End of US Tax Year Planning

With the end of the year fast approaching, the importance of US year-end tax planning becomes increasingly evident. By taking a proactive approach to assessing your financial situation, you can safeguard your wealth and minimise tax liabilities. 

Swaati Osborne
person writing on paper

By carefully evaluating your financial circumstances, considering applicable tax regulations, and employing effective strategies, you can reduce your tax liabilities, preserve wealth and ensure a smoother financial journey into the upcoming year. 

What are the key areas of US tax planning that you should consider before 31st December 2023? 

Maximise retirement account contributions

Contributions to a Traditional IRA or 401(k) can reduce your taxable income and benefit from tax-deferred growth. Alternatively, Roth contributions can enjoy tax-free growth and withdrawals over time. 

Maximising these accounts can boost your retirement savings and is an opportunity to take advantage of compounding growth tax-efficiently. For 2023, the maximum elective 401(k) contribution is $22,500, plus, if you are 50 or over, you are eligible for an additional $7,500 in catch-up contributions. The maximum IRA contribution is $6,500, plus an additional $1,000 in catch-up contributions if you are 50 or over.

Roth conversion

If you have lower income than usual this year or believe your tax rate will be higher in retirement, you can consider converting your retirement accounts to a Roth IRA. As a result, you will be able to swap taxable income for tax-free income in the future from both the US and UK perspective. The trade-off is that the value converted is taxable in the year of conversion by the US, but will not be a taxable event in the UK (it is considered a pension transfer). 

Required Minimum Distributions (RMD)

This is the minimum amount you must withdraw annually in your tax-deferred retirement accounts to avoid tax penalties. This applies to US employer-sponsored retirement plans, Traditional, SEP or SIMPLE IRAs. In 2022, the age to start RMDs was raised to age 73 and the deadline is 31st December each year. However, for the first RMD, you can delay taking the distribution until 1st April of the following year. 

Qualified Charitable Distributions (QCD) 

If you do not rely on or need your RMDs, consider using a QCD from your IRA accounts. By executing this, you can satisfy your annual RMD requirement and fund your charity goals without increasing your taxable income. The donation is made tax-free directly to the qualifying charity of your choice and is limited to $100,000 per year in 2023. 

Annual charitable donations

For US/UK taxpayers with philanthropic goals, it is possible to make charitable donations through a dual-qualified charity that is tax efficient in both countries. The US will provide an itemised tax deduction on your US return, while the donation will qualify for gift aid reclaim and a tax credit on your UK tax return. 

Meet your philanthropic commitments this year by giving wisely. Find purpose in your generosity and reap the tax benefits that can amplify your impact.

Gifting allowances 

Consider utilising your annual US gift tax exclusion of $17,000 per donee. A married couple could gift up to $34,000 to individuals without paying gift tax or using their estate exemption. Do remember to keep a record as they may qualify as Potentially Exempt Transfers (PETs) in the UK where the gift will no longer be part of the estate (for UK inheritance tax purposes) if the donor survives seven years. This can be a great tool for wealthy individuals to reduce your estate over time. 

Gifting allowances for non-US spouse

Although an unlimited amount can be gifted between US spouses, where one is a non-US citizen, the annual gift tax exclusion is limited to $175,000 for 2023. For those holding residential property in the UK, consider using this to gift a portion to the non-US spouse to reduce potential capital gains taxes upon a future sale. Noting that while your property in the UK may qualify as the principal private residence, and be fully exempt from UK capital gains, the US gains exemption is limited to $250,000 for single filers, with any surplus taxed at their respective capital gains rate. 

Tax-Loss Harvesting

If you have unrealised capital losses in your portfolio, you can consider selling investments to realise a loss. The loss can then be used to offset (dollar for dollar) taxable gains you have realised in 2023 or in future years. Alternatively, if you have a tax loss carryforward from previous years, this can be used to offset 2023 realised gains.

The time to act is now. The end of the tax year provides significant opportunities to utilise available tax allowances and plan for the tax year ahead. Not only can these steps improve your tax position now, but also in the years to come. 

If you wish to discuss any of the points raised above in more detail, please do not hesitate to contact your investment manager or wealth planner, who will be able to assist with any questions you may have.

Important information

This article is for informational purposes only and is intended for the exclusive use by the recipient to whom it has been delivered by LGT Wealth Management US Limited. It is not to be reproduced, copied or made available to others. Except where the communication is a personal recommendation which has been prepared taking into account the particular investment objectives, financial situation or needs of the recipient to whom it has been directly delivered by LGT Wealth Management US Limited, this document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. You are recommended to seek advice concerning suitability of any investment or strategy from your investment, tax or other professional adviser. Investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invested. 

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