US Tax Reform: Implications for U.S. expatriates

in Tax, 27.11.2017

In our series of blog articles on U.S. Tax Reform, potentially the biggest reform of the U.S. tax code in over 30 years, we have so far focused on the emerging corporate tax issues for non-U.S. headquartered, multinationals with operations in the U.S. In this article, we consider the potential implications for U.S. expatriates and companies sending employees on assignment to the U.S.

Progress to date

  • 16 Nov: The House of Representatives passed its version of the “Tax Cuts and Jobs Act” bill by simple majority, 227 to 205.
  • 16 Nov: On the same day, the Senate the Finance Committee approved its version of the bill
  • 20-24 Nov: Thanksgiving recess.
  • Week of 27 Nov: The Senate bill should arrive at the full Senate requiring a simple majority to pass under the complex ‘budget reconciliation’ rules. The Republican Party’s majority in the Senate is wafer thin – currently no more than 2 votes can be lost – while several Senators have voiced concern over provisions in the bill. Senior GOP members may find they need to give away more than ‘Thanks’ over the holiday period to bring the fringes of the party into line.

Secure passage of such extensive legislation, by a modern, diverse Republican party with such a thin majority, will be the biggest hurdle yet for the bill. Even if a bill moves through the Senate, differences with the House bill will then need to be reconciled, usually through joint committee, as both branches of Congress need to pass the exact same version of the bill before the President can sign it into law. Some experts are predicting that the committee stage could be the toughest nut to crack.

Proposals affecting Global Mobility Programs

The Joint Committee on Taxation estimates the 10 year overall net revenue effects of the House and Senate proposals as follows:

Taken at face value, a broadly $900bn reduction to the tax take from individuals over 10 years is great news for sending employees into the U.S. But consider, for example, that the House proposals actually include gross individual cuts amounting to a staggering $4,094.3bn, and consequently that means $3,130.6bn of revenue raisers have also been identified. It’s a similar balance in the Senate bill. So, while the ‘average’ taxpayer might look forward to a tax cut in 2018, some would see their taxes increase.

What would a reform practically mean?

Tax Rates/Deductions/Exemptions: Motivated by a commitment to simplify the tax code, both bills propose fundamental change to some core elements of the U.S. tax return:

  • 7 progressive rates would shrink to 3
  • Top tax rate threshold increase
  • Top rate reduction from 39.6% to 38.5% (Senate only)
  • State and local tax deduction repeal
  • Senate: Property tax deduction repeal, but retain mortgage interest deduction

House: Property tax deduction limit ($10,000) and curtail mortgage interest deduction

  • Foreign property tax deduction repeal
  • Standard Deduction set to almost double
  • Dependent exemption repeal, child tax credit expansion

Companies accruing for assignment costs would need to update calculations and taxpayers should consider updating their Federal tax payroll withholding instruction, on Form W4.

Moving Expenses: Both proposals call for a repeal of the qualified moving expense payroll exclusion. Not only would this materially increase the tax gross up cost of employee mobility but, as a practical issue, organisations will need to ensure processes were sufficiently robust to track all relocation related expenses.

Outbound Assignees: Tax equalised assignments from the U.S. may cost the hosting country business unit more from 2018. If the proposals, on average, reduce the hypothetical tax withheld from an American assignee, the company’s tax gross up costs would likely increase; a cost that typically sits in the host entity.

Changes to taxation/deductibility of fringe benefits: A raft of changes, in both House and Senate proposals, to the treatment of certain fringe benefits provided to staff by employers will require employers to review how they track and report such benefits.

Exemption on Sale of Principal Residence: Under current U.S. law, gains on the sale of real estate are taxable although up to $500,000 of gain on the sale of a principal residence can be excluded from U.S. tax on a jointly filed return. Certain conditions must be met including that the home is owned and used for 2 out of the 5 years prior to sale. Both House and Senate proposals extend this period to 5 out of the last 8 years potentially necessitating that individuals rethink financial plans and employers consider global mobility policy should this change disincentivise employees to move to the U.S.

Exemption on Sale of Principal Residence: Furthermore, the House bill provides for the exclusion to be ‘phased out’, broadly, where adjusted gross income (‘AGI’) exceeds $500,000 for joint filers. Assignment benefits that inflate AGI past the threshold would cause an otherwise excludable gain to become taxable so mobility policy should proactively address this circumstance.

President Trump is close to securing the biggest legislative win of his presidency to date, all eyes on the Senate next but still much lays in the balance. While focusing on corporate tax implications of a reform, Swiss and foreign groups should not forget assessing the implications on their US expatriates.

 

 

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2 Comments

  1. Brian

    This article doesn’t address the fundamental question of tax implications of the proposed legislation for US expatriates in Switzerland on local contracts.

    • Andrew Vincett

      Hi Brian, very grateful for your comment. The thrust of our article was toward an HR professional within an international corporate group and therefore focused on the aspects of the proposed reforms that might most impact them and their employee mobility program. That said a future post is planned to target expat Americans highlighting which of the proposed changes will be most relevant and impactful to them.

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