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2020 US tax year end planning

As we approach the end of 2020, we consider the impact that the US president-elect Biden will have and look at some important year end planning points to consider for US taxpayers in the UK. 

Last updated: 16 November 2020

The 2020 US tax year ends on 31 December 2020, so now is a good time to consider whether there is anything that you can do to minimise your US tax exposure for 2020 and to begin preparing for 2021.

Any tax planning opportunities should always include the US and UK tax implications for an American living in the UK, and any decisions taken in relation to buying or selling/gifting of assets should take account of both the investment as well as the tax consequences of doing so.

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Martin Scullion

+44 (0)20 7556 1207
scullionm@buzzacott.co.uk
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Last updated: 16 November 2020

The 2020 US tax year ends on 31 December 2020, so now is a good time to consider whether there is anything that you can do to minimise your US tax exposure for 2020 and to begin preparing for 2021.

Any tax planning opportunities should always include the US and UK tax implications for an American living in the UK, and any decisions taken in relation to buying or selling/gifting of assets should take account of both the investment as well as the tax consequences of doing so.

Planning with uncertainty

Planning with uncertainty

Joe Biden became the president-elect of the US following the 2020 election and is due to be inaugurated in January 2021. President Trump has not conceded the election, which is likely to make the transition difficult. In addition, the Senate doesn’t currently have one party in control, and so we await January 2021 to see how difficult it could be for Joe Biden to push through any significant tax reform from 2021. As there will continue to be uncertainty into the beginning of 2021, if you’re already considering tax planning moves such as making gifts or selling assets, you may want to accelerate these to lock in the certainty of the current rules.  

It seems unlikely that changes to income taxes can be brought in so rapidly as to be retroactive for all of 2021, particularly if the Republicans control the Senate. However, transaction based taxes, such as capital gains and estate and gifts taxes could be made effective from a specific date, although anything significant requiring congressional approval is likely to take a while to be approved or may not happen at all.

Ordinary income tax rates

Ordinary income tax rates

Assuming no retroactive income tax changes are made to 1 January 2021, the top federal tax rates are unchanged from the previous year, with a top rate of 37%. This rate applies to individuals with Adjusted Gross Income (AGI) in excess of: 

Filing status    

2020

2021 (projected)

Married Filing Jointly (MFJ)

$622,050

$628,300

Head of Household (HoH)                                      

$518,400

$523,600

Single

$518,400

$523,600

Married Filing Separately (MFS)

$311,025

$314,150

Opportunities before year end

Opportunities before year end

So what opportunities could you take advantage of in the run-up to the end of 2020? Below we’ve summarised a few for you to consider. Click the banners to view the opportunities and what you should do for each, and click the banner again to close that section.

Utilising unused 2020 allowances or deferring income to 2021

Spreading income over two tax years

Depending on your tax bracket, the tax rates on long term capital gains and qualified dividends ranges from 0% - 20%. The tax rates on ordinary income range from 0% - 37%. Biden’s proposal is to increase the top income tax rate back to 39.6% and filers with more than $1million of income will face a long-term capital gains rates of 39.6% (up from 20%).

You can deduct losses up to $3,000 with any excess loss carried forward. Should you wish to reinvest in the same stock, either it’s best to do so 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 in to 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. Do always consider the US and UK tax impact of your tax and investment planning.  

If you have an income over $1million, you may want to consider accelerating gains in 2020 if there’s a potential chance of tax rates almost doubling in the future. An investment decision should also be made, and there is the possibility of disposing of and reacquiring an asset, but we advise that you seek advice tailored to your 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 (AGI) exceeds the following thresholds:

Filing status

Threshold amount

Married Filing Jointly (MFJ)

$250,000

Married Filing Separately (MFS)

$125,000

Single

$200,000

Head of Household (HoH) with qualifying person

$200,000

Qualifying widow(er) with dependent child

$250,000

What should you do?

By spreading investment income across a number of years or offsetting it by above the line deductions, you can prevent the requirement of paying the additional 3.8% NIIT by keeping your total income under the NIIT thresholds. To do this, you could consider paying a dividend or realising capital losses. 

Estate and gift tax

For the estate of a US citizen or domicile who makes taxable gifts or passes away in the 2020 calendar year, the lifetime exclusion amount is $11.58million for determining the amount of credit against estate or gift tax. This creates opportunities for more gifting/estate planning in 2020. Remember that gifts to US charitable trusts could be deemed to be a settlement for UK tax purposes assuming the settlor is considered UK domiciled. Get in touch for advice on having US/UK tax relief on charitable contributions and avoiding any UK inheritance tax on a settlement into trust. 

The uncertainty with 2021 is whether the lifetime exclusion amount will be reduced and if so, whether changes will happen during 2021. Therefore, if you already had planning involving using up the lifetime exemption amount, you may want to follow through with this knowing that the rate is expected to be reduced at some point in the future. There are other estate issues such as the potential of there being no step up in basis of assets held at death. If such laws are enacted next year, many estate planning strategies may need to be reviewed.

What should you do?

There’s potential for you to make tax efficient gifts before the 2020 year end. For example, you could make a gift of up to $15,000, per donee, per donor and not use up the current $11.58million estate tax threshold. 

US pensions

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 as generally subsequent withdrawals are not taxable, and no minimum distribution is required each year after reaching age 72 (unlike for traditional IRAs). Conversions are taxable in the US at ordinary income tax rates and so will create a tax charge for 2020 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 the 401(k) plan or traditional IRA also involve a period of foreign service, available foreign tax credits may be used to reduce the liability. No Net Investment Income Tax (NIIT) is due on any distribution, conversion or rollover to/from a Roth IRA account.

What should you do?

You may want to consider transferring your traditional IRA/401(k) plan into a Roth IRA before the end of 2020 if you’re more suited to it from an investment perspective.

Mortgage redemptions

If you have a non-US (i.e. UK) mortgage and you’re about to sell your property and redeem the mortgage, beware of the tax trap. This includes US taxpayers with UK mortgages who have a mortgage contract about to expire (i.e. a 2 year fixed rate deal) and are considering transferring to a different mortgage.

Generally, the British pound is down against the dollar compared with the last decade, which means it costs less in dollars to relinquish a mortgage than it did when the pound was stronger. The IRS (Inland Revenue Service) 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 British pound devaluation. It’s possible to harvest excess foreign tax credits in such a situation, so we encourage you to seek advice and plan against any nasty surprises.

What should you do?

Consider the foreign exchange position before changing mortgage contracts.

UK tax payments timed before or after 31 December 2020

If you pay UK tax on your worldwide income (and are on the ‘paid’ basis of accounting for foreign tax credits), it’s important that you consider paying your UK tax liability by 31 December 2020, even if the tax on the income is not due until 31 January 2021, or possibly even 31 January 2022. This will ensure that a corresponding foreign tax credit may be taken against any federal tax due on foreign income realised in 2020, and reported on your 2020 US tax return. This is especially true for self-employed individuals with rising profits or if a capital gain has been realised in 2020.

Experience tells us that making payments before the festive season avoids last-minute problems and ensures you have the available tax credit.

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 UK tax payment to next year, to still be compliant with the 31 January 2021 UK tax return filing deadline. This is because after 10 years unused foreign tax credits are wasted. Unused 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 2020 would allow you to utilise credits going back to 2010.

What should you do?

If you’ve realised any capital gains in 2020, or your income not taxed at source has increased, consider making a prepayment of UK personal or corporation tax before 31 December 2020. If you have large carried forward unused credits, consider paying in January 2021.

Residency

If you’re considering a 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 2021 tax year will mean another year is added to the number of years considered with the eight out of 15 year expatriation tax charge regime. You may wish to take advice as to whether there would be any advantage in surrendering your green card this calendar year.

What should you do?

If you’re considering a move to a new country, get in touch with our experts first to allow adequate planning. If you’re approaching the eight year green card holding period, consider relinquishing your green card in 2020. 

Key deadlines

Key deadlines

There are other upcoming deadlines that you may need to be aware of, but here are some of the key US and UK tax deadlines to consider over the next few months.

30 December 2020

If you have UK tax liabilities of less than £3,000, you can electronically file your tax return by this date and request that the tax be collected via a PAYE coding adjustment for the 2020/21 tax year.

15 January 2021

Final instalments of 2020 US estimated taxes due.

31 January 2021

2019/20 UK tax return electronic filing deadline.

16 March 2021

US partnership and trust returns deadline. Extension can also apply to 15 September.

5 April 2021

End of the 2020/21 UK tax year – consider UK planning before this date (look out for our UK tax year end planning article we'll publish in February).

15 April 2021

Foreign Bank Account Reports (FBAR)/FinCen Form 114 – these are automatically extended to 15 October 2021.

Individual income tax return filing deadline (automatic two month extension to 15 June 2021 applies to taxpayers living overseas). Extension can also apply. First instalment of 2021 US estimated taxes due.

Speak to an expert
Speak to an expert

We recommend that you seek professional advice where appropriate before taking any action so please contact your usual Buzzacott contact or fill out the form below if you have any questions. 

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