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Tax Cuts and Jobs Act: For better or for worse?

Tax Cuts and Jobs Act: For better or worse?

Ablean Saoud, Jessica Steens and Noelle Abella outline six measures that will affect individual income taxpayers as a result of US tax reform.


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US Capital building in Washington.

On 30 January 2018, President Trump gave his first State of the Union Address. The speech was only the President’s second speech to a joint session of Congress and focused significantly on the tax reforms enacted on 22 December 2017. H.R.1, the Tax Cuts and Jobs Act, represents the most comprehensive reform to the United States (US) tax code in over 30 years and it is anticipated to result in up to US$3.2 trillion in tax cuts for American families.

On face value, the reforms seem to “make America great again”, but the devil lies in the detail. To understand if the positive impact of H.R.1 also extends to globally mobile US employees it is important to understand what key measures will impact US individual income taxpayers.

Here are the top six measures that will affect US individual income taxpayers from 1 January 2018:

  • Lower individual income tax rates –  individual income tax rates have been reduced and tax brackets have expanded. The highest marginal tax rate has dropped from 39.6 percent to 37 percent with the threshold lifting for single taxpayers from earnings greater than US$418,400 to earnings over US$500,000; and married taxpayers filing a joint return from earnings greater than US$470,700 to earnings over US$600,000.
  • Standard deductions singular and personal exemptions – the standard deductions available to individual taxpayers has almost doubled.
  • Personal exemptions – Personal exemptions have been suspended. However, taxpayers with dependent children will be able to claim a Child Tax Credit of US$2,000 per dependent child, if the dependent child has a US Social Security Number. Where a child does not have a US Social Security Number, a credit of US$500 is available.
  • Deductions for state and local taxes – the deduction for state and local income tax, plus state and local property tax will be capped at US$10,000 in total.
  • Moving expenses – there will no longer be a deduction for qualified moving expenses and employer reimbursements of such expenses would no longer be excluded from compensation.
  • Miscellaneous deductions – Miscellaneous deductions such as employee business expenses, tax preparation expenses and investment expenses are no longer deductible.

As a result of the reforms, a single person in the first year of an assignment to California and a salary of US$60,000 will experience approximately a 24 percent jump in their total tax costs, with the increase relating largely to the inability to deduct qualified moving expenses.

Couples owning a home in high-tax jurisdictions such as New York in the second year of an assignment and with income of US$250,000 will also experience a rise in their overall tax liability, now needing to pay approximately 11 percent more in Federal, State and City taxes. This is largely due to the cap on deductions for state and local income and property taxes. This situation contrast to a family with two school aged children living in a non income tax state, (e.g. Florida) in the second year of an assignment with income of US$250,000. In this scenario, the family will save approximately 13 percent in tax going forward.

Evidently, the impact of H.R.1 on taxpayers can vary greatly and is dependent on a number of factors including where they live, the size of their family and their level of income. For individuals on assignment to the US, the elimination of a deduction for qualified moving expenses, in particular, will contribute towards increased tax costs in their year of arrival.

It is an opportune time for global mobility program managers to review their assignment policies and ensure that US assignments are structured effectively to consider the changes under H.R.1.

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