- Some of the tax changes proposed by Joe Biden may affect dual Australia- US taxpayers.
- Biden proposes to remove the preferential long-term capital gains or qualified dividend tax rates (currently 20%) for taxpayers with income over US$1m.
- He also intends to raise the top income tax rate to 39.6% (for income above US$400,000) and lift the company tax rate from 21% to 28%.
Increasing taxes on the wealthy and closing the loopholes in foreign offshoring of profits were some of Joe Biden’s primary takeaways on his campaign platform.
His proposal covers changes to the code that affect the individual taxpayer, companies, estate planning, and other topics.
Some of the tax increases that may affect dual Australia-US taxpayers are discussed below.
Changes to the long-term capital gains tax rate
A major change for individuals with income over US$1 million is the elimination of the beneficial long-term capital gains tax rate of 20%. Biden proposes to completely phase out the concessional rate for taxpayers with income over the US$1m amount and impose ordinary tax rates on the gains.
Once the taxpayer reaches the US$1m threshold they’ll be kicked out of the 20% tax rate applicable to long-term gains, and into the higher ordinary income tax rates that are due for an increase under the new administration.
For affected taxpayers, this could mean capital gains that were once sheltered by foreign tax credits, having been subject to Australian tax at 23.5%, will now be subject to additional US tax.
“Capital gains that were once sheltered by foreign tax credits… will now be subject to additional US tax.”
Regarding individual income tax rates, Biden intends to raise the top income tax rate to 39.6% (for income above US$400,000 per annum), and further restrict the benefit of itemised deductions, in the process restoring certain provisions that had been repealed by the Tax Cuts and Jobs Act of 2017 (TCJA).
Estate taxes in focus
For estate tax purposes, if you intend to reduce the size of your estate, the time might be right now. The TCJA increased the estate and gift tax lifetime credit to US$11.58m for a single taxpayer, almost entirely eliminating the Federal tax on the estate of a deceased taxpayer.
Biden has proposed to reduce the credit to US$3.5m and increase the estate tax to 45%, an increase of 5% to the tax currently imposed. The 5% increase in estate tax rate extends further than just US citizens, as Australian residents who own US situs property could also be hit by the higher rate.
Doubling GILTI to 21%
If your client is a US shareholder and has majority ownership (more than 50%) in a foreign company, then you may be aware of the GILTI rules and tax imposed on the company by the US.
The TCJA brought about the GILTI provision. It was meant to target base erosion and profit shifting by multinational companies but is much broader in scope and can affect even very small business operators.
Biden has proposed to double the GILTI rate from 10.5% to 21% and eliminate the 10% exemption on tangible property. As it stands now, GILTI is calculated on the aggregate of a multinational’s pro-rata share of income from controlled foreign corporations (CFCs).
Biden proposes to implement the GILTI requirement on a country-by-country basis, which would replace the former aggregated method. This could mean losses would not be offset against income from other CFCs.
An increase in company tax
Another monumental overhaul of the tax code by the TCJA was the reduction in corporate taxes to 21%, making investing in the US more competitive globally. The proposed tax rate under Biden would rise to 28%, inching up to the rates before the TCJA was enacted.
In the meantime, Australia is preparing to reduce the corporate tax rate to 25% in the 2021-2022 financial year. The combination of these tax rate movements could result in Australia no longer being a ‘high tax’ country by the US Code, with potentially wider implications to dual taxpayers who may have relied on the exception to reduce the US tax burden on Australian income.
While the Democrats now have a majority in the House of Representatives and the Senate is split 50/50, with Vice President Kamala Harris having a casting vote, it will not be an easy task for the Democrats to push through these proposed amendments to the existing legislation.
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