It’s an unusual year in multiple ways, and this is also true when it comes to 2020 year-end tax planning.
Both the Coronavirus pandemic and the presidential election will affect year-end tax planning for some expats this year.
While the pandemic has affected the Foreign Earned Income Exclusion rules, tax changes next year due to the election result are still uncertain , as while the Democrats have announced a raft of tax plans that primarily affect businesses and higher earners, unless they can take two senate seats from the Republicans in Georgia in a run-off in January, they will be limited in their ability to enact their tax plans.
Without further ado, here are some 2020 year-end tax planning tips for Americans living abroad.
1 – Ensure that you’re up to date with your US taxes
The first and most important action expats should take to minimize US tax and penalties is to ensure that they are up to date with their US tax filing.
All American citizens are required to file US taxes, wherever in the world they reside, reporting their worldwide income. Expats may also have to report their foreign registered bank accounts, investments, business interests, and assets.
Most expats don’t end up owing any US tax as long as when they file they claim the Foreign Tax Credit or the Foreign Earned Income Exclusion.
Expats that don’t file though are considered to owe US tax on their worldwide income, regardless of whether or not they pay foreign taxes in their host country/ Expats who have missed previous years US filing meanwhile are not only considered liable for back taxes on their global income, but interest and penalties, too.
The good news is that expats who have missed previous years can usually catch up under a voluntary amnesty program such as the Streamlined Procedure, which most often eliminates their liability for back taxes and fines.
“Between the presidential election and the COVID-19 pandemic, this year has seen more than its share of uncertainty around tax — which makes year-end planning all the more crucial.”- Accounting Today
2 – The Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion allows expats to exclude $107,600 (for 2020) of their earned income from US tax. To claim it, expats must file Form 2555 and demonstrate that they are either a permanent resident in another country, or that they spent at least 330 full days outside the US. This means that expats who can’t demonstrate permanent residence abroad (through evidence of a permanent home, or paying foreign taxes, for example), must carefully count the days they spend in the US, to qualify.
For expats who wish to claim the Foreign Earned Income Exclusion (typically those who don’t pay foreign taxes and so claim the Foreign Tax Credit), this in turns means planning your travel for 2021 (and the remainder of 2020) to ensure that you qualify.
For 2020, the rules have changed slightly so that anyone who was forced to leave China because of COVID-19 between December 1st 2019 and July 15th 2020, or another country between February 1st 2020 and July 15th 2020, can still qualify.
3 – Retirement contributions
In common with Americans in the States, expats can reduce next year’s US tax bill (if they need to) by making additional contribution before the end of this year into qualifying retirement plans, such as 01(k), 403(b), Deductible IRA, SIMPLE IRA, and SEP plans.
4 – Charitable donations
Since the higher Standard Deduction was introduced in the 2017 Tax Reform, many Americans no longer seek to reduce their tax bill using itemized deductions. Furthermore, most expats don’t end up owing any US tax anyway, as long as they file. That said, some expats may still benefit from making charitable donations in 2020 to qualifying US charities.
5 – Losses
Americans abroad who will owe capital gains tax for 2020 may benefit from selling some loss-making investments now to offset their profits. Expats should note that the proceeds of loss-making investments can’t be reinvested for 30 days though.
6 – Prepare for filing
The end of the year is a good time to start preparing to file for 2020. This means ensuring that they have proof of income and bank (and investment) account statements to make filing straightforward come January 1st 2021.
7 – Seek assistance
Expats besides those with the simplest financial circumstances may benefit from a conversation with their tax adviser to determine whether there’s anything else they can do to minimize their US tax bill in 2021.