90% US Tax on Bankers Bonuses

Liz Zitzow of British American Tax reports on a proposed radical new tax in the US

Introduction 

H. R. 1586 is a bill before Congress that imposes a 90% tax in the US on the bonuses of bankers working at US banks which have received 'bail-out funds' from the US government.

Who may be affected and what amounts are caught?

Any employee of any US bank that received a government bailout from the US Treasury will potentially be affected:

• American employees living abroad who are employed by US banks
• Greencard holders in the same situation
• Non-Americans who live in the US or are directors of US banks

Employees of many American banks, including these major banks, are affected:

• AIG
• Bank of America
• Bank of NY Mellon
• Citigroup
• Goldman Sachs
• JP Morgan
• Morgan Stanley

Details of the affected institutions are updated weekly on the US Treasury's 'Financial Stability' website, and can be found on the "Troubled Assets Relief Programme" List of Transaction Reports, here.  If your bank is not on the list, be wary of the fact it may be added later in the year and, if so, you would be retroactively affected.  Also affected are certain US partnerships which are owned primarily (directly or indirectly) by bankers working for these banks. A typical partnership would be an investment vehicle created by the bank for the benefit of its higher-compensated employees.  Goldman Sachs has many of these partnerships.

The bill creates a tax of 90% on any bonus received on or after 1 Jan 2009, even if it is in relation to a previous year.

For most bankers who will be subject to the tax, their entire “disqualified” bonus payment will be subject to this tax.  A bonus payment is "qualified" (and thus exempt from this tax) if it is for things such as:

• Commissions
• Fringe benefits, such as housing, car, moving, COLA, etc.
• Expat benefits, such as holiday travel, tax equalizations, etc.
• Expense reimbursements
• Payments into the employer pension plan and AVCs, whether made by you or your employer.  A SIPP contribution would not be exempt beyond the $45,000 tax-free annual contribution allowed.

Stock options and stock grants are considered taxable bonuses under this new law.  Phantom dividends on restricted shares and ESOP shares are also considered taxable bonuses under this new law.

If a client receives a bonus payment of a sort that is not listed here, it is probably a disqualified bonus and subject to the 90% tax. 

No Tax Charge if the Bonus is Repaid

If it is returned to the employer before 31 Dec 09, the bonus is no longer subject to US tax.
           
If the employer opts to increase the bonus by an amount sufficient to cover the 90% tax, that additional pay is also subject to the 90% tax.  Gross-ups for the tax will not be affordable for the majority of banks.

UK Tax Planning

Anyone working at these banks who receives a bonus during calendar year 2009 will owe US tax of 90% on the bonus.  As offshore branches of banks often pay a substantial bonus between 1 Jan 09 – 31 March 09, this could affect you.  There are limited tax planning opportunities for anyone liable for this tax who will or has already received a bonus after 1 Jan 2009.  They can take the following actions:

1. Offer to pay some or the entire bonus back to their employer before 31 Dec 2009.
2. Pay a portion of the bonus into a UK pension plan before 31 Dec 2009:  this should be discussed with your US tax accountant before doing so, as pension contributions are not always free of US tax.

Future Progress of the Bill

The bill was approved on 20 March 2009 by the House of Representatives with a margin of 328 yea votes to 93 nay.  It still must pass a Senate vote and be signed by President Obama.  This bill is highly likely to pass, but the language may change in the interim.

For more information, contact this article’s author.

Article Added Saturday, 04 April 2009

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