Tax Considerations for U.S. Expats in the 2024 U.S. Election

As the 2024 U.S. presidential election approaches, U.S. expats face potential tax policy changes that could significantly impact them. However, both candidates have said relatively little about proposed tax policy during the campaign thus far. Major tax overhauls will largely depend on which party controls both houses of Congress, as significant changes are unlikely without a clear majority. Despite this uncertainty, U.S. expats should remain vigilant about key changes, such as the sunsetting of the estate tax exemption and possible increases in investment and corporate taxes.

The process for passing laws in the U.S. generally requires a majority in both the House of Representatives and the Senate. Furthermore, to pass most bills in the Senate, 60 votes are required to avoid a filibuster, making it difficult to pass legislation with a simple majority unless budget reconciliation is used, as seen with the Tax Cuts and Jobs Act (TCJA). President Biden's Democratic Party had a narrow majority in both houses of Congress following the 2020 election and yet it still took 18 months to enact a tax policy, and the final version was significantly scaled back from his original proposal.

Additionally, each member of Congress often has their own political agenda, which can lead to opposition even within the two parties. Biden's tax reform proposals (such as increasing corporate tax rates and taxing high-income earners) faced strong opposition from moderate Democrats, complicating efforts to get the required votes.

To date, the Republican Party and former President Donald Trump’s campaign has placed more emphasis on issues such as immigration and the economy, and there has been little in the way of proposed tax policy. However, a key priority for a Republican president would likely be to make certain provisions of the Tax Cuts and Jobs Act (TCJA) permanent. Many of the TCJA’s individual tax cuts are set to expire after 2025, including:

• Lower individual tax rates: The individual income tax brackets were lowered, with the top rate going from 39.6% to 37%).
• Increased standard deduction: The standard deduction nearly doubled under the TCJA.
• Doubled estate and gift tax exemption: The exemption for estate and gift taxes was increased from around $5 million to $11 million per individual (adjusted for inflation – currently $13.61 million in 2024).
• $10,000 cap on SALT deductions: The limit on state and local tax deductions will expire.

There is also speculation that former President Trump may pursue further reductions in income taxes, capital gains taxes, or corporate taxes—or potentially all three—as part of a broader push to maintain a low-tax environment. While specifics are lacking, such cuts would align with his previous policy positions favouring tax relief for individuals and businesses.

On 9^th October, former President Trump released a statement vowing to end double taxation for Americans overseas. While lacking in detail, this is generally assumed to mean that U.S. citizens living overseas would no longer be required to file U.S. tax returns taxable on a worldwide basis. This would be a monumental overhaul to the current U.S. tax system, which uniquely taxes based on citizenship. As with other policy changes, former Present Trump would need significant support from Congress to pass such a change. It is expected such a drastic change would be incredibly complicated to pass and implement and any change would likely involve a complex transition period and anti-avoidance measures.

Vice President Kamala Harris aligns with many of the tax policies championed by President Joe Biden and the Democratic platform and has confirmed her support of the tax changes proposed in Biden’s FY25 budget. She has yet to outline her own detailed independent tax agenda, however her positions focus on progressive tax reform, emphasizing fairness and increasing taxes on wealthy individuals and corporations.

1. Increase Taxes on High-Income Earners:

Harris supports raising the top marginal tax rate to 39.6% and increasing the capital gains tax rates for individuals earning over $1 million to match income tax rates. 

Net Investment income tax (NIIT) increasing the rate from 3.8% to 5% for those earning over $400,000.

2. Corporate Tax Increases:

Harris supports raising the corporate tax rate from 21% to 28% 

3. Closing Tax Loopholes for the Wealthy:

Harris aims to eliminate tax loopholes for wealthy individuals and corporations, including the carried interest ‘loophole’, arguing that this income should be taxed as ordinary income. She has also voiced support for taxing unrealized capital gains for those with wealth exceeding $100 million and taxing unrealized gains at death to target stepped-up basis rules that allow heirs to avoid taxes on large asset inheritances. While a Harris presidency might prioritize progressive tax policies, passing this specific measure require overcoming considerable political and legal hurdles.

4. Financial Transaction Tax:

Harris proposes implementing a financial transaction tax (FTT) on trades to curb speculative activities.

As the 2024 U.S. presidential election approaches, U.S. citizens living abroad face potential changes to tax policies that could have a significant impact on them. However, as highlighted above, a key theme in the upcoming election is the uncertainty surrounding tax policy, as any major changes will depend on which party, if any, controls both houses of Congress.

Estate Tax Exemption Set to Sunset

One policy area that we do have some clarity on is the estate tax exemption, currently at a historically high level due to the Tax Cuts and Jobs Act (TCJA). As of 2024, this allows individuals to exclude up to $13.61 million ($27.22 million for couples) from estate taxes. However, this higher exemption is set to sunset at the end of 2025, reverting to roughly half its current value. If individuals use the current estate tax exclusion there is no clawback if the exclusion is reduced post 1 January 2026. This creates a ‘use-it-or-lose-it’ opportunity to gift assets now to take advantage of the higher credit before it potentially decreases.

Increase to Net Investment Tax

The proposed increase in the Net Investment Income Tax (NIIT) rate to 5% will particularly impact U.S. taxpayers residing outside the U.S. This is because foreign taxes are not creditable against NIIT, meaning that U.S. taxpayers living abroad cannot currently offset this tax with credits from taxes paid in foreign jurisdictions. An increase in the NIIT rate to 5% will result in an overall increase in worldwide effective tax rate for U.S. taxpayers living outside the U.S.

Increases in Capital Gains Tax and Tax Rate on Carried Interest

An increase in capital gains tax rates, as well as increased rates on carried interest to align these with income tax rates, could potentially affect American taxpayers living abroad. As a result, individuals may find themselves facing higher tax burdens. However, some European jurisdictions are also considering increases to their capital gains tax rates. For instance, the new Labour government in the UK has indicated they will raise rates on carried interest and it is widely speculated that capital gains tax rates will also rise, potentially resulting in a convergence of tax rates across the Atlantic. This means that any increases in U.S. capital gains taxes might not create a mismatch for taxpayers living in the UK and other European countries, as they could be facing similar or higher rates already.

Increase to Corporate Tax Rate

An increase in the U.S. corporate tax rates might not, at first glance, be expected to impact U.S. taxpayers living abroad. However, this could be critical for taxpayers impacted by the Controlled Foreign Corporation (CFC) rules. Currently, to qualify for the high-tax exclusion under the ‘GILTI’ rules, foreign corporate taxes must be at least 90% of the U.S. corporate tax rate. Many European countries, including the UK, France & Spain, all have corporate tax rates that exceed 18.9% (90% of the current 21% U.S. rate). However, if the U.S. corporate tax rate increases to 28% as proposed, the required effective foreign tax rate would rise to 25.2%, creating challenges for many European corporate taxpayers.

While there has been limited emphasis on tax policy from either candidate during the current election campaign, it is clear from what has been said and what is speculated that each propose drastically differing tax policies. If the Republicans secure power, we can expect a push for a continuation of tax cuts, while a Democratic win would push for higher taxes on corporations and the wealthy. However, given the divided political landscape, the advancement of any substantial tax legislation is unlikely without clear party control in both houses of Congress, making major tax changes unlikely near-term. Nonetheless, U.S. expats should stay informed about potential developments, particularly regarding estate tax exemptions and possible increases in investment and corporate tax rates.