With the year drawing to a close, now is the perfect time to ensure your finances are in great shape with our expat tax planning tips. If you are a US expat living and working overseas, we recommend using these important tips and tricks to optimize your tax position. Listed below are a few important ideas to consider before this year ends.
Expat Tax Planning 101
If you’ve never done any tax planning before, it can seem intimidating. But our tips include simple ideas to get your finances into shape before 2020. If you have more questions about how to prepare or your situation is particularly complicated, feel free to sign up for a consultation or download our guide to expat tax documents in advance of the upcoming tax season.
Dispose of Any Loss-Making Shares If You Have Also Made Gains on Other Share Disposals Earlier in the Year
You can deduct up to $3,000 in capital losses, which can help towards offsetting other capital gains and reducing your annual gross income. Please note: any realized proceeds that are reinvested within 30 days (wash sales) in similar investments are not eligible to be claimed as a loss.
Check With Your Foreign Tax Accountant If Any Foreign Taxes Are Due for Payment Before December 31
Paying your foreign tax bill before December 31 – especially in a year that you need to claim foreign tax credits on your US tax return – would help optimize your final tax outcome.
Consider Making Contributions to Your IRA or Roth IRA
- $6,000 ($6,500 if you’re age 50 or older), or
- your taxable compensation for the year, if your compensation was less than this dollar limit.
Your traditional IRA contributions may be tax deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.
Roth IRA Recharacterizations
You can only recharacterize amounts rolled into a Roth IRA from an employer-sponsored retirement plan by transferring them to a new or existing traditional IRA, and not back into the plan from which they were distributed. This expat tax planning strategy helps pay the taxes on the conversion at an earlier date and provide substantial tax savings if the fund appreciates in value.
You generally can recharacterize your rollover or conversion by October 15 of the following year, regardless of whether you requested an extension to file your tax return. If the market falls, you also need to consider if the taxes on conversion justify the benefit of the re-characterization.
Sale of the US Principal Place of Residence
Unmarried taxpayers are allowed to exclude the gain on the sale of their principal residence to a maximum of $250,000, or $500,000 for married taxpayers filing joint returns, provided you meet certain qualifications.
In general, to qualify for the exclusion, a taxpayer must have owned and occupied the residence as a primary residence for at least two of the five years preceding the sale. Taxpayers who fail to meet the two-year requirement because of a change in place of employment, health, or other unforeseen circumstances may be eligible for a portion of the exclusion based on the ratio of their own qualifying period to the two-year period. The exclusion may be claimed once every two years.
When a taxpayer sells a home on which depreciation has been claimed during a rental period, the depreciation is recaptured at the time of sale (assuming that the sale price exceeds the depreciated cost of the home) and taxed at a special rate of 25%.
Pay Estimated Taxes
Estimated tax payments are required if the amount of taxes due with the return after withholding is expected to exceed $1,000. The due dates are:
4th Payment of 2019: January 15, 2020
1st Payment of 2020: April 15, 2020
2nd Payment: June 15, 2020
3rd Payment: September 15, 2020
4th Payment: January 15, 2021
Estimated tax payments are not required if no tax liability existed in the preceding year. If the estimated tax is not paid in full and none of the exceptions to the penalty apply (i.e., payments and withholding are greater than or equal to 90% of current year tax; payments and withholding are equal to 100% of last year’s tax if adjusted gross income on last year’s return was less than or equal to $150,000, or payments and withholding are equal to 110% of last year’s tax if adjusted gross income is greater than $150,000), a penalty is imposed at the interest rate that applies to assessments of tax.
Plan and Track Your US Travel for the Foreign Earned Income Exclusion
Two tests determine qualification for the Foreign Earned Income Exclusion: the bona fide residence test and physical presence test (PPT). However, in the first and last year of your foreign residence, use of the PPT may help optimize a greater number of foreign qualifying days. To qualify for the foreign exclusion under the PPT, a US citizen or resident alien must be physically present in a foreign country for 330 full days within any consecutive twelve-month period.
Make Charitable Donations
If you plan to make a charitable donation, bear in mind that you must itemize your deductions in order to receive related tax benefits. Individuals who take a standard deduction are not eligible for those benefits. You may deduct a charitable contribution made to the following organizations:
- A state or US possession (or political subdivision thereof), or the US or the District of Columbia, if made exclusively for public purposes;
- A community chest, corporation, trust, fund, or foundation, organized or created in the US or its possessions, or under the laws of the US, any state, the District of Columbia or any possession of the US, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
- A church, synagogue, or other religious organization;
- A war veterans’ organization or its post, auxiliary, trust, or foundation organized in the US or its possessions;
- A nonprofit volunteer fire company;
- A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services);
- A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
- A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.
By considering the expat tax planning tips listed above, you can be sure that you are prepared for the upcoming tax year!
Have Specific Questions About Year-End Expat Tax Planning?
The Greenback team has the answers you need about your individual situation. Get started now so that you can be sure you are ready to start 2020 on the right foot.
Originally published in 2017; updated December 11, 2019.