10 Year-End Tax Planning Tips For Expats (2021)

Dec 7, 2021 | US Expat Tax

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 2021 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 $108,700 for 2021. 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 2021 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.

2. 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 $12,550 for individuals and $25,100 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 2021. For example, you could make charitable contributions, or certain state and local tax payments in 2021 instead of 2022. One way to do this is with Donor Advised Funds. They allow you to make a single donation in one year, and the fund dispenses the money over several years.

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 2021 and no limit on itemized deductions for charitable contributions, so take advantage. Married individuals filing joint returns can deduct up to $600 for charitable cash contributions.

Also, be careful that accelerated tax deductions don’t trigger Alternative Minimum tax (AMT). Speak to an experienced accountant to avoid unintended tax consequences.

3. Avoid penalties for 2021 if you owed 2020 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 further penalties, pay estimated taxes by Jan 15, 2022, for the Sep 1 to Dec 31, 2021 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 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. This may change as a part of the Build Back Better tax bill. Any gift exceeding this limit may be taxed at rates up to 40%.

6. Consider a tax-free Roth IRA conversion – Another potential bonus for US expats

If you are an American abroad and your 2021 income will be below the FEIE limit of $108,700, you may qualify to convert money from a traditional IRA to a Roth IRA completely tax-free. While you can make 2021 IRA contributions until the April tax deadline, you must do a Roth IRA conversion before the end of 2021 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 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.

8. Explore other tax planning options

If you made a lot of money in 2021 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 IRS crypto guidance

The IRS crypto guidance released in 2019 is part of increased enforcement of crypto taxation. Make sure you use the most optimized accounting method for your situation and have good records of all transactions.

Under proposed legislation, cryptocurrencies may become subject to the Wash Sale rule, starting in 2022. So if you plan any transactions that would fall under the Wash Sale rule, you should consider doing those before December 31, 2021.

10. Consider the potential implications of a new tax bill

You may be wondering how Biden’s infrastructure bill and potential tax bill could impact your taxes. We are monitoring the situation in DC and will be studying the changes as soon as the bill has been passed.

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.

For those of you who want a deeper dive into the changes and how they may affect you, we now have a CFP® on staff and are offering financial planning services in addition to our regular tax planning service. If you are interested in learning more about this, reach out to your accountant or contact us.

Year-end tax planning is important for expats

Now is the time to review your tax situation and get organized for the 2021 tax year. You still have time to take steps that help minimize your 2021 taxes and optimize your tax-advantaged retirement accounts.

Set up a call with your accountant to go over any general steps you should take before the end of the year or ask your accountant about the tax and financial planning services we now offer.