There is a famous saying in French, “Plus ça change, plus c’est la même chose,” which means the more things change, the more they stay the same.
Two months ago, the United States held its midterm elections for the entire House of Representatives and 34 Senate seats.
The Democrats barely control the Senate, and the House of Representatives is controlled by the Republicans by a narrow margin.
So, what do these electoral results mean for US tax legislation going forward for the next few years?
Background: In 2021, the Democrats attempted to pass major tax legislation, but Sen. Joe Manchin and Sen. Kyrsten Sinema, were not willing to go along with their fellow Democrats, and no changes were enacted.
Before the elections, the Republican Party, anticipating a “Red Wave,” which would have allowed them to pick up 30 to 40 seats in the House and have a majority in the Senate, issued ambitious tax-reform proposals.
While the Republicans made strong pronouncements about the need to extend the Trump Tax Reform (TCJA), those plans obviously will not materialize.
From my vantage point, I do not expect much to change when it comes to US tax laws in the coming two years.
So, what are some issues that Americans living abroad might have been concerned about but will continue to be stuck in a deadlock?
Raising the US
corporate tax rate?
This is unlikely to happen because the Republican House of Representatives will not agree to such an increase. That is good news for US citizens living abroad who own corporations since a raise in the US corporate tax rate to 28% would expose numerous people to GILTI and Subpart F.
Taxing venture
capitalists?
The Democrats have been trying for some time to tax venture capitalists on their profits from gains from their investments as ordinary income and not as long-term capital gains. The Republican House of Representatives combined with Sinema will not allow such a provision to pass.
TCJA provisions
impacting individuals, which will expire
on December 31, 2025?
Twenty-three provisions from the Tax Cuts and Jobs Act relating to individual income taxes will expire, meaning most taxpayers will see a tax hike unless some or all provisions are extended. Some of the most impactful provisions scheduled to expire include the TCJA’s reduction of individual income rates, increased child tax credit, the increased AMT exemption, and phaseout threshold, and the increased standard deduction.
The individual income-tax code is effectively scheduled to return to what it was before the TCJA, meaning personal exemptions, the overall limitation on itemized deductions, uncapped state and local tax deductions, and many other miscellaneous itemized deductions will return.
Additionally, the qualified business income deduction, which allows pass-through businesses to deduct up to 20% of their income, and the increased estate- and gift-tax exemption will also expire.
The combination of a Democratic-controlled Senate and President Joe Biden being in the White House until at least January 2025 makes it highly unlikely that any of these provisions will be extended.
In short, in the coming two years, you can turn your attention to the sports or dining pages in the newspaper since it is unlikely that much will be happening with US taxes in the economic section of your favorite publications.
One more law
– what’s in store?
While this article focused on tax issues that followed the US elections, there was a bill that was signed in August 2022 that did contain provisions regarding US income taxes. The bill was titled The Inflation Reduction Act of 2022 (IRA).
However, as opposed to the TCJA, there were no direct provisions that affect US citizens living outside of the US.
Nonetheless, the IRA increases the Internal Revenue Service budget with appropriations of approximately $79 billion of new funding available during the next nine years. More than one-half of the appropriation is to be spent on enforcement activities.
Another portion is to be spent on improvements in operations and technology. These provisions could lead to more audits and overall scrutiny for US citizens living abroad.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
philip@pstein.com
The writer is founder of Philip Stein and Associates, US CPAs, Jerusalem.