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Last updated: 4 Nov 2021
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2021 US tax year end planning

The 2021 Autumn Budget has brought in some certainty around UK taxation, with no significant changes made. On the US side, we’re yet to hear if President Biden’s tax proposals will come into effect, but there’s still important year end planning points to consider.

The 2021 US tax year ends on 31 December 2021, so now is a good time to consider whether there is anything that you can do to minimise your US tax exposure for 2021 and to begin preparing for 2022.

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

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Annabel Poon

+44 (0)20 7710 0393
poona@buzzacott.co.uk
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The 2021 US tax year ends on 31 December 2021, so now is a good time to consider whether there is anything that you can do to minimise your US tax exposure for 2021 and to begin preparing for 2022.

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

Planning with uncertainty

There is ongoing uncertainty over US tax reforms with the Build Back Better Bill. The Biden administration is looking to push through one of the largest tax and spend bills in history, and has so far found it difficult to get the support to push it through Congress. Large modifications were made to the bill in late October, which leaves uncertainty as we get closer to the beginning of 2022. 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 in 2021. 

Nobody can say with any certainty what the new US tax law will look like nor when it will be passed, and there may be very limited time from enactment to the beginning of the new tax year to put into effect any necessary tax planning. Get in touch for advice on what tax planning you can carry out now, to combat potential tax rises. 

If and when President Biden’s tax reform proposals progress through Congress, we will issue an update on our website. To get the update delivered straight to your email inbox, click here to sign up to our expat mainstream mailing list.

Ordinary income tax rates

As it stands, the top federal tax rates for 2022 will match 2021, with a top rate of 37%. This rate applies to individuals with Adjusted Gross Income (AGI) in excess of:

Filing status    

2021

2022 (projected)

Married Filing Jointly (MFJ)

$628,300

$647,850

Head of Household (HoH)                                      

$523,600

$539,900

Single

$523,600

$539,900

Married Filing Separately (MFS)

$314,150

$323,925

This could change depending on what sort of tax bill is agreed, so we will update this accordingly when confirmed.

Opportunities before year end

So what opportunities could you take advantage of in the run-up to the end of 2021? 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 2021 allowances or deferring income to 2022

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 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.

The modified proposal is to keep the top income tax rate at 37% but introduce surtaxes for high earners. Current proposals are to have a 5% surtax for Married Filing Jointly (MFJ) taxpayers with Modified Adjusted Gross Income (MAGI) of over $10 million, plus a 3% surtax for MFJ taxpayers with MAGI of over $25 million. So for the highest earners this means a top rate of federal income tax of 45%. In terms of capital gains, Biden had proposed an increase to long-term capital gains rates to 25% beginning midway through 2021, however the modified bill has removed this increase.

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. 

As there is a potential chance of tax rates increasing, particularly for higher income earners, you may want to consider accelerating income in 2021. 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 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:

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 2021 calendar year, the lifetime exclusion amount is $11.7million for determining the amount of credit against estate or gift tax. This creates opportunities for gifting/estate planning in 2021. 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, and this could create UK tax issues. Get in touch for advice on having US/UK tax relief on charitable contributions and minimising any UK inheritance tax on a settlement into a trust. 

The uncertainty with 2022 is whether the lifetime exclusion amount will be reduced. There are other proposals such as the potential of there being no step up in basis of assets held at death. If such laws are enacted in 2022, 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 2021 year end. For example, you could make a gift of up to $15,000, per donee, per donor, and not use up the current $11.7million estate tax threshold. 

You may want to follow through with tax planning that involves using up the lifetime exemption amount, knowing that with the tax reform, the rate is expected to be reduced at some point in the future.

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 2021 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?

Consider transferring your traditional IRA/401(k) plan into a Roth IRA before the end of 2021 if you’re more suited to it from an investment perspective.

Mortgage redemptions

If you have a non-US (e.g. 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 (e.g. a two 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 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 2021

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 2021, even if the tax on the income is not due until 31 January 2022, or possibly even 31 January 2023. This will ensure that a corresponding foreign tax credit may be taken against any federal tax due on foreign income realised in 2021, and reported on your 2021 US tax return. This is especially true for self-employed individuals with rising profits or if a capital gain has been realised in 2021.

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 2022 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 2021 would allow you to utilise credits going back to 2011.

There were proposals to reduce the excess foreign tax credit carry forward period to five years, and to repeal the one year carry back period. These proposals were included in Biden's initial tax bill but only the repeal of the one year carry back period was included in the modified bill, to apply from 2023. This will be particularly difficult to those on the accruals basis in the UK who may need to rely on a one year carry back window to prevent double taxation.

What should you do?

If you’ve realised any capital gains in 2021, or your income that is not taxed at source has increased, consider making a prepayment of UK tax before 31 December 2021. If you have large carried forward unused credits, consider paying the tax in January 2022 if the unused credits are in the relevant foreign tax credit basket. If you are an accruals basis taxpayer, realising gains in quarter one of 2023 aligns the US tax with a foreign tax credit accrued in the same year.

Residency

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 2022 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 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 calendar year in 2021.

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 2021

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 UK tax year.

31 December 2021

End of the 2021 US tax year. This is the deadline for implementing any US tax year end planning, such as making an upfront UK tax payment.

18 January 2022

Final instalment of 2021 US estimated taxes due.

31 January 2022

2020/21 UK tax return electronic filing deadline.

16 March 2022

US partnership and trust return deadline. A filing extension can be made to extend the deadline to 15 September.

5 April 2022

End of the 2021/22 UK tax year - consider UK planning before this date and look out for our UK tax year end planning article that we'll publish in February.

15 April 2022

Foreign Bank Account Reports (FBAR)/FinCen Form 114 – these are automatically extended to 15 October 2022.

Individual income tax return filing deadline (automatic two-month extension to 15 June 2022 applies to taxpayers living overseas). Extension can also apply.

First instalment of 2022 US estimated taxes due.

Speak to an expert

As your circumstances are unique, we recommend that you seek professional advice where appropriate before taking any action. For more information on the above, and professional advice from our US tax experts, please fill out the form below and we’ll be in touch to discuss how we can help.

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