Year-End Tax Planning for Individual Expats

Year-end tax planning helps U.S. expats avoid surprises and lower their tax bills. Recent tax updates and ongoing changes to credits, deductions, and income thresholds require individuals to carefully evaluate their financial situation before the year closes. Taking action now can help you prepare for next year and stay on the IRS’s good side.

Year-End Tax Planning for Individuals

Tax rules keep changing for individuals. If your income or deductions have changed this year, now is the time to look closely at strategies to improve your tax outcome. This includes managing investment gains, evaluating charitable contributions, and optimizing credits and deductions while considering income thresholds that may trigger additional taxes.

For expats specifically, understanding how foreign-earned income, tax treaties, and credits like the Foreign Tax Credit or Foreign Earned Income Exclusion (FEIE) apply can make a significant difference. If you expect changes in your income for the next year, whether due to bonuses, investments, or other factors, you may want to accelerate or defer income to optimize your tax position.

Accelerating Income

If you expect to be in a higher tax bracket next year, accelerating income into the current year can help reduce your future tax liability. This might include receiving year-end bonuses, exercising stock options, or collecting client payments before December 31. Self-employed individuals should also consider invoicing clients early to recognize income this year.

However, accelerating income isn’t always beneficial. If it pushes you into a higher tax bracket or triggers additional taxes, such as the 3.8% Net Investment Income Tax (NIIT) or the 0.9% Additional Medicare Tax, it could reduce the benefit of this strategy. Be cautious of large, one-time income events like Roth IRA conversions or asset sales that could unexpectedly increase your taxable income and trigger additional taxes.

Maximizing Deductions

Deductions are equally important for year-end tax planning. If you itemize deductions, prepaying certain expenses can help lower your taxable income. For example, you can pay property taxes or state income tax installments due next year before December 31. Just make sure that property taxes are not held in a mortgage escrow account, as those payments are made by your lender.

Bunching medical expenses into a single year can also help you clear the deduction threshold. Medical and dental expenses are only deductible if they exceed 7.5% of your adjusted gross income (AGI). By consolidating elective treatments or large medical bills into one year, you may qualify for a larger deduction.

Additional Medicare Tax

The Additional Medicare Tax of 0.9% applies to individuals with income over $200,000 (single filers) or $250,000 (married filing jointly). This tax is not split with your employer, so you must plan carefully if you’re close to these income thresholds.

Unexpected income, like year-end bonuses or large payments, can trigger this tax. To prepare, consider increasing your wage withholding before the year ends. This ensures you’ve withheld enough to cover the tax and reduces the risk of underpayment penalties.

For self-employed individuals, the Additional Medicare Tax must be included in your estimated quarterly tax payments. Reviewing your income and adjusting your final payment before the January deadline can help avoid surprises when you file your return.

If you expect your income to approach the threshold, carefully review any additional income or deductions to minimize your exposure to this tax.

Alternative Minimum Tax (AMT)

The AMT, a parallel tax system with its own rules and exemptions, remains an essential consideration for higher-income individuals. Certain deductions that reduce regular tax liability, like state taxes, property taxes, and miscellaneous itemized deductions, may not apply under AMT.

For 2024, AMT exemption amounts are indexed for inflation:

• Single filers: $85,700
• Married filing jointly: $133,300

If you anticipate being subject to AMT, carefully evaluate your deductions and income to understand their impact on both your regular tax and AMT liability.

Strategize Tuition Payments

If you or your dependents are pursuing higher education, the American Opportunity Tax Credit (AOTC) remains a valuable benefit, offering up to $2,500 per student. To maximize the credit, consider paying spring tuition for the next year before December 31. This strategy allows you to claim the credit for 2024 and potentially reduce your tax liability.

The Lifetime Learning Credit is another option for expats seeking continuing education, as it applies to both undergraduate and graduate-level coursework.

Residential Energy Tax Credits

Tax credits for residential energy efficiency continue to encourage homeowners to make eco-friendly upgrades. The two main credits are:

1) Non-Business Energy Credits

The Non-Business Energy Credit applies to energy-efficient improvements such as insulation, energy-efficient windows, doors, and certain heating systems. While some energy credits have a lifetime cap, others may allow you to claim a percentage of the cost for qualifying upgrades made to your primary residence. Check for current limits and ensure you retain manufacturer certifications for eligible improvements.

2) Residential Energy Efficient Property Credits

If you install alternative energy equipment like solar panels, solar water heaters, geothermal heat pumps, or small wind turbines, you may claim a credit of 30% of the cost. This credit has no dollar cap for most technologies except fuel cells.

Alternative energy credits apply to primary residences, second homes, and new construction but not rental properties.

Charitable Contributions

Year-end giving is a win-win strategy. You support causes you care about while potentially reducing your tax liability. For contributions to qualify, ensure you have written documentation that includes the organization’s name, date, and the amount donated. Contributions of property, like stocks or appreciated assets, provide an added benefit by allowing you to avoid capital gains taxes while claiming a deduction for the fair market value.

If you plan to donate substantial amounts, consider strategies like donor-advised funds, which allow you to distribute contributions over time while taking an immediate deduction.

Investment Gains and Losses

Managing investment gains and losses before year-end can help you reduce your tax bill. Short-term gains from investments held for one year or less are taxed at ordinary income rates, which can be as high as 37% for 2024. Long-term capital gains, on the other hand, are taxed at more favorable rates: 0%, 15%, or 20%, depending on your income.

If your taxable income is below $47,150 for single filers or $94,300 for married couples filing jointly in 2024, you may qualify for the 0% tax rate on long-term capital gains and qualified dividends. If your income is higher, the maximum long-term capital gains tax rate is 20%, which still offers a significant advantage over short-term rates.

To minimize taxes, consider selling underperforming investments to generate losses that offset capital gains. Losses can offset gains dollar-for-dollar, and if your losses exceed your gains, you can deduct up to $3,000 against ordinary income. Any unused losses can be carried forward to future years.

If you plan to repurchase a sold investment, be aware of the IRS wash-sale rule. This rule disallows the loss if you buy back the same or a substantially identical investment within 30 days before or after the sale. To maintain your market position, you can purchase a similar but not identical investment.

Net Investment Income Tax (NIIT)

The 3.8% NIIT applies to net investment income, including interest, dividends, capital gains, and rental income, if your modified AGI exceeds $200,000 for single filers or $250,000 for married filers. For expats with investment income, this tax can significantly impact your returns. Careful management of gains and losses can help reduce exposure to the NIIT.

Year-End Giving to Reduce Estate Tax

For individuals with significant assets, year-end gifting can reduce the size of your taxable estate. The annual gift tax exclusion allows you to give up to $18,000 per recipient in 2024 without triggering gift tax. For married couples, this amount can be doubled to $36,000 per recipient by splitting gifts, where each spouse consents to allocate part of the gift. While not required, filing a gift tax return for split gifts ensures clear documentation and avoids potential IRS challenges later.

If you are considering gifts of appreciated property, such as stocks, this strategy can further benefit your heirs by allowing them to assume a higher cost basis and avoid capital gains taxes. Additionally, filing a gift tax return even for gifts below the threshold can be a tactical move to establish clear reporting and prevent future disputes over the value of gifts.

Other Year-End Moves

• Retirement Contributions: Maximize contributions to retirement plans like 401(k)s or IRAs to lower taxable income. If you’re self-employed, consider establishing a SEP IRA or solo 401(k).
• Health Savings Accounts (HSAs): If you have a high-deductible health plan, contributions to an HSA are tax-deductible and grow tax-free when used for qualified medical expenses.
• Roth IRA Conversions: Converting a traditional IRA to a Roth IRA may increase your income this year but could provide tax-free withdrawals in the future.

Summary

Year-end tax planning is a great way to get ahead and make sure you’re in line with IRS rules. Whether it’s bringing in income sooner, paying off deductions early, or making smart contributions to charity or investments, having a solid plan can help you save on taxes.

At Tax Samaritan, our team of Enrolled Agents specializes in helping U.S. expats navigate complex tax laws and identify planning opportunities tailored to their situation. If you need personalized guidance, contact us for a consultation today.

Take action before the year ends to get your taxes in order. We’re here to help you reduce your tax burden and set yourself up for success in 2024 and beyond. Contact 775-305-1040 for a free 30-minute no-obligation consultation, or click on this link to request a tax quote.

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.