Today, we consider and summarize how President-elect Joe Biden’s tax plan can affect US-Australians.
The plan is detailed at https://joebiden.com/two-tax-policies/.
Some of the key features of the plan include:
  1. repealing some aspects of the US 2017 Tax Cuts and Jobs Act for high-income filers (classified as those with incomes in excess of $400,000), including:
    • changing the highest individual income tax rate for taxable incomes exceeding $400,000 from 37% under the TCJA to the pre-TCJA rate of 39.6%;
    • taxing the long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% (from 20%) for income exceeding $1 million;
    • removing the “step-up in basis” (cost base) for capital assets;
    • capping the tax benefit of itemized deductions to 28%;
  2. imposing a 12.4% Social Security payroll tax for wages exceeding $400,000, to be split evenly between employers and employees;
  3. increasing the corporate income tax to 28% from 21%;
  4. establishing a corporate minimum tax on book income for corporations whose book profits are $100 million or higher;
  5. doubling the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5% to 21%; imposing the GILTI rules on a country-by-country basis; and eliminating the GILTI exemption for deemed returns on qualified business asset investment (specified tangible assets used by a taxpayer in trade or business that are depreciable under Section 167 of the IRC);
  6. temporarily increasing the Child Tax Credit and Dependent Credit – from a maximum of $3,000 in qualified expenses to $8,000; increasing the maximum reimbursement rate to 50% (from 35%);
    reestablishing the First-Time Homebuyers’ Tax Credit – up to to $15,000 for first-time homebuyers;
  7. expanding renewable-energy-related tax credits, including for carbon capture, use, and storage, residential energy efficiency, restoring the Energy Investment Tax Credit and the Electric Vehicle Tax Credit, and ending tax subsidies for fossil fuels;
  8. introducing a new advanceable 10% “Made in America” tax credit for business activities that restore production or aim to revalize manufacturing and related employment.
The economic impact of these, and other, proposed changes has been forecast by many institutions.
Politics aside, in summary, here’s what we can expect to see for US-Australians, if these changes are enacted:
  1. for individuals with taxable incomes in excess of USD $400,000, increased Federal tax liability at the individual level by 2.9% (from 37% to 39.6%), with a corresponding limitation in some deductions, and an almost doubling of the Federal capital gains tax liability for income in excess of USD $1 million (20% vs 39.6%);
  2. potentially increasing the cost of employment (and earning) in the US of highly skilled and compensated employees, with the Social Security Payroll tax on incomes above $400,000;
  3. potentially increasing the cost of the business in the US with a 7% increase in the corporate income tax rate (from 21% to 28%) – making it broadly equivalent (or in some cases, higher) to the Australian rates, increasing the effective tax rate for cross-border businesses, and potentially impacting the foreign income tax offset and franking credits for Australian shareholders;
  4. potentially creating significant changes to the GILTI rules, if enacted. It is still early to determine the impact on these rules, but this is something that businesses with offshore intangible income should keep in mind; and
  5. potentially creating significant opportunities and tax credits in the renewable-energy and manufacturing sectors – businesses seeking to expand to the US should explore these opportunities.
If the Republicans retain their majority in the Senate (as of the date of this Alert, North Carolina, and Alaska have not been called, and Georgia is subject to a runoff), it may be difficult for the Biden tax plan to be approved in both Houses at least in the next 2 years, prior to the next “off-year election” when one-third of the Senate is up for re-election.

 

For more information, please contact:

Renuka Somers
Head, US-Australia Tax Desk

Peter Harper
CEO