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US Tax Reform Bill

Shortly after midnight on Dec 2 the US Senate passed a tax reform bill. Earlier in the autumn the House of Representatives had also passed a tax reform bill. While not all of the details are yet clear, it now seems almost certain that Congress will pass tax reform legislation by the end of the year. So what is the final legislation likely to contain and what are the likely impacts upon Americans overseas?




America's largest corporations are about to get the biggest tax cut ever. The top corporate rate looks set to be slashed from 35% to 20%. Corporations with large piles of accumulated profits that have been kept outside the US to escape the high rate of US corporate tax  look set to be able to bring those profits back to the US at a reduced rate of 14.5%. In addition the US looks will move towards a territorial system of taxing corporate profits, where profits earned outside the US are taxed at a lower rate or not at all.

US citizens resident overseas are not likely to be impacted directly by this, but may benefit if they own shares in US corporations and hence benefit from any rise in share prices.

Pass - Through Deduction

The bill is also going benefit the owners of pass-throughs (S corps, LLCs and partnerships). The bill will allow business owners to deduct 23% of pass-through income,thus lowering the effective tax rate.

Alternative Minimum Tax (AMT)

Earlier versions of the bill envisaged repealing AMT (an alternative tax calculation with lower rates but fewer deductions intended to back stop the main tax in order to limit the potential for avoidance). The Senate bill partially retains AMT.

Sate and Local Deductions 

The ability to deduct state and local is being cut back and limited to a maximum $10,000.

Individual Mandate

The Senate bill would repeal the individual mandate penalties that oblige people to have health insurance or otherwise pay a fine.

Standard Deduction

The standard deduction will rise significantly from $6,350 to $12,000  for individuals and $12,700 to $24,000 for couples, thus increasing the starting point for taxable income.

Territorial Taxation Of Individuals

The US is almost unique in the world in taxing individuals based upon citizenship. There were hopes that  this might be abandoned or substantially reformed, in favour of some form of territorial taxation one based some combination or residence and the source of the income (i.e. where the income actually arises). However, neither the House nor the Senate version of the bill contains provisions for a move towards the territorial taxation of individuals.

Individual Tax Rates 

The bill reduces individual tax rates.  There will be 6 rates of tax on the ordinary income of individuals  ranging from 12% to 38.5%.  This compares to 7 brackets ranging from 10%  - 39.6% currently.

Estate Tax

Currently estates up to $5.5 million are exempt from Federal Estate Tax. Both the House and Senate bills would raise that to $10 million with possible eventual elimination.

Impact on US citizens overseas

There are many details that still need to finalised and it will also take time to properly understand the full implications.  However, the reform package does represent a substantial tax cut overall - in particular to US corporations and their owners and to the owners of pass-throughs. At this stage it appears that the impact on Americans in the UK will be very limited. In most cases tax rates in the UK are already higher than in the US so on most of their income, US citizens will not currently face US tax bills. Where they have US source income (e.g. US property rental income) they may see a small benefit from lower rates.

However, in the areas that are typically most problematic for US citizens in the UK

 - the taxation of foreign mutual funds (PFICs),

 - exchange gains on the repayment of foreign currency debt

 - and the the taxation of the gain on the sale of your main home, 

 - informational reporting on foreign assets

the legislation appears to do little to alleviate the burden.