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The impact of the US election on US taxes

As we enter the final few weeks before the US presidential and congressional elections, there is much speculation on what a Biden victory, or a continuation of the Trump administration, could mean for tax for Americans abroad, both personally and for the businesses they own. 

Last updated: 21 October 2020

A Biden victory will certainly mean a reversal of at least some of the changes of the 2017 tax reform bill. A continuation of the Trump administration likely means fewer changes but that doesn’t mean there will not be any. Because US tax law is legislatively driven, it is also not enough to know who will be president, the political composition of the US House of Representatives and the US Senate is key. Right now the Democrats control the House and the Republicans the Senate.

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Allan Wilkinson

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wilkinsona@buzzacott.hk
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Last updated: 21 October 2020

A Biden victory will certainly mean a reversal of at least some of the changes of the 2017 tax reform bill. A continuation of the Trump administration likely means fewer changes but that doesn’t mean there will not be any. Because US tax law is legislatively driven, it is also not enough to know who will be president, the political composition of the US House of Representatives and the US Senate is key. Right now the Democrats control the House and the Republicans the Senate.

Biden proposals

Biden proposals

Beyond a pledge to make the US tax code fairer, and to expand the use of tax credits to support working families and encourage clean energy, the Democratic party platform for 2020 contains few specifics. However, some key proposals have been included in various speeches and interviews given by Joe Biden:

  • Return the top rate of income tax to 39.6% from the current 37%.
  • Eliminate the beneficial rate on capital gains and dividends where income exceeds $1 million (a version of the “Buffet” rule). This could increase the rate of tax from a current 23.8% to 43.4%.
  • Restore the itemised deduction for state and local taxes that were capped at $10,000 by the 2017 reforms.
  • At the same time, Biden proposes to limit the tax benefit of itemised deductions to 28%.
  • On the US estate tax, Biden has proposed to eliminate the basis step up to market value for capital assets currently given at death. 
  • Although less clear, there are indications that the current lifetime estate and gift tax exemption would be lowered to around $5 million or even less.
  • More generally, there have been indications that the Democrats would look to curb favourable estate planning ideas, including the use of trusts and various valuation discounts for closely held businesses.
  • Biden has proposed raising the US corporate tax rate to 28%.
What about if Trump wins?

What about if Trump wins?

Would you be right to think that there will be no significant changes? It’s not entirely certain. In the first instance, the US budget deficit is increasing through a combination of the 2017 tax cuts and the impact of the cost of COVID-19 to the US economy and treasury so far. Taxes might have to rise if the fiscal pressure becomes too great.

Perhaps more likely, Trump spent a lot of time in the 2016 campaign discussing big infrastructure projects such as highways, bridges, dams, and perhaps technology infrastructure, such as improving broad band in rural areas of the country. None of this has happened. If he gets a second term, he might be ready to cut a deal to raise taxes in order to fund a major package of infrastructure improvements.

What should you do?

What should you do?

At the moment there is too much uncertainty to suggest specific action until the full results of the election are known. However, individuals already considering tax planning moves such as making gifts or selling assets may want to accelerate these to lock in the certainty of the current rules.  

It is also not possible to know the timing of when legislation can be passed to implement any tax policy changes. Whoever takes office on 20 January 2021 will have a lot on their plate. It seems unlikely that changes to income taxes can be brought in so rapidly as to be retroactive for all of 2021. However, transaction based taxes, such as capital gains and estate and gifts taxes could be made effective from a specific date.  

We will update our clients and contacts with a further article once the results of the election are known. 

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