For most of us, 2020 wasn’t what we expected. It’s certainly been an unusual year, also for US taxes. With the new year quickly approaching, now is the time for year-end tax planning, especially for expats! We share our top year-end tax tips here.
With the right tax planning, Americans abroad can maximize tax deductions and exclusions and improve their retirement savings. (See more year-end tax tips for entrepreneurs and business owners abroad here.)
Here are 11 tax planning tips for 2020 for expats:
1. Ensure you qualify for the FEIE – A big tax benefit for Americans abroad!
Review your travel dates or residency status abroad to make sure you qualify for the Foreign Earned Income Exclusion, which is up to $107,600 for 2020. Typically, 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 2020 tax year that meets the requirement.
Alternatively, if you can qualify for bona fide residency in your host country. You must show social and cultural ties to the country where you spend significant time.
Due to the pandemic, many expats spent more time in the States and might not meet those requirements. Fortunately, the IRS allows for an Adverse Conditions Waiver. So you could spend more time in the US and still qualify for the FEIE if you meet the waiver’s requirements.
2. Claim a tax credit for an unreceived stimulus check
Many Americans overseas were eligible for stimulus checks as a part of the 2020 CARES Act. Individuals could receive up to $1,200, married couples filing jointly were eligible for up to $2,400, and up to $500 for each qualifying child. If you were eligible for a stimulus check and never received it or if you did not receive the correct amount, you can claim it as a credit on your 2020 tax return. This is called the Recovery Rebate Credit.
If you received Notice 1444: Your Economic Impact Payment, received in the mail, keep it with your tax records and remember to provide a copy to your accountant.
3. Bundle deductions for maximum impact
Most US expats don’t itemize deductions but use the standard deduction instead. With the increase of the standard deduction to $12,400 for individuals and $24,800 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 2020. For example, you could make charitable contributions, or certain state and local tax payments in 2020 instead of 2021. 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.
There is a special $300 above the line deduction for charitable contributions in 2020 and no limit on itemized deductions for charitable contributions, so take advantage.
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.)
4. Avoid penalties for 2020 if you owed 2019 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, 2021, for the Sep 1 to Dec 31, 2020 period.
5. 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.
6. 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 pre-fund 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 $11.58 million. Any gift exceeding this limit may be taxed at rates up to 40%.
7. Consider a tax-free Roth IRA conversion – Extra bonus for US expats
If you are an expat and your 2020 income will be below the FEIE limit of $107,600, you may qualify for converting money from a traditional IRA to a Roth IRA completely tax-free. While you can make 2020 IRA contributions until the April tax deadline, you must do a Roth IRA conversion before the end of 2020 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.
8. Invest in Opportunity Zones
Investing in Opportunity Zones can be a great way to save capital gain tax. The 2017 tax reform allowed taxpayers with large built-in capital gains to roll over their investments into designated 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.
Keep in mind, you can only roll over this capital gain if you make a qualified opportunity zone investment within 180 days of selling your investment with a capital gain.
9. Explore other tax planning options
If you made a lot of money in 2020 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.
10. Make sure to comply with the new IRS crypto guidance
In 2019, the IRS released new guidance for cryptocurrencies. Make sure you are aware of these changes. We have been reviewing clients’ returns to allow specific identification of crypto sales to see if we can optimize their previously filed returns.
11. Consider the potential tax implications of a Biden presidency
Post-election you may be wondering how Biden’s win could impact your tax situation. Truthfully, Biden’s tax plan could play out in a variety of ways. One of the biggest variables is whether the Democrats will control the Senate. Without control of the Senate, it will be difficult for Biden to pass his proposed tax changes. If the Democrats win two additional Senate seats in Georgia during the runoffs in January, Biden could potentially pass his tax law without a single Republican vote.
If passed, the Biden tax plan would mostly impact higher incomes individuals and corporations earning over $400,000 annually. Others may benefit from Biden’s proposed tax credits, including an expanded, fully refundable, child tax credit and the lifetime exemption for estate tax purposes (currently at $11.45M).
At this time, it seems unlikely that the Democrats will control the Senate. Even if they do win both seats in Georgia, it remains to be seen if and how much of that tax plan will be implemented. We will share tax planning strategies when there is more clarity.
Year-end tax planning is important for expats
Now is the time to review your tax situation and get organized for the 2020 tax year. You still have time to take steps that help minimize your 2020 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.