As 2021 comes to a close, it’s a good time to think about the planning opportunities that may still be available to you before the end of the year. While there will be some low hanging fruit which you may already be familiar with, it’s important to also consider some of the more complex tax planning opportunities which could apply to your situation. So, what can you be doing now to optimise your global tax position? Here are seven of our top tips for your consideration.
1. Get on top of your foreign tax Credits
If you claim foreign tax credits on a paid basis, you may be required to accelerate your UK (or other foreign country) tax payment into the current calendar year. Concentrating on the UK, the tax due here on untaxed 2021 income and gains will most likely be payable after the end of the 2021 calendar year. So, by making this payment in December 2021 instead, you can ensure that this tax credit is available to offset any 2021 US tax that would otherwise be due.
Is this relevant to you?
This is typically relevant to you if you are:
■ a self-employed individual
■ a partner in a partnership
■ an arising basis taxpayer
■ an individual becoming ‘deemed domiciled’ in the UK
■ an individual with significant one-off transactions in 2021, such as a capital gain, carried interest payment or remittance to the UK
However, it is less relevant if you are in receipt of employment income only, on which taxes are typically correctly withheld at source.
An important point to note here is that the US/UK income tax treaty needs to be reviewed, to determine which jurisdiction has the primary taxing right on the specific income in question.
If you are a US taxpayer resident in the UK, the UK is awarded that right on most types of investment income, excluding US real estate and a portion of US dividend income.
And for the avoidance of any doubt, if you claim foreign tax credits on the accrued basis, the above will not apply to your situation.
2. Double-check charitable donations
For a charitable donation to be deductible in the 2021 tax year, it must be paid within 2021. This applies to donations being made in both cash and via other property.
It is always worth exploring non-cash methods of donation that may help you achieve your aims. For example, the ability to donate shares instead of cash can be overlooked. Appreciated stock can be donated to charity, with the fair market value of the stock generally equating to the deemed donation value.
What is more, the capital gains tax on the ‘sale’ will not apply when the charity later sells the stock, so this represents a very clear double tax saving.
There are also specialist donor-advised funds available which exist to enable both a US and UK tax deduction on your charitable donations. However, a fee is often payable for these services, so these should only be considered when looking to make larger donations.
Many large US universities and investment houses can offer similar dual-qualifying structures, so the next time you are considering a donation, it might be worth asking the charity if they have such a structure in place, because they may not be aware of your status as a US and UK taxpayer.
3. Itemised deductions vs the standard deduction
It is important to remember that the standard deduction has increased significantly in recent years. For 2021, the standard deduction for single taxpayers and those married but filing separately is $12,550. Married couples who file a joint return will be entitled to a standard deduction of $25,100.
With this in mind, and depending on the amounts involved, some taxpayers who have claimed itemised deductions historically, including charitable donations, may now be better off simply claiming the standard deduction instead.
Making the choice between an itemised deduction and the standard deduction is something that you can do each year. This could make it more efficient to carry out one-off larger charitable donations every few years, rather than smaller annual payments.
4. Releasing unrealised losses
The Biden administration continues to raise the prospect of an increase to the long-term capital gains tax rate in the future, although these changes now seem less likely than several months ago. Some taxpayers may still be considering realising capital gains in 2021 to ensure the 20% rate applies.
Typically, it is worth considering utilising any unrealised capital losses within the same calendar year as capital gains. In most circumstances, capital losses cannot be carried back to earlier years, so by realising losses in the same year as gains, you can achieve a noticeable tax saving.
Note that the ‘matching’ of losses to gains is not necessarily required and so you do not need to realise short term losses to offset short-term gains. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income (up to an annual limit of $3,000, or $1,500 if you are married but filing separately).
If your capital losses for the year exceed your capital gains after the deductible amount, the remaining loss is carried forward indefinitely for use against future capital gains.
Always consider foreign exchange rates when realising any capital losses to avoid any nasty surprises.
If you are selling an asset denominated in a currency other than US dollars (USD), the cost basis and proceeds will need to be converted into USD to determine the loss from a US tax perspective. This can trigger unexpected results and, sometimes, flip a foreign loss into a USD gain.
5. Consider State and Local taxes
One of the key changes as part of President Trump’s tax reform in recent years was a heavy restriction on the deductibility of State and Local taxes on the Federal tax return. This restriction remains in place for 2021 and taxpayers can only claim up to $10,000 of State and Local taxes as an itemised deduction.
Bearing this in mind, it is worth giving some thought as to whether a benefit can still be derived from accelerating those quarter four (Q4) estimated State tax payments. The decision on whether to do so should be informed by the wider context of claiming itemised deductions or the standard deduction, so it may be worth speaking to your adviser about this.
6. Feeling generous?
The gift tax annual exclusion for 2021 sits at $15,000, which is the same amount as in 2020. This means you can generally gift up to $15,000 in the tax year to any number of people without those gifts being taxable. For married taxpayers who are splitting gifts, the exclusion for 2021 is $30,000.
You are also able to give unlimited amounts towards tuition or medical expenses if you pay the provider directly.
Beyond the annual exclusion, the lifetime gift and estate tax exemption will apply – sometimes referred to as the unified credit. For 2021, the amount is an inflation adjusted $11.7m, which may allow small additional non-taxable gifts to be made by those who have previously exceeded their lifetime limit. There was much talk of tax reform significantly reducing this amount from 2022 onwards, but discussions regarding this appear to have lost momentum, for now.
Use of the unified credit during your lifetime will of course reduce the exemption available on death.
The annual gift limit to a non-US spouse has also been increased to $159,000 for 2021.
7. Life after retirement
There is still time to make contributions to your retirement plan for the 2021 tax year. For those under 50 years of age, the amount you can contribute to a Traditional Individual Retirement Account (IRA) or Roth IRA sits at $6,000 for 2021 – the same limit applied for 2020.
The maximum 2021 contribution to a 401(k) plan is $19,500. Again, this applies to those under 50.
To maximise your tax-deferred savings, you may wish to discuss with your financial advisor whether fees levied by your pension provider can be met using assets held outside of the plan.
If you are unsure about how any of the aspects we’ve discussed in this article might apply to you, please feel free to get in touch for help and advice.