Record Numbers Line Up to Renounce US Citizenship with Potential for Biden Presidency

If late into the evening of November 3rd, 2020, Joseph Robinette Biden Jr can reach the 270 electoral votes needed to become the 46th President of the United States, almost certainly holding a majority in the House of Representatives, and turn three seats or more in the Senate from red to blue, US expats across the world may be in considerable trouble... US tax-wise, that is!

As election season is upon us, it is critical to understand the economic impact each candidate's tax policies will have on you and your family as a US citizen living outside the United States. Emotion aside, death and taxes are guaranteed for all and not in that order. 

At the beginning of 2020, Vegas bookmakers and most political pundits saw Donald Trump's reelection as a forgone conclusion. Fast forward six months and most betting sites have Joe Biden as the favourite, albeit, in what will undoubtedly be a very close election come November.  While shocking to some, this COVID induced change in sentiment has record numbers of US expats scrambling to renounce their US citizenship in fear of a BIDEN presidency. Not the Donald. Why might you ask? Joe Biden's tax policies for US expats are lining up to be monumentally more punitive to Americans living abroad.

The Tax Cuts and Jobs Act ("TCJA"), signed into law by President Trump on December 22nd, 2017, was one of the most comprehensive and ambitious tax reform bills in American history and amended the Internal Revenue Code (the "Code") to provide many US taxpayers and investors with lower taxes and increased incentives to invest in the US economy. However, the TCJA was also controversial, largely due to its highly favourable corporate tax provisions and estate tax changes, culminating with many Democrats focusing their 2018 Congressional campaigns on amending or repealing the bill.

With the 2020 presidential election now less than 100 days away, many American expats are beginning to wonder what is in store for them should Joe Biden and the Democrats take power in November and what they can expect come tax time.

Recently, Joe Biden and Vermont Senator Bernie Sanders sat down to iron out some of the tax policies for a Biden administration that would be a staple of his potential presidency and lead to the undoing of Donald Trump's TCJA.

The Proposed Changes:

As of the date of this publication, President Trump has remained mostly quiet on tax changes he is planning for a second term, leaving us to assume that the reforms enacted in the TCJA will continue primarily intact. This assumption is consistent with the additional temporary provisions that were signed into law by President Trump in the Coronavirus Aid, Relief and Economic Security ("CARES") Act in April, suggesting that President Trump may be intending to keep the status quo mostly. If President Trump does intend to "keep the status quo," that means he will be maintaining one of the lowest corporate tax rates of any industrialized nation, lower individual tax rates, lower capital gains tax rates, and a unified credit exemption that shelters 99.99% of US citizens from owing estate tax at death.

Joe Biden, on the other hand, released a 110-page plan in late June (the "Biden Plan"), drafted in conjunction with Senator Sanders and other progressive members of the Democratic caucus, including Alexandria Ocasio-Cortez, outlining his vision for rolling back many of the taxpayer-friendly provisions introduced by President Trump in the TCJA.

What changes can I expect as a US expat taxpayer if Joe Biden becomes president?

Keeping in mind that all the following changes will likely require the Democrats to obtain full control of the US government in November, all US taxpayers can generally expect increased taxes on individuals, estates, and corporations under the Biden Plan.  Joe Biden has repeatedly pledged to undo the majority of President Trump's $2 trillion tax cut out on the campaign trail, and the Biden Plan as released is consistent with that promise.

Some of the proposed changes to the Code under the Biden plan include:

Biden Plan (President Biden)

TCJA (President Trump)

Individuals

  • Increasing the top individual tax bracket to 39.6%
  • Establishing limits on the use of itemized deductions for taxpayers in tax brackets higher than 28%, with additional limitations for taxpayers with gross income above $400,000 US
  • Phasing out use of the Section 199A Qualified Business Deduction for taxpayers with gross income above $400,000 US

Individuals

  • The top individual tax bracket is 37%
  • Phase-out of the Section 199A Qualified Business Deduction applies to taxpayers with gross income over $415,000 US

Capital Gains

  • Eliminating the long-term capital gains rate and taxing all capital gains at ordinary income rates for a taxpayer with income above $1,000,000 US

Capital Gains

  • Long-term capital gains are taxed at rates from 0 to 20%

Estate Tax

  • Repealing Code Section 1014 and eliminating the basis adjustment for property received by inheritance to fair market value at the time of the donor's death
  • Taxing accumulated gains in inherited assets at the time of transfer, regardless of whether or not the property is sold by the recipient
  • Returning the Section 2010 unified credit against estate tax to its pre-TCJA amount of $5.49M, with further reductions to come (many believe to around $1M)

Estate Tax

  • Basis in inherited property is adjusted to fair market value at the time of the donor's death
  • Gains are not taxed until the property is sold
  • Section 2010 unified credit against estate tax is $11.58 M, with annual adjustments for inflation

Corporate Tax

  • Increasing the corporate tax rate to 28%
  • Introducing a corporate minimum tax on book income
  • Doubling the tax rate on GILTI to 21%

Corporate Tax

  • The corporate tax rate is 21%
  • The tax rate on GILTI is 10.5%

 

One of the most significant Biden/Sanders tax policy issues for the US citizen expat is the estate tax exemption reduction. For example, a US citizen worth $3M (US) at death could be facing an estate tax bill of over $1M (based on an estimated exemption of around $1M under Biden Plan). In contrast, under President Trump, that same US citizen decedent would owe $0 at death ($11.58M exemption under Trump). This increased estate tax exposure, accompanied with the proposed individual income tax rate hikes, massive capital gains tax rate increases (an enormous problem for those looking to sell a principal residence with significant excess gains), and corporate tax rate changes, has many considering renouncing their US citizenship to preserve their wealth in life and for generations to come.

While it is impossible to know what will happen until after the election and inauguration of any administration, the best time to start thinking about and planning for these changes is now.

What we do know is that more people renounced their US citizenship in the first quarter of 2020 than any other quarter in history (2,909). While it is impossible to say precisely why each person decided to renounce, it was probably not a coincidence that there is a 50/50 prospect looming of a progressive Democratic regime replacing Donald Trump's tax policies. Planning for a potential "progressive" tax hurricane is always better done before you are in the eye of the storm. Not after.


The renunciation process is fraught with landmines, including an exit tax and being barred from the US forever if not done correctly. Proper legal advice is always highly recommended. Moodys Tax handles more renunciation files then any firm in the world. https://www.moodystax.com/renouncing-your-u-s-citizenship-is-divorcing-uncle-sam-right-for-you/

Please register for the next Moodys Tax renunciation webinar to learn if giving up your US citizenship is the right decision for you and your family, and if so, how to renounce the "right way": https://www.moodystax.com/seminars/.

Originally published August 6, 2020.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

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