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US tax reform and internationally mobile employees

US tax reform and internationally mobile employees

Ablean Saoud and Terry Hoban analyse the proposed US tax reform Bills, and their potential impact on employees moving to or from the US.

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On 2 December 2017, the United States (US) Senate passed its version of the Tax Cuts and Jobs Act, H.R. 1. This Bill has differences from the tax reform bill passed by the House of Representatives in November. In order for any of the proposals to become law, the two chambers will need to pass identical text.

The proposed legislation addresses taxation of individuals, and if enacted, could impact assignees moving to and from the US. We have analysed some of the key elements, and differences, of the two Bills, and their potential impact on mobile employees.

Most of the Senate Bill’s proposals relating to individual income tax would expire after 2025.

Some of the proposed measures could increase the US federal income tax payable by mobile employees, and others could reduce it. Employers should therefore carefully review their mobile employee population in order to determine the likely overall cost impacts, particularly regarding employees who are covered by a tax equalisation or protection arrangement.

Measures that could reduce US tax payable

  • Individual income tax rates – both Bills increase the taxable income threshold for the top rate of income tax to apply, up to USD 500,000 for a single taxpayer, and to USD 1,000,000 for a married couple filing a joint return. The House Bill has a top rate of 39.6 percent, and the Senate Bill a top rate of 38.5 percent.
  • Standard deduction – both Bills would nearly double the amount of the standard deduction available to individual taxpayers.
  • Alternative minimum tax (AMT) – the Senate Bill would increase the AMT exemption amounts and phase-out thresholds. The House Bill would repeal the AMT for individuals.

Measures that could increase US tax payable

  • Itemised deduction (state and local income tax) – both Bills eliminate the itemised deduction for state and local income taxes
  • Deduction for state and local property tax – both Bills limit the deduction to USD 10,000 per annum for US state and local property taxes paid.
  • Moving expense reimbursements and deductions – both Bills eliminate the tax exemption for employer reimbursements, and the deduction for expenses incurred by the employee (other than for military personnel).
  • Exclusion for employer-provided housing – the House Bill would limit the exclusion and also phase it out for higher income earners. The Senate Bill would retain the exclusion in its current form.
  • Exclusion for gain on sale of residence – both Bills increase the required time period of ownership and use to 5 out of 8 years, and would allow the exclusion to be available once every 5 years. The House Bill includes a phase-out for higher income earners.

There is more of the US tax reform story to play out yet, but employers should be thinking now about possible impacts on budgeting for 2018 in respect of international assignment costs.

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