We don’t want to spoil the holiday mood with a topic as dry as taxes. However, there are some moves you can and should make before 2018 is over to save on your 2018 taxes. Here we share our top 13 year-end tax tips for expats including business owners.
They take into account the changes to the 2018 tax year brought by the Tax Cuts and Jobs Act signed into law last December.
2018 tax tips for individual tax filers living abroad
1. Ensure you qualify for the FEIE
Review your travel dates or residency status abroad to make sure you qualify for the Foreign Earned Income Exclusion, which is up to $103,900 for 2018. (The IRS adjusted this from the previously reported $104,100. This reduction is due to a change in inflation adjustment from the Tax Cuts and Jobs Act.)
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. 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 2018. For example, you could make charitable contributions, or certain state and local tax payments in 2018 instead of 2019. 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.
The new tax law eliminated miscellaneous deductions, which exceed 2% of your AGI. This includes deductions for unreimbursed employee expenses and tax preparation expenses. So you don’t need to keep track of these expenses anymore. (For Businesses, expenses like a home office are still deductible on schedule C.)
3. Make use of the current lower threshold for medical expenses
The “floor” for medical expenses is 7.5% in 2018. This means that you can deduct only the portion of your qualified medical expenses that exceed 7.5% of your Adjusted Gross Income. The floor increases to 10% in 2019. Therefore, if you have significant medical expenses, you should consider paying those medical bills in 2018, while the floor is lower and you get more of a deduction.
4. Avoid penalties for 2018 if you owed 2017 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, even if you receive a tax refund at the end of the tax year.
To avoid penalties, pay estimated taxes by Jan 15, 2019 for the Sep 1 to Dec 31, 2018 period.
5. Consider a Roth IRA conversion
If you are an expat and your 2018 income will be below the FEIE limit of $104,100, you may qualify for converting money from a traditional IRA to a Roth IRA completely tax free. While 2018 IRA contributions can be made until the April tax deadline, the Roth IRA conversion must be done before the end of 2018.
Learn more here about tax-free Roth IRA conversion here.
6. Explore harvesting crypto losses to offset other gains
Crypto took a hit since the beginning of this year. Consider harvesting losses to offset capital gains. You can carry a capital loss forward but unfortunately you cannot apply it backwards to last year’s gains.
7. No more like kind exchange
Due to the tax reform, like kind exchange is only applicable in real estate. This means any like kind done for personal or business assets, whether crypto, cars, tools, equipment, etc will not be subject to the 1031 tax savings in 2018 and the future.
8. Opportunity Zones
The new tax reform gave the opportunity for taxpayers with large built-in capital gains to rollover their investments into designed funds to be invested in real estate and other businesses located in these distressed opportunity 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.
9. Did you make a lot of money?
First of all, congratulations. Consider setting up a defined benefit plan if you’re over 55 or save money with land easements or 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.
Additional year-end tax tips for business owners and entrepreneurs abroad
The Tax Cuts and Jobs Act brought significant changes for businesses, which impact your year-end tax planning. Our sister company Global Expat Advisors published a whitepaper on the impact of the tax reform on offshore businesses. You can download the whitepaper here.
10. Maximize your retirement savings
If you own a company without full-time employees other than yourself, consider opening a solo-401k by year end to take advantage of generous retirement contribution options. If you already have a solo 401k, make sure to align your salary with your contribution level. The solo 401k must be opened before December 31, 2018 in order to be eligible for 2018 tax year.
11. Optimize your business expenses
Unlike many eliminated deductions for individuals, deductions for businesses remained largely intact under the new tax law. There are even new opportunities for higher deductions like the 100% bonus depreciation.
Under the Tax Cuts and Jobs Act, you might be able to write off 100% of qualified assets acquired in 2018. Consult with your tax advisor which types of assets qualify for the 100% bonus depreciation.
Therefore you should make major qualifying purchases, such as equipment, before the end of this year.
12. Adjust your inventory accounting
If you are a small retailer with less than $25 million in sales and hold inventory, you can elect to treat the inventory are “non-incidental” material and supplies. (Previously the threshold was $1 million.) This can simplify for accounting and even result in significant tax savings for retailers and Amazon resellers if they qualify.
13. Reevaluate your business structure
The tax law brought big changes for businesses, such as for pass-through taxation, the new GILTI tax and others. Now is a good time to review your business structure to tax-optimize under the new law. Due to the implications of the new tax, it might be beneficial to make a 962 election, own the foreign company in a C Corp or just convert the entire business to an S Corp. If you haven’t already done so, schedule a structuring consultation.