Everfair Tax

Specialists in UK, US and Expatriate Tax.

Managing UK and US Pensions

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Understanding having pension schemes in more than one country.

In recent years, it is increasingly common for executives to have pension schemes in more than one country. Whether that has been from working abroad, or the option to become part of a pension scheme in another country. Therefore, the question often arises when we speak to a client; as to what to do with their pensions from a tax perspective.

Contributions

One of the first questions is often; whether you can get tax relief where you are now resident for contributions into a pension scheme in another country?

Under both the double taxation agreement between the UK and US, and under UK domestic rules, pension contributions to a plan in the other country can qualify for tax relief where you are resident. 

For tax relief to apply, you must have been contributing to the plan prior to becoming resident in the other country. In addition, the plan in question must be a qualifying retirement plan. 

Growth

Under the terms set out in the double taxation agreement between the UK and US, the growth in a qualifying plan in the other country, can’t be taxed where you are resident. Therefore, there is no need to report the annual income and gains received within a pension scheme. Nor the unrealised increase in the value of the assets held in the pension on an annual tax return. The treaty specifically lists IRAs and 401ks as qualifying pension schemes for this purpose.

Withdrawals

As a general rule, under the pensions article of the treaty, withdrawals from a qualifying pension scheme are taxed in the country of residence. This is regardless of where the pension scheme itself is based. However, this rule is subject to the savings clause contained earlier in the treaty. This clause effectively allows the countries to still tax the income on their nationals. Although, they have to provide credit for the tax paid in the country of residence.

It also provides that, where the country in which the pension plan is located would consider something as tax exempt, then it should be considered tax exempt where the person is resident. This would cover situations like the 25% tax free lump sum provided for under UK schemes. As well as the fact that withdrawals from Roth IRAs are tax free in the US. 

This provision is not subject to the savings clause in the treaty mentioned above. It has been the subject of much debate over the years. For example, whether the IRS would allow the 25% lump sum exemption on a distribution from a UK scheme to a US citizen if they are resident outside the US, due to unclear wording of the provision in question. 

Lump Sums

Where a person wants to withdraw their pension as a lump sum, in line with with the double taxation agreement, the pensions article states this is to be taxed where the plan is located. However, it is subject to the savings clause. This allows the country where the person is resident to also tax. This comes with a credit for the tax paid in the country where the plan is located. 

There has been discussion over the years between advisors about the definition of ‘lump sum’ for this purpose. This has included; whether it covers anything but a withdrawal of the whole pot. As well as whether it can still be a lump sum if you have previously drawn on the pension.

Other Charges

As well as the position on distributions, there are additional charges which can arise in respect of a pension. 

In the UK, this includes the lifetime allowance charge. This can apply at certain points when a person has more than their approved lifetime pension fund balance. The fund can vary between just over £1 million and £1.8 million depending on appropriate fixed and individual protections elections which have been made over the years. In the US, there is the 10% early withdrawal penalty if funds are withdrawn from a US pension prior to 59.5%, except in limited qualifying purposes.

The treaty doesn’t specifically provide for what happens with respect to these charges when the person receiving the funds is in the other country. Therefore, that country would normally have a right to tax regular distributions. There is very limited guidance or comment from both the IRS and HMRC. This means that such charges, where applicable, may be in addition to the normal income tax charge arising between the two countries.

Inheritance Tax (IHT) and Estate Tax

From a UK IHT perspective, UK schemes can generally be outside the scope of IHT. However, there is a potential issue with US pension schemes. These may qualify for the same treatment as domestic schemes, if they meet the conditions to be Qualifying Non-UK Pension Scheme (QNUPS) under the relevant regulations. Yet, there is an important difference in the way they are structured when compared to UK schemes.

With UK schemes, there is a non binding letter of wishes. This letter allows the trustees discretion over who they pay the funds to when a pension account holder dies. Although, they are likely to follow the letter of wishes. With the majority of US schemes, there is a binding nomination made as to who will receive the funds. This means the trustees have no discretion at all as to whom they pay the monies to on the account holders death.

This is a crucial difference as it means under UK tax rules, even if the scheme qualifies as a QNUPS, the value of the pension scheme is considered to fall back into the pension account holder’s estate for UK IHT purposes.

If you would like any help with your pension management. Or have any further questions on this topic, please don’t hesitate to contact us.

Client Work | Roald Dahl Story Company & Netflix Acquisition Deal, 2021

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You might have heard… Netflix recently acquired the iconic Roald Dahl Story Company (RDSC). This is incredibly exciting news. As part of the tax advisory team for RDSC and the wider Dahl family, the team at Everfair Tax were honoured to help bring about this remarkable partnership deal which will help bring some of the world’s most loved stories to current and future fans in creative new ways.

With family members resident in both the US and the UK – and the wish to devote a significant part of the proceeds of the sale to fund a charitable trust focused on the areas of children’s health, anti-hate and anti-racism – this was a very interesting and exciting project to be a part of.

It was great to be able to help guide on the tax consequences and ensure that everything was dealt with in the most tax efficient manner. We took into account the tax rules of both countries, the individual needs and wishes of different parts and different generations of the family and aiming to maximise the amount available for charitable work.

We look forward to continuing to work with the Dahl family and seeing these fantastic stories take on new life with Netflix.

How do double taxation agreements work?

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A double taxation agreement is designed to do exactly what it says – prevent double taxation.

It is a treaty between two countries which sets out who gets the main right to charge tax on particular types of income and capital gains.

The other country to the treaty can still potentially charge tax on that income and gains but it would have to allow a credit from the tax that would usually be due for the tax already paid in the other country. Generally this means that you end up paying whichever is the higher of the tax due in the two countries.

Sometimes the agreement does specify that a particular type of income or gains is only taxable in one of the two countries, an example being pension income or a lump sum from a pension scheme in that country. However even then there is usually a part of the agreement that says when the income or gains is not subject to tax in the country with the main taxing rights for example through a claim to the remittance basis, then the other country can still charge tax as there is no double taxation.

US treaties also contain an extra specific carve out known as the savings clause allowing US citizens to be taxed as if the treaty did not exist in most cases. What this means that even if the treaty says the income is only taxable in the UK on a UK resident, it is also taxable in the US but the US would have to give credit for the UK tax due on the same amount. In that way double taxation is still avoided.

In the more unusual circumstances where an individual is considered resident for tax purposes in both countries then before the treaty can even be considered you will need to determine where the person is resident for this purpose. This is done using a four part test set out in the agreement and you go through the four tests in order, stopping when one of the tests is met. The tests include where you have a home, where you main social, family professional and economic ties are (known as the centre of vital interests), where you physically spend more of your time and which country you are a national of.

Double taxation agreements are very useful to avoid being taxed twice on the same income in two places but can be difficult to understand and need to be applied correctly to get the right outcome.

The UK in particular are looking more and more closely and claims to foreign tax credits to ensure they are allowable under the terms of the various double tax agreements they have entered into.

Takeover Confirmed: Revisiting the Biden Tax Policy Proposal 2021

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Here, we’re revisiting the Biden Tax Proposal, now that his administration takeover has been confirmed. How will it impact Capital Gains Tax, as well as Estate and Gift Tax.

If you’d like to read this later, you can download the PDF copy here:

Now that the US has a new president, there will inevitably be a lot of change for US citizens, both in the US and those living and working abroad.

With an evenly split senate, it may be easier for Biden to pass some of his proposed legislation that would have been impossible if there was a republican majority. Even a small majority in a vote can make life easier for him.

When reviewing the Biden taxes & policy change, two of the most pertinent changes could be those planned for Capital Gains Tax and Estate Planning.

Biden Tax Policy: Capital Gains Tax changes

Capital Gains Tax will change from a flat 20% to being taxed in line with income rates which are proposed to increase from 37% to 39.6% for the highest band (more than $400K).

It is unclear whether this increase in Capital Gains Tax includes the additional 3.8% tax applied to net investment income. If this is the case CGT could be as high as 43.4%.

However, there are some practical things you can do to reduce your Capital Gains Tax liabilities.

  • Long-term investments: If you hold stock for a long time you will pay less CGT so selling early may not be as beneficial as it seems.

This can also mean anything bought more than a year ago can be considered long-term so ensure you check the trade date of the purchase to sell at the most beneficial time.

  • Tax-deferred retirement plans – Investing in a retirement plan means you won’t have to pay immediate taxes. It is also possible to use this plan for investments which won’t be subject to CGT.
  • Offset gains with capital losses – Essentially if you sold two stocks – one at a loss and one at a gain – the loss of one can be offset against the gains of another therefore reducing the CGT owed.

Biden Tax Policy: Estate and Gift Tax increase

The Estate and Gift Tax rate will possibly increase from 40%-45% and the tax exemption rate will decrease from $11.58m to $3.5m and $1m for lifetime gift tax exemption.

Essentially this restores the levels back to those of 2009. There are, however, some ways of taking advantage of the allowances to reduce the tax owed.

  • Double-up – Married couples (or civil partnerships) have the same allowance each but by combining they are able to gift up to $30k of property tax free, per year.
  • Gifts to spouse – If your spouse is a US citizen all gifts are tax free, but if they are not a US citizen the limit of tax-free gifts is $157k.
  • Timing is everything – The gift allowance runs on the calendar year, and you are unable to carry over allowance from one year to another. However, you are able to spread a large gift over multiple years to reduce the gift tax due.
  • Gifts to children – Gifts can be left in trust to your children, but they must own it outright before they are 21 years old. If they are under 18 there has to be an adult to manage the property for them.

We’ve revisited Biden Taxes – so what next?

With the situation being so uncertain, it is likely you will be watching the development over the next few weeks with bated breath. Instead you could start the conversations and find out what your options are and how such changes could affect you.

If you think some of these tax changes could affect you, or you would like clarification, give us a call today and we will offer advice on what the best plan of action could be for you at this time.

Renouncing US Citizenship, Taxes & Cost Benefits

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Renouncing US citizenship when abroad, for example in the UK, has its benefits. The benefits to taxes and the general cost is something we’re often speaking to our clients about. For this reason, we thought we’d share our experience and advice in more detail for you here.

If you’d like to read this later, you can download the PDF copy here:

As the system currently stands, US citizens, and in many cases people holding a US “green card” have to file an annual income tax return with the IRS. This is regardless of where they are living and working.

This can be a costly and time-consuming exercise. But for those with no plans to move back to the US, the possibility of renouncing US citizenship might help. There a many attractive prospects and benefits to jumping off the US tax law carousel.

However, this is a decision that should not be taken lightly. There are many non-tax issues that should be considered before going ahead.

Although the US Embassy is currently closed due to Covid-19 restrictions, you could use this time to consider whether this would be the best financial and personal option for you.

Renouncing US citizenship in the UK – how do I do it?

When abroad, renouncing US citizenship is a relatively straightforward process. It is not necessary to engage an immigration lawyer to ensure that everything is done correctly. Although some people may wish to do so to give themselves some extra comfort.

When renouncing US citizenship, you must follow these steps and requirements

  • Complete the relevant forms prior to the appointment and gather all the relevant documents of proof of citizenship, name changes, divorce and marriage with you.
  • Submit the completed forms and copies of the required documents to the US Embassy by email.
    • If the Embassy is happy that these are in order, they will schedule an in-person appointment.
    • If the Embassy is not satisfied with the forms and documents provided, they will request changes to be made.
  • Have a passport proving citizenship of another country. Without a second passport citizenship cannot be renounced.
  • Complete a form with your last US tax return which includes a personal balance sheet (i.e. a schedule of all assets and liabilities).
  • Pay the renunciation cost of $2,350 USD.
  • As part of the process if you meet one of three criteria you may also be liable for an Exit Tax:
  1. If your average income tax liability over the past five years is more than the specified amount (for 2020 this was $171k, and is adjusted annually for inflation).
  2. If the aggregate net value of your global assets less global liabilities is in excess of $2m.
  3. If you fail to certify five years of tax compliance to the US.

If you meet any of these criteria you will be treated as if you disposed of all assets on the last day of your US citizenship and will be taxed according to the Capital Gains Tax requirements. In addition, you may be deemed to have received a full distribution from certain trust or deferred compensation arrangements (such as pension plans) of which you are a beneficiary. Finally, complex rules will apply that may result in a tax charge on future gifts or bequests to US persons.

However, there are some exemptions to the Exit Tax tests listed above. Firstly, some people born with dual nationality, and citizens under the age of 18.5 years old are exempt.

Similar rules apply to individuals who relinquish their lawful permanent residence (“green card”) status if they have held their green card for more than eight of the previous fifteen years, although the administrative process of relinquishing a green card is much less involved.

Pros and cons to renouncing US citizenship

With any potentially life-changing decisions there are pros and cons and these need to be considered very carefully.

Pros

  • Simplification of future tax reporting and liabilities.
  • No longer necessary to certify your status as a US citizen with financial institutions resulting in more flexibility around investments and potentially reduced banking or investment costs.
  • You only have to report to the US certain income which derives from sources within the US.
  • Any interest earned on deposits with US banks will be tax-free in the US.

Cons

  • The administrative cost as well as the Exit Tax provisions described above.
  • Renouncing your citizenship may make it more difficult to get a job in the US.
  • Unable to vote in US elections.
  • You may need a visa to visit the US for any purpose not covered by the ESTA program.

Renouncing US citizenship cost

  • You must pay the renunciation cost of $2400 USD
  • Further financial considerations and clauses are included above

Are you are considering renouncing your US citizenship to simplify your tax affairs? Why not give our team at Everfair a call and we can talk you through the process. Hearing your specific circumstance, we can share how it would benefit you and what else you should consider.

How will Biden’s administration impact you? | US Citizen in UK

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Read the full article now, or download this PDF copy to read later.

US citizen in UK? What might a new US administration mean for you?

If 2020 hadn’t been challenging enough with the uncertainty surrounding the economy and the global pandemic there was a contested US election to top it off. With Trump’s law cases slowly being thrown out, it seems inevitable that come January 20th there will be a new president in the White House, and a new administration in office.

Although until the day the administration officially changes, and legislation is actually put in place we can only speculate on how this new administration will affect US expats living in the UK.

Possible tax changes on the horizon | US citizen in UK

However, as part of the Democrat election campaign some of their proposed tax reforms have been considered radical as they pretty much reverse changes made in 2017 by the Trump administration and will primarily affect high earners – at home and abroad.

The key proposed changes for Americans abroad include:

  • Income Tax increase – To increase the highest rate of tax from 37% to 39.6%. This would bring the top rate of income tax in line with Obama-era tax rates.
  • Capital Gains Tax changes – Long Term Capital Gains and Qualified Dividend tax rates to be scrapped for those with income over $1m. This would mean a change from the existing 20% rate to to bring it in line with ordinary income rates.
  • Estate and Gift Tax increase – To increase the top tax rate from 40% to 45%, and to decrease the tax exemption from $11.58m to $3.5m. There is also a proposal to repeal rules that provide for a step-up in basis for inherited assets, which could have a significant impact on taxpayers inheriting appreciated property.
  • Corporation Tax increase – The proposal would increase the Corporation Tax rate from 21% to 28%.
  • Global Intangible Low Tax Income (GILTI) changes – The legislation currently in place allows a 50% deduction for foreign registered companies that are subsidiaries of US corporations. The proposal is to repeal this allowance and therefore increase the GILTI tax rate from 10.5% to 21%. The deduction did not apply to individuals owning foreign companies, so would only affect those whose business interests are held by US corporations.
  • Child Tax Credit and Dependent Care Credit increases – These proposals would increase the Child Tax Credit from $2,000 to $3,000 ($3,600 for children under the age of 6), with the full amount eligible for a refund. In addition, the proposal for Dependent Care Credits would see the maximum claimable amount increased to $8,000 for one child or $16,000 for two or more children.

Such changes, if passed, could have a significant impact on the amount of tax you are due to pay to the US government.

How much difference can Biden actually make?

Ironically, winning the election was the easy part for Joe Biden, as once he takes his place at the White House the hard job of getting legislation through Congress will begin.

Depending on the outcome of the Georgia run-off elections, it is possible that while Democrats will have control of the House, they may still be the minority in the Senate. For any significant changes to be approved, the incoming President may need to secure an element of bipartisan support, so do not be surprised if some of his proposals fall by the wayside or get heavily watered-down.

What next?

With the situation being so uncertain you could be tempted to ‘wait and see’ but it is better to be prepared and start the conversations earlier rather than later. If you think some of these tax changes could affect you, or you would like clarification, give us a call today and we will offer advice on what the best plan of action could be for you at this time

What does a US Expat need to do at year end? Advice from international tax accountants

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We’ll share our professional recommendations with you now. Alternatively, you can download the PDF copy of this information, so that you can read in your own time.

If you are a US citizen you will be aware that as we are reaching the end of the financial year (December 31) it’s time to start thinking about your tax return for 2020, even if you live abroad.

Although it’s not normally due until April 15, or June 15 for those taxpayers living outside the US, last year’s filing deadline was extended to July 15 due to the pandemic. To date, no such extension has been announced for the 2020 Federal tax return season. State and local filing deadlines vary from State to State.

However, whether April or June, it’s never too soon to start preparing the information that you will require to ensure that the process runs smoothly. As usual, if you can’t meet the April or June deadlines, there is the option to file for an extension of time.

What do I need to do?

There are various pieces of information and documents that you will need to gather and prepare, if you are a US citizen residing abroad, as well as completing a tax return form. This information will include:

Travel

A schedule of the countries (including USA) you have visited with dates of arrival and departure

Wages, salaries and compensation

All official documentation (e.g. W-2, P60, P45, payslips, etc.) as well as any self-employed records of income and expenses.

Interest and dividend income

This is either from a foreign bank, domestic bank or other financial institution.

Any other income

This could include income from partnerships, trusts, or other business interests that you have.

Interest, taxes, and other deductible expenses paid

As a US citizen, mortgage interest, property taxes, and State income/sales taxes can count as a deductible expense. Other deductible expenses can include charitable contributions, alimony, and medical expenses.

Foreign housing expenses

You may be eligible to deduct the cost of your accommodation outside the US.

Dependents

You must provide information including, if available, Social Security Numbers (SSN) or Individual Tax Identification Numbers (ITIN) of your dependents.

Foreign financial accounts

You will need to provide information regarding your foreign bank and other financial accounts.

Foreign trusts, companies, and partnerships

If you have an interest in a foreign entity such as a trust, company, or partnership, you may need to provide detailed information about that entity.

The sooner you start to gather the correct information the better, and if you are unsure what applies to you or what can be counted as a deduction ,,contact your tax specialist who will be able to guide you.

Year-End Planning

In addition to preparing for next year’s tax filings, you might wish to consider a few simple year-end planning exercises to make your tax affairs run more smoothly:

  • Paying any foreign taxes due before the end of the year – the default US tax rules on claiming credits for foreign taxes paid are to consider taxes actually paid during the calendar year. So, paying before the end of the year will mean the the credit will be available on the current year’s tax return.
  • Realising capital losses – if you have realised capital gains for the year, you may also wish to consider realising any potential capital losses to minimise your tax exposure, as losses can be carried forward but not backwards. If this is something that you are keen to explore, you may wish to consult your financial adviser (if you have one) before taking any action.
  • Consider whether to make other deductible payments, such as charitable donations and State tax payments during the current year.
  • With a new Administration set to take over at The White House in January, there is abundant speculation around tax law changes that might be implemented, including reductions in gift and estate tax exemptions, and increases in income tax and long term capital gains tax rates. Whilst none of this can be predicted with any degree of certainty, you may wish to address how any changes might impact you.

Do the new laws affect you?

New US tax laws were passed in December 2019 extending a number of expiring provisions. Additionally, some new tax changes take effect from 2020 including:

  • Changing the age for required minimum distributions from retirement plans from 70.5 years to 72 years.
  • Repeal of the maximum age for traditional IRA contributions.
  • More generous provisions for deducting charitable donations, including a repeal of the AGI limitation and an ‘above the line’ deduction of up to $300.

If you are uncertain which of these breaks could benefit you or your family when you file your US tax return, here at Everfair we are always available to advise you based on your personal circumstances.

Do I need a tax specialist?

Although as a US citizen living abroad it is not necessary to engage a US tax specialist to help file US tax returns, it will definitely save you time and give you peace of mind, and it could minimise the amount of tax you could ultimately pay by ensuring all the tax breaks, exemptions and deductible expenses are taken into account, as well as reducing your risk of double taxation.

Obviously the more time, stress and tax saved will vary on your personal circumstances and how complex your financial situation is.

For peace of mind, and a stress-free US tax return, why not ,,contact us today and ensure your tax return is as accurate and as beneficial for you as possible.

IR35 changes due to come into effect from 6 April 2021.

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Do you know what the rules are and how they affect you and the businesses you provide services to?

Delayed by 12 months as a result of the COVID-19 pandemic, changes to the rules for individuals who provide professional services through certain third party entities, known as IR35, are due to come into effect from 6 April 2021

A recent survey of 2,000 of individuals providing services through a limited company, conducted by FreeAgent the cloud base accounting software company, highlighted that more than 57 percent of responders did not know what IR35 was. It is important in the light of these upcoming changes for contractors operating in this way, and the business that employ them, to be aware of the rules and their respective responsibilities under them.

The IR35 rules have been with us for some time now, having originally been introduced to combat a problem seen by HMRC where individuals set up vehicles through which to provide their services that allow them to reduce their tax and more importantly national insurance liability. It was felt that these arrangements allowed people to reduce their tax liability, but from a day to day perspective they operated in the same way and were being treated no differently than employees of the company.

Under the IR35 rules, individuals providing their services to private sector companies through a third party entity, are required to assess the arrangements they had with their client against a range of criteria set out by HMRC. These then determine if the arrangements are in essence an employment relationship. Where there is an employment relationship, the income from that contract is subject to a deemed employment income calculation on which employer and employee national insurance (NIC) and PAYE is due.

From 6 April 2021, contractors who provide services to public sector organisations, medium or large sized organisations with more than 50 employees, turnovers in excess of £10.2m or a balance sheet total of £5.1m, or who work through an intermediary such as a personal service company (PSC), will have a responsibility for declaring the employment status of contractors they engage for tax purposes. Under the new regulations, the employing organisation is now required to file a ‘status determination statement’ along with the reasons for their decision.

Should a company decide that a contractor is employed for tax purposes, they or the agency supplying the contractor, is liable for deducting and submitting to HMRC the relevant tax and NIC payments, before they pay the contractor. If they determine that the off payroll working rules do not apply, the contractor will remain responsible for meeting their tax obligations.

However, a status determination can be disputed through their hirer’s status disagreement process. For this, a contractor will need to explain to the hirer why they are challenging the decision and the organisation will have 45 days to respond. If they do not respond within the 45 days, then the organization becomes responsible for the tax and NICs.

Businesses outside the UK that use a third party entity to provide the services of a consultant based in the UK, will not be affected by these rules, providing they would not be considered to have a branch or permanent establishment in the UK

When the business to whom the services are being provided do not fall within the definition of a medium or large enterprise, or are based overseas as described above, then the position will remain as it is now and the provider of the services will need to determine whether IR35 applies to the arrangements and then calculate any deemed employment payment accordingly.

The lack of general awareness of the rules would seem to highlight the potential that these rules are not being applied properly in many cases. The HMRC guidelines state that: “It is also possible that you will pay additional income tax and NICs if you had not previously been applying the off-payroll rules (IR35) correctly.” It has also been estimated that the IR35 legislation could reduce a worker’s net income by up to 25 percent. However, HMRC will not use information resulting from these changes to open a new enquiry into earlier years, unless “there is reason to suspect fraud or criminal behaviour.”

Another recent survey by recruitment firm Harvey Nash, showed that one fifth of firms are planning to stop using contractors as a result of the IR35 legislation. A spokesperson from the freelancer industry body IPSE has also suggested that self-employed confidence levels are now at an all-time low, further highlighting the need for the government to better inform those most affected by the potential changes. The Chancellor has indicated that these rules are ripe for a wider overhaul and hopefully, that will lead to a simplification and therefore better understanding of, and compliance with, the new rules so that there can continue to be a flexible workforce.

For further information on the new IR35 legislation or any other tax query, please contact our dedicated team on 01932 320800 or email info@everfairtax.co.uk.

Trump and Biden tax policies – how might they effect taxpayers?

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How might Trump and Biden tax policies impact on taxpayer’s paychecks, tax returns, investment portfolios and savings?

With the US presidential elections now on the horizon, former Vice President Joe Biden, the Democratic presidential nominee, and President Donald Trump from the Republican camp are citing their final pre-election manifestos ahead of the 3 November election. Tax issues are high on the agenda for both, so it is worth taking a look at their respective proposals.

According to a number of commentators the Biden policies can be viewed as being that if you’re rich or if you’re a corporation, you’re going to pay more tax. If you’re middle-income or lower-income, you’ll pay either what you pay now, or you’ll pay less depending on your specific circumstances. The details of the Trump administration tax plans are sketchy and the mandate appears to be around cutting taxes, but without being specific as to how. So, what do we know about their current proposals and how may they potentially impact a taxpayer’s paycheck, investment portfolio, tax return, pension and savings?

Social security and Medicare

The first impact of each tax proposition will be seen in an individual’s take home pay. Currently US taxpayers are liable to have a 6.2% Social Security payment deducted, with the employer match funding an additional 6.2%, which combine to make a 12.4% payment up to the first $137,700 in earnings. Both parties also contribute 1.45% each for Medicare expenses.

For workers earning less than $104,000 a year, Trump has currently allowed employees to defer their 6.2% payment between September and December, resulting in the employed receiving a larger paycheck now. With the tax due to be paid next year, in addition to the returning payroll taxes, he is now pushing to have a bill passed that cancels the need for the deferred taxes to be repaid. The Biden policy in this area, is to re-start the 12.4% Social Security tax for those taxpayers earning over $400,000.

Income tax rates and allowable deductions

In another push to hit the US’s top earners, Joe Biden is also suggesting “raise(ing) taxes for anybody making over $400,000” in addition to increasing the top income tax bracket from its current 37% to 39.6%. Stating strongly that “The very wealthy should pay a fair share. Corporations should pay a fair share,” Biden has said that he will not raise taxes for those with an income below $400,000; but the new rates would result in 0.9% average decrease in after-tax income. For those above the $400,000 watershed, these changes would result in an after-tax income drop of 17.7%.

Biden has also stated that he will cap the value of itemized deductions on tax returns at 28%, even if a taxpayer comes under a higher rate tax bracket. Currently taxpayers may choose whether to use a standard deduction format, or an itemized format that includes mortgage interest, medical expenses, state and local taxes expenses and charitable contributions. 43% of taxpayers who earn between $50,000 and $100,000 chose to itemize their deduction, against 80% of the more affluent taxpayers who bring in an annual income of between $100,000 to $500,000. The view here is that this would avoid him having to choose which tax deductions should be increased or decreased.

Other current tax deductions are also being targeted by Biden; and he proposes to limit them for the more affluent, but expand them for the lower rate taxpayers. An example of this is a proposed $15,000 limit on first time homebuyers credit and an increase in tax credit for children from the current temporary rate of $2,000 to $4,000.

In the absence of specific tax amends from the Trump camp, the White House budgets for 2019 through to the 2021 tax year are assuming that the current tax rates will become permanent. Trump has however indicated that he is also looking at helping middle income families with a tax cut.

Investment portfolios

But how may the different policies affect an investment portfolio? Trump has already said that he is ”looking very seriously” at cutting capital gains tax. Another potential change he has suggested is to index the basis for capital gains tax, so that this will adjust in line with inflation and an individual would only pay gains tax on appreciated value. And, he is also proposing to widen the ‘opportunity zones’ that provide investors with preferential tax rates. This programme was part of his Tax Cuts and Jobs Act and was created to encourage investment in “economically distressed” areas.

In contrast Biden wants to set CGT for taxpayers that annually make in excess of $1 million at 39.6% – it is currently set at 20% with an additional 3.8% for net investment income tax.

Retirement accounts

In setting up the SECURE Act, President Trump has already instigated a number of provisions to enable individuals to strengthen their retirement security across the United States. And, although he has not currently announced any ongoing tax proposals for retirement savings, the ‘Setting Every Community Up for Retirement Enhancement’ legislation allows more employers to provide annuities as a 401(k) investment option. This law also raised the minimum retirement age for pension distribution from age 70.5 up to age 72, and provides tax credits to businesses with policies to automatically sign employees up to their retirement plan.

As an alternate option, Biden’s retirement planning proposal calls for a refundable tax credit of 26% to apply to each dollar deposited into an IRA or 401(k), and a tax credit deposited into the individual’s retirement account will then match fund the contributions. Currently, 401(k) contributions are taxed at the higher rates. Therefore, a flat credit could be of more benefit and have a larger impact for lower-income earners, whilst lowering the benefits for higher-income earners. But, Biden’s proposal will not change the contribution limits or affect the Roth IRA rules, where after-tax money goes into the account and may then be withdrawn tax-free.

Impact for internationally resident US citizens?

In terms of deciding how to cast your vote in November, the policies set out above are likely to be very relevant. However, for internationally resident US citizens the actual cash impact of these proposed changes are likely to be minimal. This is because of the generally higher rate of income taxes in the UK compared to the US and the effect of the double taxation agreement.

For assistance in managing your tax compliance and reporting obligations, please contact our dedicated team on 01932 320800 or email info@everfairtax.co.uk.