Autumn is typically a busy time, both professionally and personally. A few short months are squeezed between the end of Summer and the start of holiday season festivities. It is easy to forget to prioritise important year end planning for you and your family.
Given that 2018 is the first tax year with President Trump’s tax reforms in place, now is the time to review your individual situation and look to take advantage of tax-deferred growth opportunities, tax advantaged investments and charitable-giving opportunities amongst others. Reviewing your investment portfolio with respect to your wealth goals and the current tax, political and economic landscape can help you understand where adjustments need to be made to be optimally positioned for 2018 and beyond.
For those considering tax moves, you generally need to take action before 1 January. The tax reforms have resulted in different marginal income tax bands, an increase in the standard deduction, and a change in the types and thresholds of expenses allowed to be claimed as itemised deductions. Additionally, it has resulted in a change in estate planning thresholds and the way income will be taxed for many self-employed individuals.
Whilst we are not Tax Advisers, and we always recommend clients discuss such matters with their Tax Advisers, from an investment perspective, there are a few planning areas to consider before 2018 ends. Keep in mind that the ideas listed are conversation starters for most investors and is by no means an exhaustive list. You and your Wealth Manager along with your Tax Adviser should assess any action based on your own personal circumstances.
Capital Gains Planning
For any taxable investment portfolio, you should consider whether it is sensible to realise long-term gains and harvest capital losses. Reviewing opportunities to offset investment gains with investment losses may help to reduce your overall tax liability, including the Medicare surtax. If you are filing UK tax on an Arising Basis you may benefit from the UK’s annual £11,700 capital gains tax allowance. If you have not used up your annual allowance, you should consider opportunities to accelerate UK gain recognition so that the allowance benefit is not lost. In this regard, it is important to assess the gain in both GBP and USD terms as foreign currency movement over the period of ownership can potentially have a big impact on gain recognition.
With any transactions that you decide to undertake, you should be aware of “wash-sale” rules that stop you from deducting capital losses on the sale of a particular security if you purchase a similar position within a 61-day period (30 days before and after the sale date).
Retirement Planning
With respect to retirement savings goals, it is generally sensible to take advantage of tax- deferred growth opportunities.
2018 maximum contributions are as follows:
• $5,500 to Traditional and Roth IRAs (an additional catch up contribution of $1,000 is available for those aged 50 or older) – allowable and deductible contribution limits are determined based on filing status and income limitations
• $18,500 to 401(k) plans (an additional catch-up contribution of $6,000 is available for those aged 50 or older). The total of all contributions to a US qualified Defined Contribution scheme cannot exceed $55,000 (or $61,000 if aged 50 or older) in 2018. An employee still actively participating in a company 401k plan may be able to make up to $36,500 in after-tax contributions before 31 December (in addition to the $18,500 in pre-tax contributions)
• For tax year 2018/19, the maximum UK pension contribution allowance is tapered down from £40,000 to £10,000 for any individual who earns between £150,000 and £210,000 in the tax year. Individuals with any outstanding available prior year catch-up contributions should consider utilising their available allowances before they expire. This may also be a way of using available excess foreign tax credits carried on your US tax return.
It is equally important to understand what retirement distributions may be required. In most circumstances, anyone with US qualified retirement plans are required to begin taking Required Minimum Distributions from the year in which you turn age 70 and a half. If RMDs are required in 2018 they must be taken before the end of the year in order to avoid penalties. Individuals have the option to direct up to $100,000 in RMDs as a charitable contribution for the year which can lower an individual’s taxable income.
Charitable Giving
With the higher standard deduction thresholds now in place for taxpayers, it is likely that fewer individuals will be in a position of itemising deductions each year. This could result in charitable donations being lumped together in certain tax years to maximise the tax impact in the year donations are made. With this in mind, it may be sensible to consider whether a dual qualified donor- advised fund helps meet your legacy and tax- savings objectives. The tax deduction occurs in the year the DAF is funded, but donations can be spread out to various charities over the preferred number of years.
Additionally, as always it is important to think strategically about what assets are used to facilitate charitable donations. For example, consideration should be given to whether to donate low-cost basis stocks or highly appreciated assets rather than cash.
Gift Planning
In 2018, US individuals can gift $152,000 to non-US citizen spouses and $15,000 to other non-spouse individuals before the gift applies against the individual’s US lifetime allowance. If tax efficient wealth transfer is a consideration, then thinking about utilising this allowance can help you transfer significant wealth over time without triggering a gift tax liability.
Individuals can consider making a gift of up to $5,500 to a Roth or Traditional IRA for any US resident children or grandchildren who are not funding their own IRAs but have enough US earned income to do so. Contributions to IRAs for family members will be considered taxable gifts and should be coordinated with any other gifts that you make.
For any children or grandchildren that might attend primary or secondary schools with tuition bills or are of university age, you could consider paying the tuition bill directly to the institution. Paying the institution directly can qualify as an exemption from the US gifting rules and will not reduce your lifetime allowance.
Business Planning
There were a number of changes announced under the Trump Tax Reform for US owners of foreign businesses. If you haven’t yet sought tax advice on how the changes impact your individual situation, it is important to consider doing so. In addition to the repatriation tax that impacted many business owners, the global intangible low- taxed income, or GILTI for short, is set to have a material effect on tax payable on a go forward basis for many individuals. As is always helpful as you approach year end, it is sensible to get organised by first making sure your accounting records are updated and accurate.
If you are self-employed, consider contributing to an individual qualified retirement plan, such as an individual 401(k), SEP IRA, SIMPLE plan, or UK pension plan, if you qualify. This can allow you to make contributions as an employee and employer based on your earnings which may result in higher deferral options.
Accelerating Payment Of UK Taxes
If you claim foreign tax credits on the paid basis, it is often necessary to accelerate your UK tax payments into the same calendar year as the income will be reported on your US tax return. This will ensure that the credit is available to offset the US tax that would otherwise be due.
This point is typically relevant to the following groups:
• Self-employed individuals
• Partners in partnerships
• Arising basis UK taxpayers
• Individuals who have large, one-off transactions such as a major capital gain.
It is important to look to the UK/US Double Income Tax Treaty to understand which country has the primary right to tax and which must give credit. For UK resident individuals, including US citizens, the UK is awarded that right on most investment income, other than US real estate income and some proportional element of US dividend income.
Summary
There are several key actions you can take before the end of 2018 to ensure you have a clear picture of where you stand financially. A call with your Wealth Manager and Tax Adviser will help ensure you are on track to meet your goals and help to identify areas in need of adjustment so your plan can evolve as your needs change. Take the time now to discuss those changing needs, to fully understand where you are and where you want to go.
Risk Warnings And Important Information
MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is registered in England and Wales as a Limited Liability Partnership (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS.
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is an SEC Registered Investment Advisor in the United States of America.
This article does not take into account the specific goals or requirements of individuals and is not intended to be, nor should be construed as, investment or tax advice. Information contained in this article is based on MASECO’s understanding of current tax law and legislation which is subject to change. MASECO Private Wealth is not a tax specialist. Your ability to benefit from any of the tax mitigation planning mentioned in this article will depend on your personal circumstances. The levels, and bases, of tax relief is subject to change. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy. We strongly recommend that every client seeks their own tax advice prior to acting on any of the tax mitigation opportunities described in this article.
Andrea Solana is Head of Advanced Planning at MASECO Private Wealth where she helps to provide financial planning and wealth structuring advisory services to US expatriates in the UK and British nationals in the US. Before joining MASECO, Andrea spent the first part of her career with a well-known Washington DC based international tax and global wealth management firm where she gained considerable experience advising high net worth individuals with multi-jurisdictional financial interests to design and implement strategies for tax-efficient and risk-managed asset growth. She has written numerous white papers regarding fundamental financial planning and investment strategies for US connected individuals and has previously been a speaker on financial planning topics at numerous places including both The World Bank and International Monetary Fund (IMF).
Andrea graduated from University of Virginia’s McIntire School of Commerce with a degree in Finance and Management and completed her MBA at Imperial College London.
Visit www.masecoprivatewealth.com for further information.