In the recent fiscal year 2025 budget proposal from the Biden administration, there has been a notable push towards increasing tax rates, particularly on capital gains, which could have significant implications for US citizens living around the world.
The proposal introduces a graduated taxing structure, with further modifications to include an increase to a 44.6% capital gains rate. That's up from the current 20% capital gains tax rate from the 2017 Trump tax reform. And as my mother used to say, if someone tells you who they are, believe them (good or bad). If President Biden is successful in his re-election campaign in November, this policy change could be the centrepiece of a restructured tax agenda for his second and final term.
US taxpayers take note: An increase to 44.6% would be the highest federal capital gains rate in US history (at least since 1922)!
These proposed tax increases are part of a wider effort by the Biden administration to roll back Trump-era tax cuts and increase funding for various social programs, including infrastructure, childcare, and education. The aim is to target wealthier Americans to fund these initiatives. It's a plan being rolled out in other countries, most recently in Canada via Justin Trudeau and the Liberal Party's 2024 budget. Although Canada's capital gain rate increase is set to jump to around 33%, not 44.6%!
Imagine John Doe, a US citizen living abroad, who sells his principal residence outside the US for a gain. That gain is almost certainly tax-free in the country John lives in today but is subject to capital gains tax to the IRS for any gain above $250k USD, as he is a US citizen taxed on his worldwide assets and income. Under current US tax law, that taxable capital gain amount is only subject to a 20% tax rate – horrifically unfair to John Doe – but imagine if the tax rate was 44.6%!
Let's also imagine our John Doe, US expat, sells his non-US stock held for retirement and pays a 25% tax rate on the gains in the country he lives in. But because John is a US citizen, nearly another 20% will be taxed on those capital gains and owed to Uncle Sam.
Expats need to stay informed about these potential changes as they could significantly impact their family's financial planning and tax strategies. Moreover, the proposals include measures to enhance IRS oversight and auditing capabilities, emphasizing the need for compliance.
This bit of potentially bad news for US expats is on top of:
- FACTA legislation passed in 2010 under the Obama administration to find non-compliant US citizens living abroad;
- US tax reform passed in 2017 under the Trump administration targeting US expats holding interests in non-US privately held corporations; and
- the recent Inflation Reduction Act of 2023 under the Biden administration, giving the IRS $80 billion and 87,000 new IRS agents to find non-compliant US persons.
It's not hard to see why record numbers of US citizens living abroad are looking to turn in their US citizenship and stop the double taxation nightmare. Both sides of the aisle seem hell-bent on taking turns making US expat John Doe their tax punching bag.
If you are considering renouncing your US citizenship (the right way), you can bid farewell to the potential capital-gain-tax-increase nightmares. No more worrying about Uncle Sam dipping into your pockets while you're alive or after you're gone. But remember: you need to renounce the right way!
In our webinars, we cannot help but stress that renouncing your US citizenship must be done properly. The US has a host of tricks and traps you'll need to avoid (including the exit tax, inheritance tax, travel issues, loss of benefits, and the threat of being barred from the US for life) during the process.
Our team of experienced US lawyers represents between 800 and 1200 US citizens and green card holders who decide to renounce their US status correctly every year on six continents – more than any other firm in the world. We can also help expedite your renunciation process by identifying US embassies and consulates with shorter wait times.
If you or a family member is a US citizen or green card holder considering renunciation, we invite you to visit our dedicated webpage for more information. This page contains links to register for our upcoming renunciation webinars. You can find one tailored to your geographic location in our events listings.
These webinars thoroughly review everything you need to know about the US citizenship renunciation process and available options should you decide to take the next steps.
Originally published May 7, 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.