Clinton's tax plans to affect US expats

ONE group of expatriates in Hongkong listened with more than a passing interest last week as United States President Mr Bill Clinton outlined his plans to reduce the country's deficit and rejuvenate its economy.

These were the 23,000 Americans living and working in the territory who will be significantly affected by the president's plans to pump more money into government coffers.

Mr Clinton's economic package - outlined in his State of the Union address on Thursday - included tax increases on individuals and businesses totalling US$328 billion (about HK$2.6 trillion) over 1993-1998.

While all taxpayers with annual taxable income exceeding US$30,000 would likely face a tax increase, the package was crafted to squeeze upper income individuals for a major portion of the tax revenue.

The US, unlike other countries, imposes income tax on its citizens and permanent residents even if they reside abroad.

Many US expatriates living in Hongkong will therefore be affected by these proposals, if enacted.

Among the major changes affecting US expatriates in Hongkong: The top marginal rate for individual taxpayers would be increased from 31 per cent to 36 per cent, beginning January 1, 1993.

This bracket would apply to couples with taxable incomes exceeding US$140,000 and individuals with taxable income exceeding US$115,000.

A 10-per cent surtax would be imposed on regular taxable income above US$250,000, effectively raising the marginal tax rate to 39.6 per cent. However, the maximum capital gains tax rate would remain at 28 per cent.

The alternative minimum tax rate, which typically applies to taxpayers with large amounts of deductions and exemptions, would be increased from 24 per cent to 26 per cent for alternative minimum taxable income under US$175,000 and to 28 per cent for income above US$175,000.

However, the minimum income level at which taxpayers would be subject to the alternative minimum tax would be increased to $45,000 for couples and $37,500 for single filers.

The top estate and gift tax rates would rise to 53 per cent and 55 per cent, bringing them back to where they were until this year when they dropped to 50 per cent.

The portion of meal and entertainment expenses disallowed for tax deductions would be raised from 20 per cent to 50 per cent.

Furthermore, club dues would no longer be deductible as a business expense.

Tax deductions by employers for certain executive compensation exceeding $1 million a year per executive would be disallowed.

Before the tax package was released, there was speculation that the foreign-earned income and housing exclusions now enjoyed by Americans working abroad could be eliminated.

This would be particularly detrimental to Americans residing in low-tax countries such as Hongkong.

To the relief of many US expatriates, Mr Clinton did not propose curtailing these exclusions in his tax package.

Accordingly, US expatriates with income levels within or not vastly in excess of the exclusion level (such as US$70,000, plus foreign housing allowance above US$8,385) may only experience a slight increase in their tax bill.

However, US expatriates with high taxable income despite the foreign exclusions would face a stiff tax increase.

While it would be prudent for US expatriates to begin planning alternatives, it should be noted that Mr Clinton's deficit-reduction package is potentially subject to modification by the US Congress.

Actual drafting of the legislation may not be completed before this autumn.

Whether the current tax reform proposal will be enacted entirely in its current form remains to be seen.

Anthony Tong is US Tax Partner at Price Waterhouse