Year-End Tax Planning for Cross-Border Families
As the 2014 tax year in the U.S. nears its end, now is an important time for international and cross-border families to consider actions which can reduce your tax bill. In this article, we highlight some important tax moves that any U.S. taxpayer should be thinking about, along with some additional items uniquely focused on international families in the States, and U.S. citizens and residents living abroad.
Review your portfolio
You should actively monitor your gains and losses to ensure that you minimize your capital gain position as of 31 December 2014. If you have a brokerage account outside the US, that advisor may not know that this is important for your tax planning in the U.S. Also, be sure to account for any exchange rate movements that could affect your calculations – the U.S. uses the USD equivalent purchase cost and sale proceeds. This means that it is possible to have a significant gain or loss in a security for U.S. tax purposes, even if the underlying security did not change in value (given the recent USD strength, it is more likely that you will have a loss in USD terms).
Also, if you are close to the threshold for the Net Investment Income tax you may wish to accelerate or defer capital gains or losses to minimize the additional 3.8% tax charge.
Worldviewize tax-deferred savings vehicles
Wherever possible, we recommend maximizing your contributions to pre-tax retirement savings programs (like the 401(k) for those on U.S. payroll). We have written a lot on the benefits of these programs, even for those who plan on leaving the U.S. for good in the future. Generally, the tax-deferred growth benefits persist, even for international families who move abroad. Should you be eligible to participate in an international tax-deferred salary deferral program, we recommend you participate (as long as that country’s plans qualify for U.S. purposes – if you are a U.S. resident).
Consolidate your foreign accounts and review your historical reporting
For those of you who have a requirement to file reports of foreign accounts, think about consolidating your accounts during 2014. This will simplify your compliance for 2015. It’s a good time to ensure you have access to the necessary statements for the coming year to easily find the maximum balances. Remember that the disclosures include non-US shares, trust and business assets, pension assets and deferred compensation as well as financial accounts. If you have missed out on any disclosure of a non-US financial asset you may benefit from one of the voluntary disclosure programs currently offered.
Optimizing your foreign tax credit position
You may benefit from making advance payments of foreign tax owed before 31 December 2014 to offset U.S. taxes due in the same calendar year. If you have generated a large item of income or gain in 2014, and the foreign tax has not yet been paid, it is advisable to seek advice to confirm whether or not you should pre-pay your foreign tax before 31 December.
Have an unreported home abroad? Consider reporting to the IRS
Many of our clients own homes in another country; often they are rented out. Many international professionals come to the U.S. and don’t totally understand that they should be reporting these offshore assets on their U.S. tax return. Once they learn that they should, they worry that doing so might negatively affect them from a tax perspective. From our experience, usually there is little to no tax impact from reporting the home to the IRS. In fact, if your home has a mortgage, you may be in a position of having a tax deduction were you to report it on your tax return. Thanks to tax deductible depreciation, this may be the case even if you have positive cash flow from the rental.
Don’t forget higher tax rates in the U.S. since 2013
Beginning January 2013, federal income tax rates changed to seven federal tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%). The maximum rate that applies to long-term capital gains also increased from 15% to 20% for families in the highest tax bracket (applies to long-term capital gains and qualified dividends). For married couples, the highest tax rate applies to those earning over $458k ($407k for single taxpayers).
Don’t forget the new Medicare taxes
New Medicare taxes created by the health-care reform legislation passed in 2010 took effect in 2013 as well. These added another 0.9% in income tax –commonly referred to as the Medicare portion—for high-wage earners.
Also in 2013, a new 3.8% Medicare contribution tax was imposed on the passive or unearned income (capital gains, interest, dividends, rents and royalty income, non-trade or non-business income, and any other passive income) of high-wage earners. This tax is especially hard on investors, as it effectively makes the Federal long-term capital gains tax rate 23.8% for high earners, and this doesn’t even include state taxes where applicable.
Who is affected? These new taxes affect all U.S. tax residents with wages exceeding $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).
What about California?
In California, Proposition 30, a Sales and Income Tax Increase Initiative, passed beginning with the 2013 tax year. It provided for an increase in the minimum statewide sales tax, as well as raising the personal income tax on annual earnings (all income including capital gains) over $250,000 for seven years, retroactive to the start of the 2012 tax year.
Most married families earning between $100k – $500k (or single filers earning $50k – $250k) pay a marginal tax equal to 9.3%. The highest earners (making over $1m for married couples, and $500k for a single person) pay a marginal rate of 12.3% – one of the highest in the nation.
Watch the timing of charitable giving or other itemized deductions
It’s sometimes possible to accelerate or defer deductions (like charitable giving, medical expenses, interest, state and local taxes, or property taxes) so that they can be claimed in one year instead of the other. For example, you might be able to accelerate deductions in 2014 by paying them out before the end of the year. Or, assuming you plan to realize more taxable income next year, you might consider trying to postpone deductions so that you can claim them in 2015 rather than 2014.
Utilizing gift tax exemptions
The most commonly used method for tax free giving is the annual gift tax exclusion which, for 2014, allows you to give up to $14,000 per recipient without reducing your estate and lifetime gift tax exclusion. Spouses can elect to ‘gift split’ and double the amount to $28,000. Taxpayers married to non-US spouses have a special annual exclusion of $145,000 for 2014 which increases to $147,000 in 2015. Both of these exemptions work on a ‘use it or lose it’ basis, so take advantage before year end.
When making larger gifts, planning may be needed to understand the subsequent tax position for the donor and recipient.
Talk to a professional
When it comes to year-end tax planning, there’s always a lot to think about. A qualified cross border wealth advisor or tax professional can help you evaluate your situation and make the best decisions possible for your future.
Please contact us to learn more about how we can help you to maximize your wealth.