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Last updated: 14 Nov 2023
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2023 US tax year end planning

The 2023 US tax year ends on 31 December 2023, so now is a good time to consider whether there is anything that you can do to minimise your US tax exposure for 2023 and begin preparing for 2024.

Key considerations

The US Supreme Court ruled that the $10,000 Foreign Bank Account Report (FBAR) penalty for non-wilful violations is calculated on a per annual filing basis and not a per account basis.  The outcome of this ruling is likely to lead to the IRS imposing these penalties on a routine basis and highlights the importance of this filing requirement for 2023. We encourage US persons to focus early in 2024 to ensure this filing requirement is fully met and not see this as an appendage to the tax return.

The IRS Streamlined filing program is still available to eligible non-wilful non-filers who want to bring their US tax affairs up to date without incurring any penalties (including the aforementioned $10,000 per FBAR). However, it remains to be seen how much longer the IRS will support this, so it’s imperative to act quickly and get in touch with us now if you’d like to discuss the Streamlined filing program for delinquent taxpayers.

In July 2023 the IRS published Notice 2023-55, providing temporary relief from the final foreign tax credit regulations issued in 2022. The final regulations made it a requirement for taxpayers to determine whether a foreign tax was eligible as a foreign tax credit, but with a creditability criteria that could have pushed certain US citizens into double taxation. This temporary relief was for the 2022 and 2023 tax years, as such the question on foreign tax credit eligibility returns for 2024. We expect that the regulations will be clarified at some point in 2024, but if you’re concerned about having eligible foreign tax credits in 2024, you may want to consider pre-paying your 2024 foreign taxes in 2023, as excess foreign tax credits can be carried forward up to 10 years.

With the 60th US Presidential election taking place this time next year, change could be on the horizon - be it a Republican looking to extend President Trump’s Tax Cuts and Jobs Act of 2017, or a Democrat aiming to “make billionaires pay up” as President Biden likes to say. With no clear front runner at this stage it’s all the more important to consider your tax position today to utilise all available tax planning options.

About the authors

Allan Wilkinson

+852 2531 7003
wilkinsona@buzzacott.hk
LinkedIn

Virginia Zee

+852 2531 7004
zeev@buzzacott.hk

Key considerations

The US Supreme Court ruled that the $10,000 Foreign Bank Account Report (FBAR) penalty for non-wilful violations is calculated on a per annual filing basis and not a per account basis.  The outcome of this ruling is likely to lead to the IRS imposing these penalties on a routine basis and highlights the importance of this filing requirement for 2023. We encourage US persons to focus early in 2024 to ensure this filing requirement is fully met and not see this as an appendage to the tax return.

The IRS Streamlined filing program is still available to eligible non-wilful non-filers who want to bring their US tax affairs up to date without incurring any penalties (including the aforementioned $10,000 per FBAR). However, it remains to be seen how much longer the IRS will support this, so it’s imperative to act quickly and get in touch with us now if you’d like to discuss the Streamlined filing program for delinquent taxpayers.

In July 2023 the IRS published Notice 2023-55, providing temporary relief from the final foreign tax credit regulations issued in 2022. The final regulations made it a requirement for taxpayers to determine whether a foreign tax was eligible as a foreign tax credit, but with a creditability criteria that could have pushed certain US citizens into double taxation. This temporary relief was for the 2022 and 2023 tax years, as such the question on foreign tax credit eligibility returns for 2024. We expect that the regulations will be clarified at some point in 2024, but if you’re concerned about having eligible foreign tax credits in 2024, you may want to consider pre-paying your 2024 foreign taxes in 2023, as excess foreign tax credits can be carried forward up to 10 years.

With the 60th US Presidential election taking place this time next year, change could be on the horizon - be it a Republican looking to extend President Trump’s Tax Cuts and Jobs Act of 2017, or a Democrat aiming to “make billionaires pay up” as President Biden likes to say. With no clear front runner at this stage it’s all the more important to consider your tax position today to utilise all available tax planning options.

Ordinary income tax rates

Ordinary Income Tax rates

As it stands, the top Federal tax rates for 2024 will match 2023, with a top rate of 37%. This rate applies to individuals with Adjusted Gross Income (AGI) in excess of:

Filing status    

2023

2024

Married Filing Jointly (MFJ)

$693,750

$731,200

Head of Household (HoH)                                      

$578,100

$609,350

Single

$578,125

$609,350

Married Filing Separately (MFS)

$346,875

$346,875

Standard deduction for the 2024 tax year: rises to $29,200 for MFJ (an increase of $1,500 from 2023), rises to $14,600 for Single and MFS (an increase of $750 from 2023), and rises to $21,900 for HoH (an increase of $1,100 from 2023). 

Opportunities before year end

Opportunities before year end

So, what opportunities could you take advantage of in the run-up to the end of 2023? We’ve summarised a few for you to consider. Click the banners below to view the opportunities and what you should do for each. Click the banner again to close the section once you are done.

Utilising unused 2023 allowances or deferring income to 2024

Spreading income over two tax years

Depending on your tax bracket, the tax rate on long term capital gains and qualified dividends ranges from 0% - 20%. The tax rates on ordinary income range from 0% - 37%. You can deduct losses up to $3,000 with any excess losses carried forward. Should you wish to reinvest in the same stock, it’s best to do so either 30 days before or 30 days after the sale to avoid wash sale rules, which would disallow the loss.

What should you do?

By spreading capital gains/income between tax years, you can abstain from incurring spikes in income, which may push gains/income into the higher tax brackets. This may help minimise the total tax paid for those tax years. You may also want to consider realising some capital losses to reduce tax on other investment income and gains. 

An investment decision should also be made, and there’s the possibility of disposing of and reacquiring an asset, so we advise that you seek advice tailored to your unique circumstances.

Net Investment Income Tax (NIIT)

You may continue to incur an additional tax of 3.8% on unearned investment income, where your Modified Adjusted Gross Income (MAGI) exceeds the following thresholds:

Filing status

Threshold amount

Married Filing Jointly (MFJ)

$250,000

Married Filing Separately (MFS)

$125,000

Single

$200,000

Head of Household (HoH) with qualifying person

$200,000

Qualifying widow(er) with dependent child

$250,000

What should you do?

If you spread investment income across a number of years or offset it by above the line deductions, you can avoid incurring the additional 3.8% NIIT by keeping your total income under the thresholds. You could also consider realising capital losses in years where you have higher investment income.

Estate and gift tax

For the estate of a US citizen or domicile who makes taxable gifts or passes away in the 2023 calendar year, the lifetime exclusion available against the estate or gift tax is $12,920,000, increasing to $13,610,000 in 2024.

Bearing in mind that the exclusion amount is scheduled to reduce to pre-2018 levels after 2025, and the IRS has confirmed that individuals taking advantage of the increased levels for 2018 to 2025 will not be inversely impacted after 2025, 2023 is a good time to take advantage of gifting opportunities before the exclusion decreases.

What should you do?

There’s potential for you to make tax-efficient gifts before the 2023 year end. For example, you could make a gift of up to $17,000 ($18,000 In 2024), per donee, per donor, and not use up the current $12,920,000 Estate Tax threshold. 

You may also want to follow through with any tax planning that involves using up the lifetime exemption amount before it reduces in a few years’ time.

US pensions

If you hold a traditional Individual Retirement Account (IRA) or 401(k) plan, you continue to be able to convert it to a Roth IRA. Converting your traditional IRA to a Roth IRA will, for some taxpayers, create long-term tax benefits. This is because, generally speaking, subsequent withdrawals are not taxable and no minimum distribution is required each year after reaching age 73 (unlike for traditional IRAs). Conversions are taxable in the US at ordinary Income Tax rates and so will create a tax charge for 2023 that must be met by other sources of cash. However, given the flexibility that a Roth may bring, if you’re more suited to a Roth IRA from an investment perspective, you may wish to consider making the conversion now. 

Where contributions into a 401(k) plan or traditional IRA also involve a period of foreign service, available foreign tax credits may be used to reduce the liability. Furthermore, no Net Investment Income Tax (NIIT) is due on any distribution, conversion or rollover to/from a Roth IRA account.

What should you do?

Consider transferring your traditional IRA/401(k) plan into a Roth IRA before the end of 2023 if you’re more suited to it from an investment perspective.

Mortgage redemptions

If you have a mortgage denominated in a currency other than the US dollar and you’re about to sell your property and redeem the mortgage, beware of the tax trap. This includes US taxpayers with non-US mortgages who have a mortgage contract about to expire (e.g. a two year fixed rate deal) and are considering transferring to a different mortgage (re-mortgage). This does not include a product transfer of the same mortgage with the same mortgage provider.

If the mortgage currency is down against the dollar compared with the exchange rate at the time the mortgage was agreed, it will cost less in dollars to relinquish the mortgage than it did when that currency was stronger. The IRS unfortunately taxes this dollar ‘gain’ as income, which can surprise a lot of people, especially when the actual value of the property may have gone down in dollar terms as a result of the relative devaluation of the local currency. 

What should you do?

Consider the foreign exchange position before changing mortgage contracts.

Foreign tax payments timed before or after 31 December 2023

If you pay tax in any non-US jurisdiction and are on the ‘paid’ basis of accounting for foreign tax credits, it’s important that you consider paying your local tax liability by 31 December 2023, even if the tax on the income is not due until a later date. This will ensure that a corresponding foreign tax credit may be taken against any Federal tax due on non-US income realised in 2023 and reported on your 2023 US tax return. This is especially true for self-employed individuals and partners with rising profits or if a capital gain has been realised in 2023.

Experience tells us that making payments before the festive season avoids last-minute problems and ensures you have the available tax credit. However, you should note that it’s not always possible to make payments early so it will depend on how tax is assessed in your local jurisdiction.

Conversely, if you have plenty of excess foreign tax credits carried forward from the previous 10 years, you may want to consider utilising these by deferring a foreign tax payment to next year, if it is possible to do so without incurring penalties for late payment. This is because after 10 years, unused foreign tax credits are wasted. Rolled over foreign tax credits are utilised in a year with a shortfall of foreign tax credits on a first in first out basis, so intentionally creating a shortfall in 2023 may allow you to utilise credits going back to 2013.

What should you do?

If you’ve realised any capital gains in 2023, or your income that is not taxed at source has increased, consider making a prepayment of UK tax before 31 December 2023.

If you have large carried forward unused credits, consider paying the tax in2024 if the unused credits are in the relevant basket.

Residency

When looking to move to a new country, it’s important that tax advice is taken well ahead of the move to allow for the most efficient tax planning. If you’re a green card holder, the beginning of the new 2024 tax year will mean another year is added to the number of years considered under the eight out of 15 year expatriation tax charge regime.

What should you do?

If you’re considering a move to a new country, get in touch with our experts first to allow adequate time for planning. If you’re approaching the eight-year green card holding period, you may wish to take advice as to whether there would be any advantage in surrendering your green card this 2023 calendar year.

Key deadlines

Key deadlines

There are other upcoming deadlines that you may need to be aware of, but here are some of the key US tax deadlines to consider over the next few months.

31 December 2023

End of the 2023 US tax year. This is the deadline for implementing any US tax year end planning, such as making an upfront UK tax payment.

16 January 2024

Final instalment of 2023 US estimated taxes due.

15 March 2024

US partnership and trust return deadline. A filing extension can be made to extend the deadline to 16 September.

15 April 2024

Foreign Bank Account Reports (FBAR)/FinCen Form 114 – these are automatically extended to 15 October 2024.

Individual Income Tax return filing deadline (automatic two-month extension to 17 June 2024 applies to taxpayers living overseas). Further extensions can also apply if filed.

First instalment of 2024 US estimated taxes due.

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As your circumstances are unique, we recommend that you seek professional advice where appropriate before taking any action. For professional advice tailored to your unique circumstances, please fill out the form below and one of our experts will be in touch to discuss your requirements and how we can help. Please note that our advisory services are charged at our hourly rates and a formal engagement will need to be in place before any advice is provided. 

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