Are you an American expat living abroad? If so, it’s important to make sure you are maximizing all the deductions and credits available to you on your US expat tax return.
Proper tax planning and preparation can help you save a significant amount of money and ensure you are in compliance with all relevant tax laws.
In this blog, we will provide some tips for maximizing deductions and credits on your US expat tax return, including seeking out an US expat tax consultation and taking advantage of the Foreign Earned Income Exclusion and Capital Gain Tax exclusion.
Keep reading to learn more and make sure you’re getting the most out of your expat tax return.
1. FEIE qualification – a significant tax benefit for Americans living overseas!
Review your trip dates and foreign residency status to ensure you qualify for the Foreign Earned Income Exclusion for 2023, which is up to $108,700.
Typically, you must spend at least 330 full days in foreign nations within a 12-month period to satisfy the physical presence requirement. Review your trip dates and intentions to verify you have a 12-month timeframe that satisfies the requirement for the 2023 tax year.
Alternatively, if you qualify for bona fide residency in your host nation. You must demonstrate social and cultural ties to the nation in which you have spent considerable time.
2. Combine deductions for the greatest impact
The majority of US expats do not itemise deductions but instead use the standard deduction. With the standard deduction rising to $12,550 for individuals and $25,100 for married couples filing jointly, itemising will help an even smaller portion of taxpayers.
Consider shifting deductible spending into 2023 if you are near to these new criteria. You might, for instance, make charity contributions or certain state and local tax payments in 2023 as opposed to 2022. Donor-Advised Funds are one way to accomplish this goal. They permit you to make a single donation in a given year, and the fund distributes the money across a number of years.
However, if you anticipate being in a lower tax bracket the following year, it makes sense to accelerate more expenses into the following tax year. Remember that not all overseas charities are recognised by the Internal Revenue Service.
Take advantage of the exceptional $300 above-the-line deduction and the absence of a restriction on itemised deductions for charitable contributions in 2023. Cash contributions to charities can be deducted up to $600 for married taxpayers filing joint returns.
Additionally, ensure that accelerated tax deductions do not trigger the Alternative Minimum Tax (AMT). Consult with a CPA firm or seasoned accountant to prevent unforeseen tax repercussions.
3. Avoid 2023 fines if you owed tax in 2021 or are self-employed.
If your tax withholdings are insufficient or you are self-employed without withholdings, you must pay estimated taxes quarterly. Failure to pay sufficient taxes by the due date may incur penalties.
To avoid further penalties, pay projected taxes for the period from September 1 to December 31 by January 15, 2023.
4. Recoup your capital losses, including your cryptocurrency losses
You can utilise a loss from the sale of a losing investment to offset taxable capital gains on assets such as stocks, bonds, and ETFs. You can also offset capital gains with losses carried over from earlier years.
When your capital losses for the year exceed your capital gains, you can use up to $3,000 of your net capital loss to offset other taxable income, such as salary, interest, and dividend income. Any additional losses might be carried over to the following year.
5. Contribute to a 529 college savings plan –
A 529 plan is a tax-advantaged savings account for education-related costs like tuition. The savings accumulate tax-free, but they must be used for qualified education expenses.
One can contribute up to $15,000 as an individual on yearly basis. It is even feasible to pre-fund the plan with up to $70,000 in donations spanning five years. Check to see if your state allows you to deduct this contribution from your income.
Contributions exceeding the annual gift tax limit of $15,000 are applied against the lifetime gift exclusion. This must be reported on IRS Form 709. Currently, the lifetime exclusion is $11.58 million. As part of the Build Back Better tax bill, this may alter. Any gifts exceeding this threshold may be subject to tax rates of up to 40%.
6. Consider a tax-free Roth IRA conversion –
If you are an American living abroad and your income in 2023 will be less than the FEIE limit of $108,700, you may be eligible to convert conventional IRA funds to Roth IRA funds tax-free.
Despite the fact that you can make 2023 IRA contributions until the April tax deadline, you must convert your IRA to a Roth IRA by the end of 2023 in order to get the benefits. This is why expats’ year-end tax planning is so crucial.
Although the tax benefits can be substantial, you should only do so under the supervision of an expert tax counsellor.
7. Put money into Opportunity Zones –
Opportunity Zone investments can be an excellent strategy to defer capital gains tax.
The 2017 tax change permitted taxpayers with substantial built-in capital gains to roll over their investments into designated funds that invest in real estate and other enterprises in these distressed zones.
This would result in the deferral of capital gains and the possible elimination of capital gains taxes, depending on how long the investment was held in the opportunity zone.
Remember that you can only roll over this capital gain if you invest in an eligible opportunity zone within 180 days of selling an investment that generated a capital gain.
8. Explore other tax planning alternatives –
If you made a substantial amount of money in 2023, you may choose to consult with a seasoned accountant & experienced cpa firm about additional tax planning strategies.
Consider establishing a defined benefit plan if you are 55 or older, or save money with land easements and US oil drilling.
Depending on their income and age, a defined benefit plan permits sole proprietors to invest hundreds of thousands of dollars in a pension account.
When land is granted to a land trust or government body, a land easement is created.
If the donation assists the public by permanently safeguarding key conservation resources, the donor may be eligible for a tax deduction on their federal income tax return.
Investments in U.S. oil drilling can provide investors with tax benefits proportional to the cost of drilling.
9. Ensure compliance with IRS crypto currency instructions –
The IRS crypto guideline announced in 2019 is a component of enhanced crypto tax enforcement.
Use the most efficient accounting approach for your situation and maintain accurate records of all transactions.
Beginning in 2023, under the proposed law, cryptocurrencies may be subject to the Wash Sale rule.
Consequently, you should consider conducting any transactions that would fall under the Wash Sale regulation before December 31, 2023.
10. Evaluate the probable effects of the new tax plan –
You may be curious about how Biden’s infrastructure package and future tax bill may affect your taxes. We are monitoring the situation in Washington, D.C., and will examine the modifications after the law has passed.
If enacted, the Biden tax plan would mostly affect individuals and corporations with earnings exceeding $400,000 annually.
Others may benefit from the tax credits advocated by Biden, such as an enlarged, fully refundable child tax credit.
As a provider of expat tax services, we are familiar with the unique issues that American expats experience while filing their tax returns. US expat tax planning and preparation are necessary to maximise deductions and credits and ensure compliance with applicable tax rules.
By adhering to these suggestions and seeking professional assistance, American expats may efficiently plan and prepare for their expat tax return and potentially save a substantial amount of money.
At Smart Accountants, we are dedicated to assisting expats in navigating complex tax regulations and maximizing their tax deductions and credits. Please contact us if you have any issues with your expat tax return or would like more information about our expat tax services.