Global Implications of the United States' Tax Cuts and Jobs Act
Contributed by Brooke Faulkner
04 May, 2018
In a sprint for the finish victory, United States President Donald Trump signed the Tax Cuts and Jobs Act into effect on December 22, 2017. With the plan pushed through the House and Senate at breakneck speed, few people had time to truly explore the implications of the eleventh hour bill.
The Act makes the biggest changes to the US Tax Code in 30 years, and the changes were set to go into effect a mere nine days after it's passing. Now that the dust has settled and the Act has been perused, analyzed, and maybe understood a little better, it's time to explore the implications of the new tax code for those living and working overseas.
Individual Filing and Expats
For expats living abroad, the tax code hasn't changed much. The Foreign Earned Income Exclusion still allows for the exclusion of income earned abroad, though it's still required to file a US tax return if you're a US citizen. Expats are also eligible for a certain amount of housing exclusion and may be able to write off foreign tax credit against any US incurred balance.
Personal tax deductions saw a change, as well. The overall individual deductions were increased to a set amount for a single individual and for married couples. For married families with numerous children, the higher amount may not offset the money lost by not writing off dependents individually.
State and local taxes (SALT) deductions were capped at 10,000 dollars, which means that some individuals living in high tax areas may see a decrease in their federal deductions. However, if you own a property that you rent for income, or you're renting your primary residence while living abroad, the taxes paid on those properties remain deductible.
The estate tax needs a mention because it's been making headlines, though little has changed. The federal estate tax exemption has been raised, meaning that estates over $10,000,000 are no longer subject to federal taxes. State estate taxes continue to be individually mandated, so if you're evaluating an inheritance, you still need to pay attention to the state of residence of the deceased.
If you're just looking to buy a home, though, the real estate market faces a slightly different fate. Most notably, the amount of interest that homeowners are allowed to write off has been capped at $500 thousand, down from the former $1 million. The change is significant, and the decrease in tax benefit may further discourage prospective home buyers, especially those considering investing in additional real estate for rental income. The decreased tax break combined with the cap on SALT (which includes property taxes) might be enough to put off housing purchases or make current homeowners reassess their mortgage payments.
Corporate Tax Changes
The biggest change for corporations is the lowering of the corporate tax rate. Companies now pay taxes at 21 percent instead of 35, with the assumption being that employers will use the extra profits to create jobs and increase the wages for existing employees. However, only 14 percent of surveyed CEOs intend to put that gain towards their current and future employees. Instead, companies will funnel that money towards shareholders through dividends and buyback programs.
Companies will also be required to bring offshore profits back into the US through mandatory repatriation. Under the reformed repatriation laws, companies must pay taxes on profits earned overseas whether they remain in foreign bank accounts or come back through the US. They'll also have to shell out a one-time fee of 8 to 15.5 percent of the profits they've made overseas since 1986, marking a painful blow for large international companies like Apple and JP Morgan Chase.
In addition to this one time transition tax, future income from foreign subsidiaries is no longer available to defer indefinitely. Companies will be taxed on their foreign income, though they will be given credit for foreign income taxes up to 80 percent. Intangible profits will be taxed per the GILTI provision, but they'll be given a 50 percent deduction, effectively putting their tax rate at 10.5 percent. On the whole, it's a massive overhaul, and it's going to take some time for all the business consequences to play out.
The recently passed US tax plan has made waves in communities and tax brackets throughout the country, and it's an understatement to say the United States business abroad is facing some major changes in tax code. It'll take a couple years for the kinks to be worked out, loopholes found, and new business strategies established to maximize the bottom line.
Financial analysts are split on whether or not this will actually help the economy, or whether the Tax Cuts and Jobs Act will actually create jobs. While it doesn't look like CEOs intend to use their profits for increased employee compensation, there may be a different level of economic boost.
In the next 7 years, many of these provisions will have changed, expired, or potentially been rewritten. GILTI will see a higher tax rate, healthcare will no longer be mandated, and by 2026, individuals tax cuts will expire, prompting a tax hike unless changes are made. It's impossible to predict what might happen to American politics in that time, though the short term promises plenty of tumultuous changes to keep the global front on it's toes.
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