For Americans living abroad, Trump’s recent proposal to eliminate ‘double taxation’ on expats is a significant policy shift that could capture attention, no matter your stance on his broader policies.
In his latest tax cut proposal in the run up to the election, Trump stated that he supports the ending of double taxation for overseas Americans. This is widely understood to be a reference to the regime imposed by the US, and only one other country in the world (Eritrea), which means that a US citizen has to pay taxes in the US regardless of whether or not they are residing in the US. The result of this being that an American who is resident outside of the US for tax purposes is likely to be the subject of at least two taxing regimes, which brings with it possible double taxation, double reporting and double the cost related to such reporting.
If the US were to stop taxing its citizens based on citizenship alone, this is likely to create opportunities for Americans living abroad, including the possibility to:
- Invest in a way more suited to the country in which you are resident. For instance, at present Americans living in the UK are advised not to invest in UK ISAs. Whilst these investment vehicles have generous tax advantages in the UK, they can be seen as PFICs for purposes of US taxation, leading to potential penal taxes on US citizens. However, if Americans living in the UK are no longer subject to taxation in the US, it would follow that they would no longer have to worry about investing in a 'US-friendly' way.
- Sell certain assets, which may be subject to preferential taxing rules (for example, in the UK, selling your principal residence), which would ordinarily have been subject to tax in the US despite any reliefs in the country of residence.
- Take advantage of settled trust regimes outside of the US and to consider taking distributions from such trusts. At present it is common to exclude US beneficiaries from family trusts due to a concern about US taxation, which might be removed if US citizen but not resident beneficiaries are excluded from the US taxation regime.
It remains to be seen whether any such changes are extended further to cover estate and gift taxes, which would likely bring with them not only tax savings but also opportunities in relation to succession planning for couples in mixed-marriages, where one spouse is a US citizen and one is not.
Whilst it is usual for tax promises to be made during an election, should this one see the light of day in legislation, Americans living abroad should wish to review their tax affairs to take advantage of new opportunities.
If you are a US person residing abroad and wish to discuss what these changes might mean for you, please seek expert advice to capitalise on potential tax opportunities while avoiding unintended tax liabilities.
