Expats are also required to report bank account balances and investments that they hold abroad.
Here is a breakdown of some of the ways that US citizens living in a foreign country could be affected by Biden’s new tax plan. It should be noted that this proposal is still in its preliminary stages and is yet to be passed by congress. Everything detailed below still has the potential to be amended or not happen at all.
This new tax plan proposes to raise the corporate tax rate from 21% to 28%. This will naturally affect all businesses; however, one change that would specifically affect US Expats who have a foreign business is the elimination of The Global Intangible Low Tax Income. This can currently be used under certain conditions and can reduce rates of tax by 50%, resulting in the current Corporate Tax decreasing from 21% to 10.5%. In Biden’s proposal, he is looking to eliminate this discount, effectively doubling the rate at which American-owned Foreign Businesses will pay tax.
As well as corporate, the new plan could introduce changes to an individual’s tax returns as well. These taxes are mostly targeted towards high earners.
In 2017, President Trump passed the Tax Cuts and Jobs Act, which set the income tax bracket at 37% and estate and gift tax at 40%. Biden’s proposal would raise taxes back to their previous levels. This would mean:
- The current income tax bracket of 37% would be raised to 39.6%; and
- The current estate and gift tax of 40% would be raised to 45%, whilst the exemption of $11.58 million would be decreased to $3.5 million.
It should be noted there are exemptions available to US Expats that could be utilised. The foreign earned income exclusion or foreign tax credits can be used to reduce the amount of tax payable on income, if not totally exclude it.
Changes to FATCA
The Foreign Account Tax Compliance Act (FATCA) was passed during Obama’s presidency when Joe Biden was serving as Vice President. This act granted the IRS permission to globally enforce tax, which US Expats found came with some negative consequences.
As a result of FATCA, it became increasingly difficult for US Expats to get any kind of financial or banking services, which proved a problem for many people. This new Biden Tax Plan, as it stands, does not contain anything that sets to provide relief to US Expats in relation to FATCA.
We are currently still awaiting further information on whether these proposed changes will come into force. As it stands, the Made in America proposal remains just that, a proposal. Its enforcement will require the actions of congress.
If you are filing your taxes and would like to confirm that you are paying the right amount and declaring the correct income, then you should consider contacting an expert tax advisor or consultant who specialises in US expatriate tax matters.
Tom Griffiths is a tax advisor and consultant who specialises in US expatriate tax matters. He is a member of the Association of Taxation Technicians and an Enrolled Agent who practices before the Internal Revenue Service.
Tom works with clients to help them better structure and streamline their taxes. Thanks to his impeccable knowledge of both US and UK engagements, he is able to advise on all aspects of trading through foreign partnerships and cooperation’s.