Biden Tax Plan Analysis
When Biden is sworn into office in January 2021, US Taxpayers, both abroad and in the US, may experience changes to their US tax returns.
The Internal Revenue Service requires all US citizens to file a tax return each year reporting income regardless of where in the world it was earned or where the taxpayer resides. Although there are provisions in the tax code that can eliminate US taxes owed by expats (the Foreign Earned Income Exclusion and the Foreign Tax Credit are the two most-used provisions), even then all US citizens living abroad must still file an annual tax return.
Additionally, many expats are required to report any investments and bank account balances held abroad.
As with any administration change, there will most likely be tax policy changes, so let’s take a look at how Biden's Tax plan may impact US citizens living abroad. Please note, this is preliminary (writing Dec 1, 2020) and may change as more information comes out.
Individual Taxes
The core of Biden’s proposed tax plan is to raise taxes back to the level they were prior to the passage of President Trump’s signature legislation in 2017 — the Tax Cuts and Jobs Act.
Some of the key changes would be:
- Increase the 37% income tax bracket to 39.6%
- Raise the estate and gift tax to 45% from the current 40%, while decreasing the exemption to $3.5 million from the current $11.58 million.
These tax increases are targeted mostly at higher earners. An additional proposal that could help many expats is raising the Child Tax Credit to $3,000 from the current $2,000 and making the entire credit refundable. (The current refundable amount is $1,400.) The Child and Dependent Care Credit could also be revised to be refundable.
The practical effect of the changes to these credits is to increase the amount that can be refunded to expats who claim the credits while paying no taxes.
Corporate Taxes
Along with raising individual tax rates, Joe Biden’s proposed tax plan will raise the corporate tax rate from 21% to 28%.
Another tax affects expats who have a foreign business. The Global Intangible Low Tax Income (GILTI) can currently be offset using tax credits and can, under certain conditions, also be reduced by 50% - effectively decreasing the rate to 10.5% from 21%. The Biden tax plan will eliminate this 50% discount, essentially doubling the tax rate of American-owned foreign businesses.
No proposed changes to FATCA
When Joe Biden was serving as vice president, the Foreign Account Tax Compliance Act (FATCA) was passed. This gave the IRS a way to enforce tax compliance globally. There were unintended consequences for US expats, including making it difficult for US citizens living abroad to obtain banking and financial services. The Biden tax plan does not contain any provisions to provide relief to expats relative to FATCA.
Can These Changes Be Passed?
Of course, these proposed changes require congress to act. . As of this writing, Senate control is dependent on the results of two runoff races in Georgia in January.
What to Do?
Taxes are complex and only getting more complex with additional lines added to the tax code. Regardless of what changes (or lack of changes) may come during the next presidency, you need a trusted advisor on your side. TFX has been preparing tax returns for over 25 years and focuses on the entire user experience of the client. Our team of experts stands ready to assist and ensure you are compliant and avoid penalties, while obtaining all available tax relief.
If you have not filed for many years, there are specific amnesty programs available to get caught up without penalty. TFX has helped thousands of taxpayers use the“Streamlined Procedure” and get on the right side of Uncle Sam.