updated 2:28 PM CEST, May 24, 2023

Bright!Tax comment: The candidates' tax plans, and their likely implications for expats

Bright!Tax comment: The candidates' tax plans, and their likely implications for expats Cottonbro

Nov. 3, the date of the 2020 U.S. presidential election, is two weeks and one day away. Many expats will have voted by now, but for those who haven't – or those who did, but who aren't all that sure of their chosen candidate's views on such issues as taxes that affect Americans who live outside of the U.S. – Bright!Tax managing partner Katelynn Minott assesses the options, and what the implications for expats of the two outcomes are likely to be...

It’s the strangest U.S. election year in living memory, and perhaps ever, with the American economy rocked by a global pandemic, social unrest across the country, and the president catching Covid a few weeks before the vote.

In this article, we’ll look at the tax plans the two parties have announced so far that will impact expats, as well as a recap on voting from abroad.

Democrat and Republican tax plans

The Democrats have said they plan to increase income taxes solely for higher earners. Few expats would notice this, though, as most can claim either the Foreign Earned Income Exclusion or the Foreign Tax Credit when they file, which often eliminates their US tax bill completely, because their taxes tend to be higher where they live.

One tax raise planned by the Democrats that would impact those expats with a foreign registered business, though, is a plan to double the effective GILTI (Global Intangible Low-Taxed Income) tax rate to 21% from 10.5%, for overseas Americans with a foreign business that has a U.S. parent company.

Tens of thousands of American expats created a U.S. parent company for their foreign registered business in 2018, following the introduction of GILTI, to take advantage of the 10.5% rate.

The GILTI regime was created by President Trump's 2017 Tax Cuts and Jobs Act, and has been heavily criticized by expat organizations and businesses for what they say are its unintended and massive consequences for Americans who own small, non-U.S. businesses. 

There is, though, a source of hope for expats who are affected by the GILTI obligations, in the form of a lawsuit that Monte Silver, an American tax attorney resident in Israel, filed in June against the IRS, which may result in a GILTI exemption for American owners of a foreign businesses with revenue of less than US$25m a year.

The Democrats also plan to increase the overall U.S. corporate tax rate to 28% from 21%.

Dems on FATCA: 'no plans to repeal'

As for the Foreign Account Tax Compliance Act (FATCA), introduced by President Obama in 2010 to crack down on the use of foreign bank accounts by some wealthy Americans to avoid having to pay U.S. taxes on some of their assets, the Democrats have no plans at present to repeal it. Nor has the party stated any intention of planning to replace the current U.S. citizenship-based tax (CBT) regime with one based on residency, even though many tax experts say this would immediately make life easier for American expats, in addition to being fairer, and wouldn't greatly affect the Treasury's annual tax inflows.

However, without specifically mentioning FATCA or CBT, Joe Biden did recently address Americans living abroad, in a letter posted on the Democrats Abroad website on June 29, saying that he and his administration would, if elected, "work in partnership with you on all the issues that impact your lives and well-being as Americans resident abroad, including reviewing the barriers to accessing banking and financial services".

Republicans: 'No tax increases'

For their part, the Republicans have pledged not to increase any taxes, and also to repeal FATCA, and replace citizenship-based taxation with a residence-based tax regime. (It should be noted that repealing FATCA and replacing CBT with RBT were also in the GOP's 2016 election platform, but neither was acted upon during President Trump's first term in office.)

If implemented, though, as noted above, repealing FATCA and replacing CBT with RBT would provide relief for Americans living abroad from having to report their foreign income, and also make it easier for them to acess financial services in the countries in which they live, as non-U.S. financial institutions are wary of having to comply with FATCA.

The question is whether either measure would be acted upon, were the Republicans to be given a second term. 

Last month, the Republicans Overseas sent a letter to White House Chief of Staff Mark Meadows in which the organization urged him to ask the president to issue an executive order aimed at alleviating various tax-related issues that U.S. expats struggle with. Meadows subsequently let it be known that the matter would be best left until after the election, and dealt with legislatively.  

In summary, whichever party wins, the most probable scenario is that the majority of U.S. expats won’t notice any difference with regards to U.S. taxes – the possible exception being those expats with foreign registered businesses, should the Democrats win.

Is it too late for expats to vote?

Whether an American currently resident overseas can still register to vote, as of today, would depend on which state they last resided in. State registration deadlines vary, and can be seen here.

For those expats who have already registered, it’s important that they return their ballots as soon as possible, to ensure that their vote is received and counted.

As I noted here in July, voting from abroad in a U.S. federal election will not cause the IRS to come after anyone, as it has no access to state voting registers. So there's no need to refrain from voting because one is wary of having to face a possible IRS audit, or other form of unwanted attention. 

That said, Americans resident overseas who have questions about their obligation to file a U.S. tax return every year – which they are required to do, even if they won't owe any U.S. tax, if their worldwide income exceeds IRS minimum filing thresholds (which I detailed in my July article, mentioned above) – should seek advice from a U.S. expat tax specialist as soon as possible, to ensure that they avoid any future penalties.

Anyone who is behind with their U.S. tax filing can often catch up without having to pay any penalties under an IRS amnesty program called the Streamlined Procedure.
Katelynn Minott BrightTax croppedKatelynn Minott, pictured left, is a managing Certified Public Accountant and partner of Bright!Tax, an online American expat tax specialist firm that has clients in some 190 countries, according to its website. The views expressed in the article are for general information purposes only and should not be construed as recommendations or advice for any individual, nor should any action be taken on account of the information presented. Further information may be obtained by contacting Bright!Tax, at https://brighttax.com/.