2023 US tax year end planning

Spreading income over two tax years

Depending on your tax bracket, the tax rate on long term capital gains and qualified dividends ranges from 0% - 20%. The tax rates on ordinary income range from 0% - 37%. You can deduct losses up to $3,000 with any excess losses carried forward. Should you wish to reinvest in the same stock, it’s best to do so either 30 days before or 30 days after the sale to avoid wash sale rules, which would disallow the loss.

What should you do?

By spreading capital gains/income between tax years, you can abstain from incurring spikes in income, which may push gains/income into the higher tax brackets. This may help minimise the total tax paid for those tax years. You may also want to consider realising some capital losses to reduce tax on other investment income and gains. 

An investment decision should also be made, and there’s the possibility of disposing of and reacquiring an asset, so we advise that you seek advice tailored to your unique circumstances.

Net Investment Income Tax (NIIT)

You may continue to incur an additional tax of 3.8% on unearned investment income, where your Modified Adjusted Gross Income (MAGI) exceeds the following thresholds:

What should you do?

If you spread investment income across a number of years or offset it by above the line deductions, you can avoid incurring the additional 3.8% NIIT by keeping your total income under the thresholds. You could also consider realising capital losses in years where you have higher investment income.

For the estate of a US citizen or domicile who makes taxable gifts or passes away in the 2023 calendar year, the lifetime exclusion available against the estate or gift tax is $12,920,000, increasing to $13,610,000 in 2024.

Bearing in mind that the exclusion amount is scheduled to reduce to pre-2018 levels after 2025, and the IRS has confirmed that individuals taking advantage of the increased levels for 2018 to 2025 will not be inversely impacted after 2025, 2023 is a good time to take advantage of gifting opportunities before the exclusion decreases.

What should you do?

There’s potential for you to make tax-efficient gifts before the 2023 year end. For example, you could make a gift of up to $17,000 ($18,000 In 2024), per donee, per donor, and not use up the current $12,920,000 Estate Tax threshold. 

You may also want to follow through with any tax planning that involves using up the lifetime exemption amount before it reduces in a few years’ time.

If you hold a traditional Individual Retirement Account (IRA) or 401(k) plan, you continue to be able to convert it to a Roth IRA. Converting your traditional IRA to a Roth IRA will, for some taxpayers, create long-term tax benefits. This is because, generally speaking, subsequent withdrawals are not taxable and no minimum distribution is required each year after reaching age 73 (unlike for traditional IRAs). Conversions are taxable in the US at ordinary Income Tax rates and so will create a tax charge for 2023 that must be met by other sources of cash. However, given the flexibility that a Roth may bring, if you’re more suited to a Roth IRA from an investment perspective, you may wish to consider making the conversion now. 

Where contributions into a 401(k) plan or traditional IRA also involve a period of foreign service, available foreign tax credits may be used to reduce the liability. Furthermore, no Net Investment Income Tax (NIIT) is due on any distribution, conversion or rollover to/from a Roth IRA account.

What should you do?

Consider transferring your traditional IRA/401(k) plan into a Roth IRA before the end of 2023 if you’re more suited to it from an investment perspective.

If you have a mortgage denominated in a currency other than the US dollar and you’re about to sell your property and redeem the mortgage, beware of the tax trap. This includes US taxpayers with non-US mortgages who have a mortgage contract about to expire (e.g. a two year fixed rate deal) and are considering transferring to a different mortgage (re-mortgage). This does not include a product transfer of the same mortgage with the same mortgage provider.

If the mortgage currency is down against the dollar compared with the exchange rate at the time the mortgage was agreed, it will cost less in dollars to relinquish the mortgage than it did when that currency was stronger. The IRS unfortunately taxes this dollar ‘gain’ as income, which can surprise a lot of people, especially when the actual value of the property may have gone down in dollar terms as a result of the relative devaluation of the local currency. 

What should you do?

Consider the foreign exchange position before changing mortgage contracts.

If you pay tax in any non-US jurisdiction and are on the ‘paid’ basis of accounting for foreign tax credits, it’s important that you consider paying your local tax liability by 31 December 2023, even if the tax on the income is not due until a later date. This will ensure that a corresponding foreign tax credit may be taken against any Federal tax due on non-US income realised in 2023 and reported on your 2023 US tax return. This is especially true for self-employed individuals and partners with rising profits or if a capital gain has been realised in 2023.

Experience tells us that making payments before the festive season avoids last-minute problems and ensures you have the available tax credit. However, you should note that it’s not always possible to make payments early so it will depend on how tax is assessed in your local jurisdiction.

Conversely, if you have plenty of excess foreign tax credits carried forward from the previous 10 years, you may want to consider utilising these by deferring a foreign tax payment to next year, if it is possible to do so without incurring penalties for late payment. This is because after 10 years, unused foreign tax credits are wasted. Rolled over foreign tax credits are utilised in a year with a shortfall of foreign tax credits on a first in first out basis, so intentionally creating a shortfall in 2023 may allow you to utilise credits going back to 2013.

What should you do?

If you’ve realised any capital gains in 2023, or your income that is not taxed at source has increased, consider making a prepayment of UK tax before 31 December 2023.

If you have large carried forward unused credits, consider paying the tax in2024 if the unused credits are in the relevant basket.

When looking to move to a new country, it’s important that tax advice is taken well ahead of the move to allow for the most efficient tax planning. If you’re a green card holder, the beginning of the new 2024 tax year will mean another year is added to the number of years considered under the eight out of 15 year expatriation tax charge regime.

What should you do?

If you’re considering a move to a new country, get in touch with our experts first to allow adequate time for planning. If you’re approaching the eight-year green card holding period, you may wish to take advice as to whether there would be any advantage in surrendering your green card this 2023 calendar year.