Will HNW Americans vote with their pockets? How post-election tax changes might affect wealthy Americans in the UK
By Jonathan Gold | 16 Oct, 2020
The countdown to the 2020 US Presidential election is well underway, and whether the outcome will be a blue or a red winner, is still far from certain. What is clear, is that the very different tax positions proposed by the Republicans and Democrats could have a very significant impact for wealthy US citizens.
What are the differences in tax policy?
Jonathan Gold, Executive Director on our US Family Office team, outlines some of the major policies being proposed by Joe Biden and Donald Trump.
Taxes
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Democrat
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Republican
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Income Taxes
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- Return to the 39.6% top rate Income Tax from 37%.
- Abolish the preferential 20% rate for Qualified Dividends for incomes >$1m.
- Limit the benefit of itemized deductions for those earning >$400k.
- Continue to restrict the deduction of State Taxes against Federal taxes meaning >50% tax rate for those living in New York or California.
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- Tax cut for middle-income families potentially by lowering the current 22% tax rate to 15%.
- Second round of stimulus checks (talk of $3.4k for a family of 4).
- During the period 1 Sep 2020 – 31 Dec 2020 employees earning <$104k per year will not have to pay 6.2% social security. This may be forgiven permanently from 2021.
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Capital Gains
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- Raising long term capital gains tax rates to match income tax rates (39.6% + NIIT) for incomes >$1m.
- Eliminate the step-up that exempts unrealised gains at death. Any gain would be subject to rates up to 39.6%.
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- Abolishing the top 20% rate of long-term capital gains and setting the new top rate at 15%.
- A reduction in capital gains tax rates may be difficult to pass and as such this may be achieved by indexing gains to inflation.
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Estate Taxes
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- Reduce the estate tax exemption to $5.49m from the current $11.58m (not adjusted for inflation) per individual.
- 40% Estate tax rate will remain unchanged.
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- Likely to consider the extension of ‘sunset’ provisions beyond 2025.
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Corporate & Business Taxes
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- Elimination of 20% Qualified Business Income (QBI) deduction for higher income taxpayers.
- Increase Corporation tax from 21% to 28%.
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- May reduce corporate tax rate further to 20%.
- Increased allowable deductions including all meals and entertainment costs.
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State taxes
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- New York considers tax hikes but only for ‘Super-Rich’ (Assets >$1b).
- California proposing a Millionaires Tax, putting into place a 1%, 3% or 3.5% surcharge in addition to the top marginal rate of 13.3% for taxpayers with incomes over $1m, $2m and $5m respectively.
- Other states including DC, NJ and PA propose tax hikes, with no specifics revealed yet.
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Among the reforms proposed by the Democrats are the following key policies:
- Rate parity of 39.6% (+NIIT) between long-term capital gains tax and income tax for incomes above $1m
- Reduction of estate tax exemption from $11.58m to $5.49m per person
- Removal of basis step-up upon death
Depending on the outcome of the elections, these reforms may come into effect as soon as 1 January 2021.
What planning can be done now?
- Realise long-term capital gains now
- Gift assets with built-in capital gains tax – shift the basis to the recipient
- Gift excess assets above core requirements
- Use of irrevocable trusts
UK domiciled clients may have additional tax considerations. Before making any decisions, clients should consult their investment and tax advisors to consider their individual circumstances.
London & Capital provides financial planning and tax-efficient investment management strategies for Private Clients, including a team specialising in US-connected clients. If you would like to review your current investments or for some advice on establishing a new investment strategy, please contact the US Family Office team at London & Capital.
