Optimising your US tax position via year-end planning is going to be particularly challenging for 2017 given President Trump’s tax reform proposals. These contain an overhaul of the ‘Schedule A’ deduction system, which is a key part of traditional year-end planning, and we have the likely change to the US tax bands.
We now have the proposals in the form of the Tax Cuts and Jobs Act and it is clear that income deferral, where possible, and the acceleration of itemised deductions are likely to be favourable in the majority of cases, but we must be aware that the provisions may change as the tax legislation passes through Congress.
We will be sending weekly ‘tax bites’ between now and Christmas covering some of the most relevant year end planning considerations. For now, our high-level summary of the key areas for discussion are as follows.
Foreign tax credit management
If you claim foreign tax credits on the paid basis, it is often necessary to accelerate your UK (or foreign country) tax payments into the same calendar year as the income will be reported on your US tax return. This will ensure that the credit is available to offset the US tax that would otherwise be due.
This point is typically relevant to the following groups:
- Self-employed individuals
- Partners in partnerships
- Arising basis UK taxpayers
- Individuals who have large, one-off transactions such as a major capital gain or carried interest
This may also be relevant for the first time to individuals who would be deemed domiciled in the UK for income tax purposes from April 2017 but have previously paid the Remittance Basis Charge (RBC), as this may be the first US tax year that non-UK income will suffer foreign tax.
It is important to note that we need to look to the UK/US Double Income Tax Treaty to understand which country has the primary right to tax and which must give credit. For UK resident individuals, including US citizens, the UK is awarded that right on most investment income, other than US real estate income and some proportional element of US dividend income.
Although President Trump has called for a widespread elimination of itemised deductions, the deduction allowed for charitable donations is not scheduled to be lost. However, we do expect to see a large increase in the Standard Deduction for 2018, and it might pay to accelerate charitable donations into 2017 where the point of electing Itemised Deductions over the Standard Deduction will arrive sooner.
Charitable donations, either in cash or other property, need to be paid before the close of the tax year to be deductible during 2017. The deduction is typically limited to 50% of Adjusted Gross Income (AGI).
Did you know that you can donate stock instead of cash? Appreciated stock can be donated to charity and whilst the fair market value of the stock is the deductible value, capital gains tax on the disposal will not apply offering a double tax saving.
Have you considered gifting via dual qualifying charities? There are various organisations which specialise in the management and handling of donations that enable a simultaneous US and UK tax deduction. Many large US charities also have their own dual qualifying structures, and it would be sensible to check this before you donate to ensure that you maximise the benefit of your giving.
Capital gains and losses
A review of year-to-date investment income and realised gains and losses versus your current unrealised gain and loss position within your portfolios is a good exercise in itself. That will allow you to understand whether there are any opportunities to offset taxable gains by crystalising losses. Managing this properly where opportunities exist can help to reduce your overall tax liability and potentially reduce exposure to the Net Investment Income Tax (NIIT).
Any US mutual fund holdings will be shortly publishing estimated year-end capital gains distributions which should be considered when assessing estimated overall investment income positions.
The key will be assessing gain and loss harvesting in both USD and GBP terms as you may be sitting on large GBP gains due to foreign currency movement over the last few years.
State and Local Taxes
One area of proposed reform that has met staunch opposition has been the suggested elimination of state and local taxes as a Schedule A deduction but the Act, as due to be debated, does provide for widespread elimination. In order to plan ahead of these proposed changes, it may make sense to accelerate any final 2017 estimated tax payments due at a state or local level into the 2017 calendar year (otherwise likely to be due 15 January 2018 or 15 April 2018). Putting possible reform aside, this should also be considered more generally as way of accelerating the deduction, and also may be relevant where taxable income is vastly different year on year.
Don’t panic, you have more time to make contributions to traditional IRA, Roth IRA, Health Savings Account, SEP-IRA or Solo 401(k) for the 2017 tax year!
In Roth and IRA plans, the contribution maximum is still $5,500 for those aged 50 or younger and $6,500 for those over age 50, while the maximum for 401(k) plans is still set at $18,000 for people who are aged 50 or younger and $24,000 for those over age 50.
For anyone looking to establish a new Solo 401(k) for 2017, this must be set up by 31 December and the employee portion of any Solo 401(k) contribution must be made by year-end as well (whilst the employer earnings portion of the contribution can be made up until the filing of your US tax return).
For any individuals over age 70½ with US retirement plans, remember to distribute your Required Minimum Distributions (RMD) before 31 December to avoid penalties.
The gift tax annual exclusion amount remains $14,000 per individual for 2017. This generally means you can give up to $14,000 every year (or $28,000 for US spouses ‘splitting gifts’) to any number of donees without those gifts being subject to US gift or transfer taxes. The annual gift limit will rise to $15,000 in 2018. Inter-spousal gifts are not normally subject to gift tax, however, that is not the case when a US citizen makes gifts to his/her non-US citizen spouse. A limited lifetime exclusion applies to these gifts. This has been increased to $149,000 in 2017 and is scheduled to rise further to $152,000 in 2018.
You may be able to give unlimited amounts toward tuition or medical expenses if you pay the educational institution or provider directly.