US Tax Reform: A Cross-Border Perspective for Canadians With Ties to the US and Americans Living in Canada

2018 is almost here, and as 2017 comes to a close, Republicans in the US Congress are racing to pass the widest-sweeping legislation to reform US tax since the 1980s.

Below is a comparison of the Senate and House versions of the tax reform bills, with a focus on four key issues and a discussion of the cross-border implications of the proposed tax reforms.

1) Tax Brackets

  • Senate Bill: Keeps seven tax brackets (the current number of brackets), but shifts some income brackets to lower rates.
  • House Bill: Reduces the number of tax brackets to four.
  • Tentative House & Senate Deal of December 13: The top individual tax rate would be set at 37%, down from the 39.6% proposed in the House and 38.5% in the Senate.
  • Cross-Border Perspective: As these bills effectively lower tax rates, Canadians moving to the US will benefit; while the Senate bill lowers the top tax rate to 38.5% and the House bill keeps it the same at 39.6%, both bills and the tentative deal (37%) change the top bracket so that you’re only caught if you earn more than $1 million of income in a year. Typically, US tax rates are lower than Canadian ones, but further lowering tax rates across the board makes moving to the US even more attractive for Canadians.

2) US Estate Tax

  • Senate Bill: Doubles the US estate tax exemption amount to about $11 million for an individual and $22 million per married couple, with these amounts indexed to inflation through 2025.
  • House Bill: Doubles the US estate tax exemption amount in the same manner, but ultimately repeals it in 2025.
  • Tentative House & Senate Deal as of December 13: The estate tax exemption would double to be about $11 million and would not be repealed, which matches the Senate Bill’s proposal.
  • Cross-Border Perspective: The obvious positive here is that fewer Canadians (and others) moving to the US or snowbirds owning US property will be affected by the estate tax with such high exemption amounts. However, Canadians who are moving there or snowbirds who might still buy US property shouldn’t get too comfortable: even with estate tax being less of a concern, there are other issues to be aware of when purchasing property in the US. As such, carrying out US estate and financial planning is still a necessity for Canadians with ties to the US. It’s also important to note that when the Democrats eventually get back into power, estate tax exemption amounts may very well revert back to the current (or even lower) levels.

3) Permanent Corporate Tax Rate Cut

  • Senate Bill: Delays the significant corporate tax rate cut from 35% to 20% until 2019, which helps the bill’s immediate deficit impact.
  • House Bill: Immediately reduces the corporate tax rate from 35% to 20% in 2018.
  • Tentative House & Senate Deal of December 13: Immediately reduces the corporate tax rate from 35% to 21% in 2018.
  • Cross-Border Perspective: This tax cut would likely make doing business in the US slightly more attractive for Canadians. The rate cut may also be a big win for Americans who are more than 50% shareholders of Canadian companies as it could lead to an exemption from the punitive tax on income that is characterized as “Subpart F income” (investment income, rents, royalties etc.). If this exemption kicks in, this may allow US citizens in Canada to take advantage of tax deferral opportunities that aren’t currently available.

4) State and Local Tax Deduction (“SALT”)

  • Senate Bill: Partially eliminates SALT in accordance with the House bill, though the Senate originally aimed to completely eliminate SALT.
  • House Bill: Allows taxpayers to claim up to $10,000 in state and local property tax deductions, but eliminates state and local sales and income tax deductions. However, House Republicans from California are hoping for the $10,000 deduction to include state and local sales and income tax deductions as well, so this point is still being debated.
  • Tentative House & Senate Deal of December 13: SALT deduction will include property and income tax with a maximum total deduction of $10,000.
  • Cross-Border Perspective: Limiting or eliminating SALT may erode some of the other tax savings associated with the tax bill for those living in states with high state income tax such as California, Hawaii and New Jersey.

The race to reform the US tax system has been a heated, dynamic one – with the clock counting down to the new year, we will soon see the outcome of the current bills. The goal is for a final proposal to be passed and to reach President Donald Trump by December 20, 2017.

MCA Cross Border Advisors will keep you informed about both the status of US tax reform and its impact on cross-border issues for Canadians with ties to the US and Americans living in Canada.