November is the time of year we send out our year end planning commentary. This traditionally was simply a timely reminder on a range of simple steps to improve your US tax position for the year ended 31 December by accelerating or delaying transactions. This became routine and we found much of our advice repetitive or not sufficiently tailored for the wide variety of personal circumstances.
We have highlighted planning ideas to consider bearing in mind that for taxpayers having to deal with the complexity of two or more tax jurisdictions, there is no one size fits all. Please view the ideas below as prompts, and take specific advice on your own tax situation to optimise your position.
Our year-end advice highlights several ‘big picture’ points:
1 – UK Taxes
a) It may be useful to accelerate UK tax payments otherwise due in 2017 or later to December if you are unable to rely on an accrual method or a significant build-up of excess tax credit carryovers.
b) The UK taxation changes to carried interest could create a 28% tax on ‘gains’ arising on or after 8 July 2015. To mitigate double taxation, you may wish to make an estimated UK tax payment by 31 December to offset the US tax arising on the same income. Your credit carryovers may not be of the same category to offset this type of charge. If you are unsure if you are affected, it is vital to contact the tax department of the relevant partnership or business you work for as soon as possible. Please see our Alert for more information.
c) Although not strictly a US planning point, the new restrictions on contributions by highly paid taxpayers to UK pension plans, and certain US plans, causes many taxpayers to review their unused pension limitations for the current and three prior years and perhaps contribute further funds by 5 April. This review may be useful to ensure you are optimising your worldwide reliefs without exceeding the reduced limits. We cannot provide financial advice but can assist with determining the tax treatment of plan contributions, rollovers, Roth IRA conversions, and other matters.
d) Do you need a source of funds in the UK but are restricted by the remittance basis rules? Please contact us for further guidance.
2 – Income and Deductions; Gains and Losses
a) Will the US tax rates decrease? Changes are likely and you may wish to delay transactions that could be more beneficially treated in a later year.
b) Will your UK personal tax position become less favourable with the non-domicile changes effective after 5 April 2017? This may lead you to accelerate income and gains, or re-structure your non-UK affairs.
c) The netting of capital gains and losses is always complex, and even more so for international taxpayers.
i) Losses for US and UK purposes can be carried forward and not back so you may wish to review the applicable tax rates and the netting rules. Losses in one jurisdiction may create gains in another.
ii) It is important to be aware of where your primary tax will be on such transactions – will it be in the US or the UK?
iii) Will your assets receive capital gain treatment, or are you invested in funds with the possibility of punitive tax treatment?
iv) Will you be eligible for re-basing of your asset for UK purposes?
v) Are you able to claim offshore losses from a UK perspective?
d) Dually qualified charitable deductions made by 31 December and before filing your UK tax return can be claimed on your 2016 US return as well as being carried back to your UK return for 2015/16
3 – Exchange Rates
Exchange rates have been on a roller coaster this year with the exchange rate to sterling fluctuating between $1.52:£1.00 and $1.21:£1.00. Not only that, you may be closing out transactions from prior years in which the exchange rate to sterling was as high as $2.00:£1.00. Our key points in relation to this for US taxpayers are broadly summarised as follows:
a) Avoid repaying sterling debt which could create a significant currency gain in US dollars without taking advice on the tax liability you may be creating. Paying off just £10,000 of debt from early in 2008 could result in a gain of $7,500.