The year has been flying by. Maybe you just finished your expat taxes with the extended deadline, or you already filed earlier in the year. Chances are that you paid more tax than what you wanted. Now is the time for year-end tax planning, especially for expats!
With the right tax planning, expats can maximize tax deductions and exclusions and improve their retirement savings. (See more tips for entrepreneurs and business owners abroad here.)
Here are 9 tax planning tips – two of them are especially beneficial for expats:
1. Ensure you qualify for the FEIE – A big tax benefit for expats!
Review your travel dates or residency status abroad to make sure you qualify for the Foreign Earned Income Exclusion, which is up to $105,900 for 2019. To meet the physical presence test, you must spend at least 330 full days in foreign countries within a 12 month period. Review your travel dates and plans to ensure you have a 12 month period for the 2018 tax year that meets the requirement.
Alternatively, see if you qualify for bona fide residency in your host country. You can do things like apply for a visa, open a bank account, get a gym membership (it’s a good New Year’s resolution anyway, right?), obtain a healthcare plan, sign a long term lease and do things that show social and cultural ties to the country where you spend significant time.
Being a bona fide resident in a foreign country gives you more flexibility with travel to the US. It does have other strict requirements though.
2. Bundle deductions for maximum impact
Most expats don’t itemize deductions but use the standard deduction instead. With the increase of the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly, even fewer will benefit from itemizing.
If you are close to these new thresholds, consider moving deductible expenses up into 2019. For example, you could make charitable contributions, or certain state and local tax payments in 2019 instead of 2020. However, if you expect to be in a lower tax bracket next year, then it makes sense to bundle more expenses into the next tax year. When you contribute to international charities, keep in mind that not all are recognized by the IRS.
Also be careful that accelerated tax deductions don’t trigger Alternative Minimum tax AMT. Speak to an experienced accountant to avoid unintended tax consequences.
Unfortunately, under the 2017 tax law you can no longer deduct unreimbursed employee or tax preparation expenses. (Businesses and independent contractors can still deduct expenses like a home office on schedule C.)
3. Avoid penalties for 2019 if you owed 2018 tax or are self-employed
If your tax withholdings are not sufficient or you are self-employed and don’t have withholdings, you must pay quarterly estimated taxes. Failure to pay enough tax by each due date may result in penalties.
To avoid penalties, pay estimated taxes by Jan 15, 2020 for the Sep 1 to Dec 31, 2019 period.
4. Harvest your capital losses, including crypto losses
If you are selling an investment that is trading at a loss, you can use the loss to offset taxable capital gains from investments such as stock, bonds, ETFs. You can also apply a loss-carry over from prior years against capital gains.
When your capital losses exceed your capital gains for the year, you can even use up to $3,000 of that net capital loss to offset other taxable income such as salary, interest or dividend income. Any losses above that you can carry over to the next year.
5. Contribute to a 529 educational plan
A 529 plan is a tax-advantaged savings plan for educational expenses such as tuition. The savings grow tax free but must be used for eligible education expenses.
You can contribute up to $15,000 per year and person. It is even possible to prefund the plan with up to five years’ worth of contributions, for a total of $75,000. For certain states, this contribution is a deduction from your income so check if your state qualifies.
Contributions above the annual gift tax limit of $15,000 count against the lifetime exclusion for gifts. You must report this on IRS form 709. The lifetime exclusion is currently $11.4million. Any gift exceeding this limit may be taxed at rates up to 40%.
6. Consider a tax-free Roth IRA conversion – Extra bonus for expats
If you are an expat and your 2019 income will be below the FEIE limit of $105,900, you may qualify for converting money from a traditional IRA to a Roth IRA completely tax free. While you can make 2019 IRA contributions until the April tax deadline, you must do a Roth IRA conversion before the end of 2019 to reap the benefits. This is why year-end tax planning for expats is so important.
While the tax savings can be significant, you should only do this with the guidance of an experienced tax advisor.
7. Invest in Opportunity Zones
Investing in Opportunity Zones can be a great way to save capital gain tax. The 2017 tax reform gave the opportunity for taxpayers with large built in capital gains to rollover their investments into designed funds that invest in real estate and other businesses located in these distressed zones. This would result in a deferral of capital gains and potential reduction of the taxes on the capital gains to zero, dependent on how long the investment in the opportunity zone was held.
8. Explore other tax planning options
If you made a lot of money in 2019 you might want to explore additional options with an experienced accountant. Consider setting up a defined benefit plan if you’re over 55 or save money with land easements, US oil drilling.
A defined benefit plan allows sole owner entrepreneurs to put away hundreds of thousands of dollars to a pension account, based on their income and age.
A land easement is when land is donated to a land trust or government agency. If it benefits the public by permanently protecting important conservation resources, it can qualify as a charitable tax deduction on the donor’s federal income tax return.
Investments in US oil drilling can give investors deductions based on the amount of drilling costs.
9. Make sure to comply with the new IRS crypto guidance
The IRS recently released new guidance for crypto currencies. We have been reviewing clients’ returns to allow specific identification of crypto sales to see if we can optimize their previously filed returns.
We will publish a full article on this topic shortly.
Year-end tax planning is important for expats
Now is the time to review your tax situation and get organized for the 2019 tax year. You still have time to take steps that help minimize your 2019 taxes and optimize your tax-advantaged retirement accounts.
Set up a call with your accountant to go over any steps you should take before the end of the year.