London & Capital, the FAWCO sponsored resource, has published an article in November 2023 called “Considerations for US Persons Coming up to the 2023 Tax Year End.” Although this article is geared mainly toward Americans living in the UK, it does summarize six strategic areas that US citizens living abroad need to be aware of: Capital Gains Planning, Foreign Tax Credit Planning Opportunities, Required Minimum Distributions. Annual Gifting Allowances & Donations Estate Tax Planning and Income Taxes.
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Considerations for US Persons Coming up to the 2023 Tax Year End
Written by Jonathan Gold & Tahir Mahmood
The UK and US operate on distinct tax years and rates, presenting a number of planning opportunities for US persons living in the UK.
01 Capital Gains Planning
The basic principles remain important planning tools, for example, taking advantage of appreciated securities that have been held for over 12 months, to the extent that you have capital losses in that year (or loss carryover from earlier years). There are additional considerations for Americans living in the UK:
1. HMRC thinks of assets in GBP and the U.S. Internal Revenue Service (IRS) thinks of assets in USD, which means any fluctuation in the exchange rate between the date of purchase and sale of a security, could create an unforeseen gain in either currency. Approach the notion of “net perfect tax position” with caution when dealing with different currencies.
2. Avoid ‘bed and breakfasting’ (rebuying the same asset within 30 days) as this may allow the HMRC or IRS to disallow losses incurred.
3. Individuals should remember that under both tax regimes, capital losses can be carried forward indefinitely*. These could also be a useful tool to offset any future tax increases. Unfortunately, losses cannot be carried back and so ensuring losses are realised before or in the same year, as gains, is a useful planning tool.
4. US individuals who do not offset gains will need to bear in mind the Net Investment Income Tax, which is payable on any investment income and cannot be offset by tax suffered in the UK.
*Additional consideration is required for those who have made the capital loss election and still file on the remittance basis; please speak to your tax advisor.
02 Foreign Tax Credit Planning Opportunities
What are Foreign Tax Credits?
Due to the differing fiscal years in the US and the UK, individuals who claim foreign tax credits on a paid basis, may be required to accelerate their UK tax payment into the current calendar year.
Making an advanced payment in December 2023 will ensure that there are tax credits available to offset any US tax that would otherwise be due. Failing to do so may lead to a timing issue, as payments for tax due on income realised in 2023 may not be due to HMRC for some time.
It is important to be aware of the type of income you have, and ensure you have sufficient tax credits in the corresponding US basket. Due to the higher UK rates, individuals who have paid UK tax on their worldwide income for a number of years will likely have built up excess foreign tax credits in certain baskets.
How can I utilise them?
A way to consider using these credits is by utilising UK tax efficient planning still caught by the IRS net of taxation such as UK pension contributions.
In the UK, the annual allowance for pension contributions benefitting from tax relief is your total earnings up to £60,000 (subject to taper rules).
In addition to this, you are able to make use of any annual allowances unused during the three previous UK tax years, provided you were part of a registered pension scheme, which can result in a contribution level of up to £240,000 being available.
03 Required Minimum Distributions
Individuals who hold an IRA (Individual retirement account), SEP (Simplified Employee Pension) or SIMPLE IRA must take a required minimum distribution each year from the 1st of April, following the year in which they turn 73.
These rules prevent taxpayers who have reached retirement age accumulating tax free returns indefinitely. Failure to take the minimum distribution results in the required distribution being taxable at 50%.
04 Annual Gifting Allowances & Donations
The idea of gifting assets away can be unnerving, especially if you are near or at retirement and have spent the majority of your life building a pot to live on.
However, seeking advice to become comfortable with the idea of gifting can be rewarding in seeing those people and charities you care about benefit whilst you are still around, reducing the portion of your estate given to the relevant tax authorities after your death and profiting from an immediate tax benefit.
How can I make gifts?
Using the annual gift exclusion, a US person can gift up to $17,000 in 2023 to any number of people without incurring gift tax. In addition, a US person may gift up to $175,000 to a non-US spouse.
When considering making substantial gifts or gifting non-cash assets, please discuss the capital gains implications with your tax advisor.
Beyond gifting to friends and family as a useful estate tax planning tool, those feeling generous and looking to reduce their income taxes may wish to make charitable donations.
Donations paid within 2023 will be deductible on US returns in full, under the CARES Act. In the UK, donations made under gift aid extend the amount of income subject to tax at the lowest rates. For US/UK individuals it is important that any donations are made to dual-qualifying charities to allow for relief in both jurisdictions.
Do not forget that there is also the ability to donate shares, rather than cash, which provides tax relief on the fair market value of the shares and avoids capital gains tax for the donor.
05 Estate Tax Planning
In summary, any gifts above the $17,000 will chip away at the lifetime gift and estate tax exemption. It is currently $12.92m person. This is currently scheduled to drop to around the $7m mark at the start of January 2026.
If you are thinking of gifting large amounts, please speak to the team at London & Capital.
06 Income Tax
Top rates of US income tax are 37%. The UK rates are still higher at 45%, so the only real implication of this for UK/US taxpayers is utilising more of your foreign tax credits.
If you no longer have a link to the UK, there may be some potential opportunities to shift into more dividend paying assets to reduce your tax liability.
