Seven Top Tips for US year-end tax planning
The holiday season is here, and we have a gift for you! The first in a series of posts geared towards making tax clearer, which we refer to as Everything you didn’t learn about taxes in school, provides seven US year-end tax tips to make 2022 as pain-free as possible.
- Donate to a US Charity. In the spirit of Thanksgiving and Christmas, the IRS has announced that on the 2021 US tax return US persons will, again, be able to deduct up to $600 (married filing jointly) or $300 (married filing separately or single). Normally, this would only apply to those who are itemizing their deductions, but as in 2020, for 2021, taxpayers will be able to claim this deduction again, even if they are not itemizing deductions. Donate to your favorite (US valid) charity and get a small tax benefit from it as well!
- File your 2020 taxes before the end of the year. While this should go without saying, make sure you have filed your 2020 US taxes (including your FBAR if needed) before the end of the year. While the filing deadline may have already passed, depending on your status, it’s better to file sooner, rather than later, to limit the possible penalty and interest you may owe on the taxes due. It’s the perfect pre-New Year’s resolution!
- Don’t wait to file Form W-9 with your bank. If you are a US person, with a foreign bank account, make sure your bank knows you are. Make sure you use the correct form. A US person files Form W-9, not W8-Ben. Tax authorities worldwide are focusing on money laundering and foreign bank FATCA reporting is a huge part of that. Banks are cracking down to avoid penalties from tax authorities on possible reporting requirements. You risk your account being frozen or even closed if you mislead your bank about your citizenship.
- Contribute to an HSA (or open an HSA account) if you can. If you participate in a high-deductible health plan, you may qualify for or already have an HSA account. Make sure you are getting the most from these accounts. If you are single or married filing separately, you can contribute up to $3,600 ($3,650 for 2022) per year. For those who use a married filing jointly status, the limit is up to $7,200 ($7,300 for 2022). There is a yearly catch-up contribution allowed of $1,000 for people 55 or older. As well, the current year contribution can be made up to the due date of the tax return for that year, generally April 15th of the following year. So, you have extra time to sort this out.
- Contribute to an IRA (or open an IRA). There are two types of IRA’s, the traditional IRA, and the Roth IRA (thanks to Senator William of Delaware). The main difference between the two is that a traditional IRA contribution may be deductible, whereas the Roth IRA allows for tax-free distributions. Regardless of which you choose, you are allowed to make a total contribution of $6,000 ($7,000 if you’re 50 or older) per year. As above, you can contribute up to the due date of the current year’s return, generally April 15th of the following year.
- Get that Social Security Number you’ve been putting off for your US child. Just because your child has a US passport, US parents, and loves the red, white and blue, in the eyes of the IRS they do not qualify for the child tax credit or other potential tax-saving opportunities without it. So, don’t delay and get that 9-digit magical number for your little bundle(s) of joy. If you filed prior year returns without claiming your dependent(s) due to this issue, consider amending the returns, as you likely missed out on some stimulus payments or other credits or deductions Keep in mind, not getting your child a Social Security Number does not protect them from the tax authorities regarding their possible US tax filings, if they are born a US person, they are a US person and have tax obligations like any other American.
- Plan for next year. While your documents will not be delivered or available to you until early 2022, start making a list of what you expect to come your way. As shown by this list, there is nothing a tax professional likes more than a well-organized list (and client!). You should expect documents like W-2s, foreign wage statements, Form 1099’s forms (INT, DIV, B, SA, MISC, R, SSA) and similar foreign type tax reporting. If you sold stock or other assets, start collecting the information required to report the sale for US purposes (purchase dates, prices, currency, sales date, prices). As always for those living overseas, you need to sort out your local foreign return first before you can tackle the US return. So, start planning that as soon as possible in the new year.
Get in touch if you have any questions about any of the above tips.