Potential tax reform from Washington could have a profound impact on multinational corporations and the thousands of Americans living and working abroad.
Of course, no one knows what-—if anything—will emerge from Republican efforts to overhaul the U.S. tax code. But companies need to be aware that the proposed changes could have far-reaching implications on the cost of international assignments, both for employees just going abroad and for those already working abroad on short or long-term assignments.
The reason: Many multinationals try to make sure that expat employees pay roughly the same amount of tax that they would if they still lived in the U.S. Typically, that means calculating a hypothetical tax based on the current U.S. tax code. So, any changes in tax rates and deductions would affect the multinational’s cost of providing tax equalization to its overseas employees.
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Right now, tax reform discussions are focused on the “core principles” issued by President Trump in April, on the 2016 House “Blueprint,” as well as other concepts such as the Camp bill from 2014 and the sentiments of some Republican senators. All of this is further focused conceptually on using the FY 2018 Budget Reconciliation process and its unique rules as a potential legislative vehicle for tax reform.
Overview and comparison of plans:
- Individual tax rates
Trump is proposing three federal tax brackets for ordinary income: 10 percent, 25 percent and 35 percent, which are slightly different from the GOP blueprint (12 percent, 25 percent and 33 percent). So far, there are no details on the income levels at which those rates would apply.
- Investment income
The House GOP plan would not tax the first 50 percent of net capital gains, dividends and interest income. That would produce an effective tax rate of 16.5 percent, 12.5 percent and 6 percent, depending on the individual’s tax bracket.
Trump’s latest proposal doesn’t mention this issue, but his proposals during the presidential campaign called for keeping the current tax brackets on capital gains at 0 percent, 15 percent and 20 percent.
- Deductions and exemptions
Both Trump and the GOP plan would eliminate personal exemptions but roughly double the standard deduction for taxpayers, which is currently $6,350 for single people, $9,350 for single people with a child and $12,700 for married couples filing jointly.
- Itemized deductions
Both proposals would eliminate all itemized deductions except those for mortgage interest and charitable donations.
- Net investment income tax
Both proposals would end the 3.8 percent tax on any investment income that (when combined with modified adjusted gross income) exceeds certain amounts, which is currently $200,000 for individuals and $250,000 for married couples filing jointly. The tax applies to investment income such as dividends and interest payments on bonds as well as things like rental income.
- Alternative minimum tax
Both proposals would end the alternative minimum tax, which kicks in when deductions push a person’s taxable income below certain levels.
- Children and dependents
The GOP plan would consolidate the child credit and personal exemptions for dependents into an increased child credit of $1,500. The first $1,000 would be refundable, as it is now. A non-refundable credit of $500 would also be allowed for non-child dependents. The latest Trump proposal would provide for child-care and dependent elder-care, including exemptions and rebates.
- Estate and gift tax
Both proposals would eliminate the estate tax but don’t mention the gift tax.
Neither plan addresses two tax rules that are particularly important to American expats. One is the foreign tax credit, whereby U.S. liability is offset by foreign taxes paid on the same income. There’s also no mention of the exclusions for foreign-earned income and housing amounts, which are also used widely to avoid double taxation.
What it all means
With the proposed changes to the taxation of earned income, itemized deductions and investment income, both the Blueprint and the Trump Plan could have significant impact on multinationals and their globally mobile employees. While there is momentum around major tax reform, there are still significant hurdles to overcome before any legislation is signed into law. Multinationals and their expat employees should continue to monitor the situation to make sure they’re prepared for whatever comes out of Washington.
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