Most of Trump’s tax plans will help American expats. If you’re living abroad, and making more than the Foreign Earned Income Exclusion, or have significant capital gains, Trump might cut your US taxes significantly.
First, I should point out that there’s been no indication Trump will attack the FEIE. I don’t expect this Exclusion to be reduced. If you’re working abroad and earning less than $102,100, you’re golden.
Second, note that Trump’s changes to international tax law have been focused on import taxes and preventing jobs from going overseas. Unless you sell a physical good into the United States, his negative tax plans should not affect you.
That is to say, if you’re an expat with a portable business, or an internet, service, drop shipping, or consulting business, Trump’s plans won’t hurt you. So long as you’re not importing into the United States, there’s no need to worry.
Let’s take a look at a few highlights of Trump’s tax plan.
- Reduce taxes across the board, with special focus on working and middle-class Americans
- Ensure the wealthy pays their fair share, but not so much that it’s detrimental to jobs or undermines the ability to compete
- Eliminate special interest loopholes, make business tax rates more competitive in order to keep jobs in the US, and create new opportunities to revitalize the economy
- Lower childcare costs by allowing families to fully deduct the average cost of childcare from their taxes
The Trump Plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000. Personal exemptions will be eliminated as will the head-of-household filing status.
In addition, the Trump Plan will cap itemized deductions at $200,000 for Married-Joint filers or $100,000 for Single filers.
Most importantly, Trump’s tax plan will lower personal income taxes and reduce the number of brackets. Under Trump’s plan, our current seven tax brackets will be collapsed into just three.
Lower-income families will end up with an effective income tax rate of zero. According to Trump, a middle-class family with two children would see a tax cut of about 35%.
The proposed income tax rates for a married filing joint taxpayer are as follows:
- Less than $75,000 – 12%
- More than $75,000 but less than $225,000 – 25%
- More than $225,000 – 33%
Tax brackets for single filers will be exactly half of the amounts listed above. This is why there is no more “head of household” or status, nor is there a “marriage penalty.” The single tax brackets are now exactly half of those for married joint filers.
Remember that your first $102,100 will be excluded under the FEIE. So, an expat’s tax bracket will start at 25% and go up to 33% on salary in excess of the Exclusion.
I also note that your bracket begins at 25% and not at 0% or 12%. The excluded $102,100 counts toward your bracket, it doesn’t start at zero as if the income was never earned.
So, someone who earns $200,000 in salary for 2017 will pay 25% on about $100,000 (the amount over the FEIE). If that same person earns $300,000, the first $100,000 is tax free, the second $125,000 is taxed at 25% and the remaining $75,000 is taxed at 33%.
Self employed expats operating through an offshore corporation can manage these taxes by holding income in excess of the FEIE in the corporation as retained earnings. Pay yourself (and your spouse, if possible) the max allowed and retained the balance in your corporation tax deferred.
American expats can eliminate income tax using the Foreign Earned Income Exclusion. There is no such tax break for capital gains. So long as you hold a blue passport, Uncle wants his cut of your passive income.
Trump has suggested he will keep the current long-term capital gains tax rates of 0%, 15%, and 20% but reduce the number of tax brackets from seven to three as described above. Trump’s simplified and consolidated tax brackets, and their corresponding long-term capital gains tax rates are:
|Marginal Tax Rate||Taxable Income (Single)||Taxable Income (Married Joint Filers)||Long-Term Capital Gains Rate|
|33%||$112,500 and above||$225,000 and above||20%|
DATA SOURCE: WWW.DONALDJTRUMP.COM
It’s also become clear that Trump plans to repeal Obamacare (the Affordable Care Act), and thereby eliminate the 3.8% investment income tax. Under Obama, most investors were paying 23.8% on long term capital gains. Under Trump that will likely go back to 20%.
Nowhere in Trump’s tax plan is a reduction of self employment or payroll taxes mentioned. Therefore, American expats will benefit from incorporating offshore and running their businesses through an offshore company.
You should report your salary on IRS Form 2555 as coming from a foreign corporation to eliminate self employment and payroll taxes of 15%. For more on this, see: How self employment tax works when you’re offshore.
Remember that self employment taxes are not reduced by the Foreign Earned Income Exclusion. The FEIE applies to income taxes paid against your salary. SE tax is not an “income” tax.
The only way for an expat to eliminate SE and payroll taxes is to operate his or her business through an offshore corporation. This trick alone can save you $15,000 a year if you’re single or $30,000 if a husband and wife both work in the business and max out the FEIE.
I hope you’ve found this article on Trump’s tax plan for expats to be informative. For assistance with an offshore corporation or US tax compliance, please contact us at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free and confidential.