12 Key U.S. Year-End Tax Considerations: A "12 Days of Christmas" Guide
2024 has seen unprecedented levels of political change across the world, including the recent US election. Regardless of your political association one thing is clear: the next tax season waits for no one.
While the political dust settles, it’s time to start thinking about the key tax planning considerations which may need to be actioned before 31 December 2024. Instead of the 12 days of Christmas perhaps it’s time to introduce the 12 days of tax planning with some important ideas below…
A Partridge in a Pear Tree: Maximize Retirement Contributions
Just like the “Partridge in a Pear Tree,” your retirement savings could be the foundation of your long-term financial security. The end of the year is a great time to make additional contributions to tax-advantaged retirement accounts such as 401(k)s, IRAs, and SEP IRAs. These contributions can lower your taxable income, potentially reducing your tax bill for the current year.
Two Turtle Doves: Double Down on Tax Loss Harvesting
Similar to the harmony of the “Two Turtle Doves,” tax loss harvesting involves balancing your investment portfolio and reducing your tax liability. Where individuals are currently sat at a net realised gain position, it is worth considering whether they should crystalise capital losses on assets which have decreased in value to offset those capital gains.
The losses can also offset up to $3,000 of other income ($1,500 if married filing separately), with any excess loss carried forward to future years.
As always, an individual does need to think about all the countries in which they are considered resident and potential foreign exchange rate movements to avoid any unwelcome surprises.
Three French Hens: Consider Tax-Deferred Growth Investments
Like the “Three French Hens”, tax-deferred investments (such as annuities or 529 college savings plans) can add a diverse layer to your financial strategy. You may want to review your portfolio to ensure you’re taking full advantage of tax-deferred growth. Gains in these accounts are generally not taxed until you withdraw them, which can help you grow your savings more efficiently over time.
Careful consideration should be given to individuals who are resident in more than one jurisdiction to ensure the plans have the same tax deferral mechanism.
Four Calling Birds: Estimated Payments
Representing the four quarterly estimated payments. If you have income not subject to withholding (e.g., self-employment or investment income), make sure to meet the IRS’s safe harbor requirements for estimated tax payments to avoid penalties. The fourth quarter estimated payment is typically due on January 15, 2025, but you may want to bring this forward to avoid interest charges on any underpaid amounts so far.
Five Gold Rings: Foreign Tax Credits
Everyone’s favourite of the days and perhaps the most important planning tool for US taxpayers resident outside the US or with significant non-US sourced income, is the timing of foreign tax credit payments to avoid double taxation.
If a taxpayer claims foreign tax credits on the paid basis they may need to accelerate and make the foreign tax payment before 31 December 2024. In the UK for example, the UK tax payable on a capital gain arising during 2024 may not be due to the UK until January 2026 but it will need to be paid in 2024 to be available as a foreign tax credit on a taxpayer’s 2024 US return.
Individuals with significant excess foreign tax credits may benefit from deferring their foreign tax payments until the following year as excess credits can only be carried forward for 10 years. Careful planning should be taken ahead of adopting this strategy.
Taxpayers should also consider the potential FX fluctuations from the time the income or gain arises and the tax payment point as this could cause significant differences in the amount of foreign tax credit available to offset the US tax.
Six Geese a-Laying: Deferring Income
Just as the “Six Geese a-Laying” symbolize abundance, you can build your tax planning strategy by deferring income to the following year.
If you expect to be in a lower tax bracket this can be particularly beneficial, or at the very least provide a cash flow deferral with the tax payment potentially being deferred.
Seven Swans a-Swimming: Shut Down Unused Foreign Accounts
To avoid feeling like you are swimming against the tide when it comes to your US tax reporting, you should consider closing non-US accounts which are no longer used. The Foreign Bank Account Reporting (FBAR) and Form 8938 requirements to disclose non-US accounts can add administrative burdens to US taxpayers. By closing accounts before 2025 you can simplify and reduce your reporting obligations.
Eight Maids a-Milking: Where to spend New Year’s Eve?
As the 8th day traditionally falls on New Year’s Eve, attention turns to welcoming in the new year. Whilst we can’t help you pick the perfect destination for your NYE parties, if you are considering becoming resident in a jurisdiction such as the US you may wish to delay your entry until later in 2025. Residency can be triggered from the first day you are present in the US during the year so it may be beneficial to welcome in the new year outside the US.
Nine Ladies Dancing: Required Minimum Distributions (RMDs)
Well ok, not just for Ladies, but for individuals aged 73 and older. Required Minimum Distributions (RMDs) from tax-deferred retirement accounts like traditional IRAs, 401(k)s, and other retirement plans must begin. Failing to take an RMD by the December 31 deadline results in a hefty 25% penalty (reduced to 10% if corrected in a timely manner).
If you are over 70½, consider making a Qualified Charitable Distribution from your IRA. QCDs allow you to donate directly to a charity from your IRA, which counts toward your required minimum distribution (RMD) but is not included in your taxable income.
Ten Lords a-Leaping: Charitable Giving
The “Ten Lords a-Leaping” symbolise proactive action and charitable giving is a great example of taking active steps on tax planning.
- Cash Donations: Direct donations to charities are deductible, provided you have proper documentation. If you donate before the end of the year, you can claim the deduction on your 2024 tax return.
- Donor-Advised Funds (DAFs): If you want to make a charitable gift but defer the decision on which charity to support, a Donor-Advised Fund allows you to contribute assets, take an immediate tax deduction, and then distribute the funds to charities over time.
Crucially for individual’s resident in more than one jurisdiction, taxpayers should consider making gifts to dual-qualified charities or DAFs to be eligible for tax relief in both jurisdictions ensuring they mitigate their worldwide tax exposure.
Eleven Pipers Piping: Annual Gifts
When Donald Trump first introduced the Tax Cuts and Jobs Act (TCJA) he increased the estate tax exclusion to $11.18 million which has since risen to $13.61 million for 2024 with inflation.
In the U.S., the annual gift tax exclusion allows individuals to gift a certain amount of money or assets to others each year without incurring gift tax. For 2024, the annual limit is $18,000 per recipient. This means you can give up to $18,000 to as many people as you wish without it counting against your lifetime estate and gift tax exemption or triggering any tax obligations.
If you’re married, you and your spouse can combine your exclusions, effectively gifting up to $36,000 per recipient annually. These gifts can be cash, stock, or even property, and they are not subject to income tax for the recipient.
For individuals with a non-US citizen spouse the limit is increased to up to $184,000 and can be a great tool for sheltering funds from the US tax net.
Any gifting should be considered as part of a wider estate plan with consideration given to all jurisdictions relevant to the taxpayer making the gift and the recipient.
Twelve Drummers Drumming: Itemised or Standard Deduction
As the drum roll comes to an end, the choice between itemised or standard deductions is one which can be planned for.
For 2024, the standard deduction amounts are $14,600 for single filers and $29,200 for married couples filing jointly. Taxpayers can choose to either take the standard deduction or itemize their deductions, depending on which results in a larger tax benefit. Common itemized deductions include mortgage interest, state and local taxes (SALT), medical expenses, and charitable contributions.
If your total itemized deductions are close to the standard deduction limit, it may be beneficial to defer certain expenses, like charitable donations or medical costs, until the following year to “bunch” them into one tax year. This could help you exceed the standard deduction threshold in the next year and maximize your tax savings.
Conclusion
Tax planning can be complex, and individual circumstances vary widely. While this guide provides 12 key strategies as a general overview, we strongly recommend consulting with a tax advisor to consider an individual’s circumstances with particular reference to their worldwide tax exposure position.
Happy holidays—and happy tax planning!
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