What to expect in the upcoming US election 2024 – Harris vs Trump tax policies

Individual Income Tax rate changes

Harris’ tax policy echoes the Biden administration’s proposals, aimed at increasing taxes on wealthy individuals and corporations and creating an Opportunity Economy. Some of the key changes include:

• Increasing the individual Income Tax rate to 39.6% on incomes above $400,000 for single filers and $450,000 for joint filers. 
• Raising the Net Investment Income Tax (NIIT) from 3.8% to 5% for those earning above $400,000. 
• Increasing the long-term Capital Gains and qualified Dividends Tax rate from 20% to 28% for individuals earning over $1 million.
• Taxing carried interest as ordinary income for those earning above $400,000.
• Creating a “billionaire minimum tax” and imposing tax on unrealised Capital Gains for taxpayers with net wealth exceeding $100 million.

In contrast, Trump’s key campaign promise is to make the expiring 2017 TCJA permanent, so it is expected the current individual tax rates and brackets will remain unchanged after the 2025 tax year.

US expats living in the UK may find themselves facing an overall higher global tax burden, which not only stems from proposed US tax changes but from the recent UK Autumn Budget as well. Last week, the Chancellor announced an immediate increase in Capital Gains Tax to 24% and a raise to the Carried Interest Tax rate to 32% which will apply from April 2025. This will undoubtedly increase the overall tax costs for many dual US/UK taxpayers here.

State and Local Taxes deduction

A cap on the State and Local Tax (SALT) deductions was introduced under the TCJA in 2017. Taxpayers can deduct up to $10,000 of property, sales, or income taxes paid to State and Local governments when they itemise deductions on their US tax returns. The SALT cap is set to apply to the 2018 to 2025 tax years and so will expire after 2025. Prior to TCJA, there was no cap on the SALT tax deduction, so taxpayers could deduct 100% of their SALT paid.

Harris has not specified her plans for the SALT cap at this point. Although Trump has promised to make the Income Tax cuts from the 2017 TCJA permanent, he plans to reinstate the unlimited deduction for SALT paid. Therefore, it is possible that the SALT cap will be eliminated from the 2026 tax year onwards. 

US expats living in the UK generally have lower exposure and are subject to SALT only on certain State source income and gains.

US Estate Tax exemption

Currently, the historically high Estate Tax exemption of $13.99 million for the 2025 tax year ($27.98 million for couples) is set to sunset at the end of 2025. The exemption will revert to the pre-2017 TCJA level, which will be roughly half of its current value ($5 million adjusted for inflation). The high exemption level will likely be permanent under a second Trump administration, but it will not be the case under Harris. The IRS has already confirmed there is no clawback for individuals taking advantage of the increased Estate Tax exemption level during the 2018 to 2025 tax years. This is a “use-it-or-lose-it” opportunity to take advantage of the higher exemption amount before it potentially decreases after the end of 2025. 

In the UK Autumn Budget last week, the UK Chancellor confirmed there will be no change to the 7-year rule for Potentially Exempt Transfers (PETs) in the UK. PETs will be exempt from UK Inheritance Tax (IHT) if the transfer survives for seven years or more. US expats living in the UK will now have a window to observe the result of the US election and decide whether a gift should be made before the end of 2025. This is to utilise the US Estate Tax exemption without triggering IHT in the UK as long as they meet the 7-year rule.

Changes in Corporate Tax rates

Both the Harris and Trump campaigns have proposed changes to Corporate Tax rates. Harris has proposed raising the rate from 21% to 28%, while Trump has vowed to reduce Corporate Tax to 20%, with a further reduction to 15% for companies that make their products in the US. The change could impact US expats who own foreign companies abroad, such as in the UK. 

US shareholders of Controlled Foreign Corporations (CFCs) are required to include Global Intangible Low Taxed Income (GILTI) in their taxable income to discourage businesses from shifting profits offshore. Under the current rules, the effective US tax rate on GILTI is 10.5% after deduction. Taxpayers can claim up to 80% of foreign taxes paid or accrued on GILTI against the US tax due. There is often little to nil US tax due as corporations pay a rate of UK Corporation Tax similar to the US rate and there is an option to claim GILTI high-tax exemption. 

The proposed increase in the Corporate Tax rate to 28% and reduction of the GILTI deduction to 25% by Harris will increase the GILTI effective tax rate from 10.5% to 21%. Although the amount of foreign taxes creditable against the US tax has also increased to 95%, the GILTI high-tax exemption will be eliminated. 

In the UK, Corporation Tax rate sits at 25% (and 19% for the small profits rate), and they remain unchanged after the recent Autumn Budget. It is possible that the UK Corporation Tax may no longer fully offset the increased US tax due on the GILTI income (which is the case if the effective tax rate in the UK ends up being lower than 22.11%), likely translating to a higher US tax due on the GILTI income.

What should you do?

It will be some time before we gain more clarity on tax policy changes under the next President and Congress, making it difficult to recommend specific actions at this stage. Individuals considering making gifts or selling assets subject to transaction-based tax may want to accelerate these to lock in the certainty of the current rules.

We will follow up with further insights once the election results are confirmed and more details of the tax policy are released.

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