Year-End Tax Planning Tips for Expats in 2021
2021 has flown by, and the holidays are approaching once again. As the October extended tax filing deadline recedes in the memory, it’s a great time to do a little year-end planning to ensure that filing in 2022 is smooth and easy in order to minimize your tax bill.
1 – Ensure you’re up to date to avoid penalties and back taxes
If you’re living abroad but haven’t been filing US taxes, catch up as soon as possible to avoid possible penalties. The US taxes all American citizens on their worldwide income, so if you’re worldwide earnings exceeded $12,400 in 2020 ($12,550 in 2021, or just $400 of self-employment income, or just $5 of any income if you’re married to but filing separately from a foreigner), you should be filing, wherever in the world your income originated.
When you file, you can claim special provisions for expats such as the Foreign Tax Credit for those who pay taxes in their resident country or the Foreign Earned Income Exclusion. Claiming these results in most expats not owing any US tax.
If you’ve missed several years of US filing because you didn’t know you had to file from abroad, there’s an IRS amnesty program called the Streamlined Procedure that allows you to catch up without having to pay penalties. The important thing is to seek advice and get caught up as soon as possible.
2 – Retirement and education saving
“While tax season 2022 may be months away, the fourth quarter is the time for some proactive tax planning to lower your 2021 tax bill.” – Forbes
If you think you will have a US tax bill next year, increasing your retirement and education savings now can reduce it.
Qualifying retirement saving plans include Deductible IRA, Simple IRA, 301(k), 403(b), and SEP plans. Contributions made before the end of the year will reduce next year’s taxable income.
You can also contribute up to $15,000 (per person) into a 529 educational investment plan, where your savings will grow tax free, although they have to be spent on educational expenses and are allowed only for qualified educational institutions.
3 – Capital gains planning
The most common way to reduce next year’s capital gains tax bill is loss harvesting, which involves selling loss making investments this year to offset gains, so reducing your overall bill. Proceeds from loss making investments can be reinvested again after a minimum of 30 days.
4 – Business owners and self-employed expats
Year-end is a good time for business owners to review their corporate structure to ensure best tax efficiency.
As a business grows, it may make sense to change structure, in consultation with your expat tax CPA. Furthermore, expats with businesses registered overseas should keep an eye on President Biden’s planned tax changes, which may impose higher taxes on all businesses, and especially overseas ones owned by Americans.
Self-employed Americans meanwhile may benefit from starting a business to reduce their US social security tax bill, again in consultation with their US expat tax CPA.
5 – Lower earners
Lower earners living overseas may be able to do a tax-free IRA conversion if they claim the Foreign Earned Income Exclusion but earn less than the maximum FEIE limit ($108,700 in 2021), utilizing their ‘unused’ exclusion amount.
If you’re considering claiming the Foreign Earned Income Exclusion next year, remember to ensure that you’ll qualify by not spending more than 35 days in the US this year (for those expats who can’t provide evidence of being a permanent resident in another country).
6 – Higher earners
Higher earners on the other hand should keep an eye on the Biden tax plans, which aim to increase income tax and capital gains rates. It may be worth bringing forward income distributions or asset sales to this year, for example. Higher earners may also benefit from itemizing deductions instead of using the Standard Deduction next year – don’t forget the Home Office Deduction if you’ve been working remotely.
7 – Get ready for filing in 2022
All expats benefit from ensuring that they have all of their paperwork from 2021 in order and available now, including financial and income statements covering the whole year. This will help make your US tax filing in 2022 a breeze!