American expat tax filers are understandably concerned about their annual U.S. tax filing obligations. But now, they have something else to think about: what changes may lie ahead with President Trump’s clear plans to implement across-the-board tax cuts for both individuals and corporations? And how, if at all, might expats benefit? While many of the changes are still in the planning phase, here are a few possibilities, based on recent statements by President Trump and his team:
1. Simplification. By “simplify” does President Trump mean to really “reduce” taxes? One important potential change is President Trump’s plan to reduce the total number of tax brackets for individuals from seven to three. The new brackets would then be 12, 25, and 33 percent. Also, the net investment income tax (NIIT), which was included as part of the Patient and Affordable Care Act, will likely be eliminated. This would thus allow these new tax brackets – along with the relatively lower tax rates for dividends and capital gains – to represent actual tax rates and not ones with tack-ones such as NIIT.
2. Elimination of Estate or “Inheritance” Tax. Currently, estate tax is imposed on estates with total value exceeding $5.45 million (or $10.9 for married couples), and there are no separate taxes owed for unrealized capital gains within the portfolio at the time of death. President Trump’s proposal would effectively eliminate estate taxes, but with one key twist: tax could be imposed on unrealized gains for those estates exceeding a $10 million threshold.
3. What this means for expats. Generally speaking, the tax changes under President Trump’s proposal could decrease taxes for those in higher tax brackets but potentially increase taxes for those in lower-income ranges. As most expats qualify for the Foreign Income Exclusion (FIE) in the amount of $101,300 for the 2016 tax year filed in 2017, the ultimate effect could mean a lower tax bill for those with income levels exceeding the FIE for 2017 and beyond. This would especially be the case for those with tax obligations on unearned, or passive income, such as interest, dividends, and capital gains.
-by Eric la Cara