First of all, I would like to wish all of our clients, stakeholders, and followers a happy New Year.
As with each electoral cycle in the United States, we need to begin thinking about the possible tax changes that we might see.
Almost infamously, as can be expected, the new president, Donald Trump tends to require us to read between the lines on his intentions, and in some situations, even guess.
Below, we’ll go over some widely expected changes to the US tax system, amongst others which are simply my personal predictions. The likelihood change below, is my personal opinion only.
Extension of the TCJA
Likelihood - 90%
For those unfamiliar with the term, the TCJA stands for the Tax Cuts and Jobs Act. This was Trump’s flagship tax policy in his first term as president.
The main changes under the TCJA were the:
Doubling of the estate tax and gifting threshold
Removal of most itemised deductions
Large increase to the standard deduction
Suspension of casualty losses as a deductible cost
General tax cuts
This is only a brief list amongst many changes made under the TCJA. In addition, the system of GILTI taxation was introduced (Global Intangible Low Taxed Income). This system had a profound effect for those US expats in New Zealand and worldwide whom owned a business, whereby retained profits in a company could be subject to US taxation.
The intention of GILTI was to prevent large US corporations from hoarding cash overseas (ie in Ireland).
The TCJA was due to sunset in 2025, meaning most rules reverted back to their status prior to the TCJA being enacted.
Given that this was Trump’s flagship tax policy, we’re highly likely to see this return.
Reduced taxes on crypto transactions
Likelihood - 70%
Currently, cryptocurrency transactions are in effect, not recognised as a currency transaction by the IRS. Instead, they are viewed similar to a capital asset.
For example, if you bought 1 NZcoin and it was worth $1, then a week later the price increased and 1NZcoin was now worth $2, and you used this to purchase a coffee, then a tax liability may exist on the $1 gain in value of the coin.
Given that Elon Musk, a staunch supporter of cryptocurrency, has been appointed as an advisor to Donald Trump, we should expect to see more favourable tax treatment of crypto transactions.
End of “Double Taxation”
Likelihood – 10%
During the election campaign, Donald Trump made the claim that he will “end double taxation”. This is of course a very broad term, and typically for Donald Trump, no other detail was provided.
For the most optimistic, this may have meant the end to citizenship based taxation. For the less optimistic, it may have been interpreted as an empty campaign promise.
My personal opinion on what to expect is somewhere in the middle. Of course, it could be argued that I may have a biased opinion on this, given my area of expertise, however it also does give me an insight into the general direction that the IRS takes on certain matters.
As a reminder, the US ties tax residency of the United States, to US citizenship. This means that a US citizen residing anywhere worldwide, is required to file a tax return annually to the IRS to report worldwide income (assuming filing thresholds have been met).
On a geo-political level, the US is almost infamous for the widespread collection of data in both the US and worldwide. This serves a number of purposes, such as anti-money laundering, crime prevention and general security. As part of the US system of citizenship based taxation, the US gains information on both US and in some cases, non US citizens on a global basis.
By ending citizenship based taxation, the US will lose the ability to collect this information, which could damage the country’s ability to achieve its aims with regards to data collection. In addition, it could be argued that there is little political will in the United States, to end the taxation of US citizens who have moved overseas.
The US voting system consists of 538 electoral college votes, of which overseas voters consist of roughly 10. This means that overseas voters can only have a fairly minor impact on a US election, leaving little incentive for politicians to “woo” overseas voters.
This is also not considering the patriotic element of politicians seen to be promoting the interests of overseas US citizens.
Frankly, the taxation of overseas US citizens collects only a tiny minority of US tax revenue, however the data gathered is likely the key goal.
In addition, having such a widespread tax system covering all US citizens worldwide, does help prevent tax evasion by transient US citizens, or those residing in the US with overseas interests.
On a political level, Donald Trump has made trade, immigration, and the economy his key priorities during his term. Given the challenges he may face (as any presidency does), the challenge of ending citizenship based taxation may well be low on the list of priorities, given the general apathy towards the issue amongst US politicians.
For the reasons above, I believe Donald Trump may struggle to get any change which ends citizenship based taxation, past US lawmakers.
But, I do believe we may see some other measure to “end double taxation”.
As a personal prediction, I anticipate we may see a new credit introduced, or a similar deduction. I would expect this to be an amount, possibly $1000-3000 of non-refundable tax credit for overseas US citizens.
In practice, how I would expect this to work (assuming a credit of $2000), is that in the instance an overseas US citizen has a tax liability of (for example) $1500, then this credit would be applied to offset the tax liability. For the few US citizens in New Zealand who do owe tax to the US, this would offset the liability for more than half (based on our own client base).
A system such as the above would help ensure Donald Trump is able to maintain a campaign promise, reducing the likelihood of a tax liability for many, whilst avoiding the more complex and difficult process of ending citizenship based taxation entirely.
New Taxes on Selling Goods Into the US
Likelihood – 70%
Currently, a New Zealand based company without any permanent establishment in the US, is able to sell goods to the US with no tax liability in most cases (excluding sales tax in some instances). Whilst import tariffs exist for certain goods, generally it is fairly easy to make income by selling to US consumers.
Donald Trump has made it a priority to tackle the import of goods, through higher taxes and tariffs. Whilst it would be complex and difficult to enforce, I believe it is likely we may see new taxes which apply on the income generated by US sales, regardless of whether the foreign company has any establishment in the US. This may cause conflict with double tax treaties, so exactly how this may work is an unknown.
Summary
Of course, the entire above article is only a prediction, and none or all of it may actually happen. However, I am frequently asked prior to any election, which president stands for what, and the tax impact it could have for NZ US citizens.
As we run down just a few days to the inauguration, time will tell on any tax changes for US citizens living in New Zealand.
If you’d like to discuss any US tax questions, or understand US taxes in New Zealand better, book an appointment today through our contact form, or info@usatax.nz