Year-End Tax Planning Tips for US/UK Taxpayers

US citizens living in the UK have to juggle two sets of tax rules, each with its own complexities. With year-end fast approaching and tax policies ever-changing, now is the time to take control of your tax planning. Effective strategies can help reduce the risk of double taxation and avoid cash flow headaches – especially when it comes to leveraging foreign tax credits, a key tool in managing dual tax obligations. In this article we will explore some common year-end tax planning tips to help you navigate both US and UK tax systems.

Make the Most of Foreign Tax Credits

For the majority of US taxpayers who claim foreign tax credits on their US federal returns on the “paid” basis it is crucial to pay enough UK tax by 31 December 2024.

Aligning your UK tax payments with the year in which your income or gain occurs ensures the foreign tax credit is available on the relevant US federal return. If you have a shortfall of foreign tax credits then this can create cash-flow issues and, potentially, double taxation.

Running an estimate of your US taxes and considering whether you need to pre-pay any UK taxes now will help you manage your tax liabilities and cash flow.

This is particularly important for individuals who recognised capital gains and/or received sources of income not subject to withholding at source which will be taxable in both the US and the UK.

Similarly, for those in partnerships or holding Carried Interest, it is critical to ensure sufficient UK taxes are paid by 31 December 2024. This is especially important if you face a spike in profits or distributions that could impact your foreign tax credits and liabilities.

Smart Strategies for Charitable Giving

US taxpayers can reduce their taxable income by choosing between the standard deduction or itemised deductions. The standard deduction for 2024 is $14,600 for individuals and $29,200 for married couples filing jointly, with married filing separately taxpayers receiving $14,600 as well.

While the standard deduction is the most common choice, itemising deductions – such as charitable contributions, mortgage interest, and medical expenses -might be more beneficial for some. It’s important to evaluate each year which option provides the greatest tax benefit.

For US/UK taxpayers, dual-qualified charitable donations offer a powerful tax-planning tool. Donations to charities recognised by both the IRS and the UK Charity Commission can provide deductions in both countries. Non-cash donations, like shares, offer additional tax benefits by reducing capital gains tax on appreciated value. Strategic planning of charitable contributions, especially during high-income years, can maximise deductions and reduce tax liabilities in both the US and the UK.

Maximising Gifting Strategies

As the year ends, US citizens and domiciliaries have a valuable opportunity to lower estate tax exposure through gifting. With the lifetime estate and gift tax exemption potentially decreasing after 2025 (although President elect Trump has said he will look to maintain the current exemptions) now is the time to consider taking advantage of generous annual allowances and strategically reduce your estate value if you have not done so already. Understanding the rules and timing of gifting can make a significant impact on future taxes.

In 2024, you can gift up to $18,000 per recipient annually, or $36,000 for joint gifts made by married couples. Gifts to a non-US citizen spouse have a higher exemption of $185,000. However, exceeding the limit does not necessarily mean you will owe tax, thanks to the current high lifetime estate and gift tax exemption which in 2024 is $13.61 million per individual ($27.22 million for couples).

Gifting now helps lower your estate value and potentially lessen future US estate taxes, which can reach 40%. By acting before any changes to the exemption, you can maximise your gifting strategy and think ahead on future estate tax exposure.

In the UK, the Government announced in the autumn Budget that a person will become subject to UK inheritance tax (“IHT”) on their worldwide assets once they have been UK tax resident for 10 years. They will then remain subject to IHT for 10 years after leaving the UK. Changes were also added which removed the IHT protections for trusts settled by long-term residents so that the assets within the trusts will be subject to the UK’s IHT regime.

Therefore, Americans who have lived in the UK for a long time or recent arrivals who intend to remain in the UK for the next 10 years should also consider their potential UK inheritance tax exposure when making plans for the future.

Other Considerations for Year-End Tax Planning

As the year ends, US expats in the UK should focus on tax planning to optimise their financial outcomes. If you have realised significant capital gains, consider speaking with your wealth manager to identify any unrealised losses that can be realised before 1st January to offset your gains. You can offset up to $3,000 of other income ($1,500 for those filing individually) if losses exceed gains.

If you hold a US pension plan, you might also want to consider maximising your contributions before the year-end to utilise any unused allowances for 2024. Although it is possible to claim UK tax relief for contributions to US plans (and vice versa) under the US tax treaty, it is important to consider any potential UK tax implications of doing so.

You could even start thinking ahead to the next tax filing season and reflect on any new sources of income or financial assets you might have acquired in 2024 so you can begin gathering the information for your 2024 tax filings in the New Year!

As a US citizen living in the UK, year-end tax planning is an important part of any tax planning strategy to help ensure you are making the most of available deductions, credits, and exemptions. Whether it’s optimising foreign tax credits, leveraging gifting strategies, or recognising capital losses, thoughtful planning can significantly lower your tax liabilities in both the US and the UK. By addressing these key areas, you can avoid surprises and position yourself for a more financially efficient year ahead.

If you have any questions, feel free to contact us.

Article written by Harry Swift and Johana Regatuso