Ten Takeaways From the Tax Reform for High-Net-Worth Investors

The good, the bad and the GILTI.

BY MICHAEL BRUNO, STEVEN HADJILOGIOU, DANIEL HUDSON, ABRAHM SMITH AND PAUL DEPASQUALE, WEALTHMANAGEMENT.COM

The Tax Cuts and Jobs Act introduced significant changes to the taxation of high-net-worth individuals. The changes particularly affect globally mobile clients and multi-jurisdictional families with U.S. connections.
Here are some key takeaways for international HNW individuals.

The Good
1. Consider planning opportunities for overseas dividends. Qualified dividends of a U.S. individual are generally taxed at a maximum 20 percent rate while other dividends are taxed at a maximum 37 percent rate. Dividends from non-U.S. corporations qualify for the reduced 20 percent rate only if the payer is organized in a country that has an income tax treaty with the United States. In Latin America, only Mexico and Venezuela have income tax treaties with the U.S. Therefore, dividends paid to U.S. individuals from companies organized in most Latin American jurisdictions (except Mexico and Venezuela) generally are taxed at the higher ordinary income rates. The Tax Cuts and Jobs Act modified participation exemption regime and the reduced corporate tax rate of 21 percent create opportunities for individuals to restructure ownership of non-U.S. corporations to benefit from the reduced tax rates. The participation exemption exempts dividends paid by foreign corporations to U.S. C corporate shareholders from U.S. federal tax, which wasn’t the case before the act.

2. The lower corporate tax rate is driving new thinking on choice of entity. The act reduces the U.S. federal corporate tax rate from a top marginal rate of 35 percent to a flat rate of 21 percent effective Jan. 1, 2018. The act also introduced a deduction of up to 20 percent for qualified business income earned through pass-through entities, which could reduce the top ordinary rate to 29.6 percent. The pass-through deduction is subject to significant limitations under the tax law and is set to expire in 2026. There are many factors in deciding to invest or operate through a corporate or pass-through entity. For instance, will the business accumulate, reinvest or distribute earnings? In some cases, a corporation may be subject to punitive tax if it accumulates earnings or doesn’t properly reinvest the earnings in the business. It’s important to consider the type of income earned, duration of the business, the tax treatment on exit, liquidity events and non-U.S. taxes (where applicable). The disparity between the corporate rate (21 percent) and the maximum individual rate (37 percent) require clients to consider alternative structures for holding U.S. real estate and other investments.

3. Increased gift and estate tax exclusion for U.S. individuals. The act provides immediate relief from estate tax, gift tax and generation-skipping transfer tax by doubling the exclusion to $11.2 million (expected, as the figure is indexed for inflation), beginning in 2018. By doubling the exclusion, married couples who use portability can shield up to $22.4 million (as indexed for inflation) from estate, gift and GST taxes. The increased exemption is set to decrease to pre-act levels in 2026; however, the exclusion may also be reduced before 2026 by future legislation, so clients should consider strategic gifting early to ensure that they can use the increased exclusion. Noncitizens not domiciled in the U.S. have only a $60,000 exclusion from estate tax and no exemption from gift tax.

4. New tax incentive for U.S. exporters. U.S. corporations that export goods or services may benefit from a special deduction on income earned from non-U.S. markets. This effectively reduces the tax rate from 21 percent to 13.125 percent, on qualifying income.

The Bad >> READ MORE