Do you know how taxes impact your retirement plan?
Everyone knows that in life there are a few things that you can’t avoid and one of them is paying taxes. It is especially the case for Americans since it is one of the only countries in the world that requires citizens to file taxes for their lifetime.
There are many great tax strategies that can provide great relief and could change your retirement plan in a huge way. In this article, I will review a few of these strategies and we will look at the tax changes for 2023.
Important Tax Documents and Filing Deadlines for Expats
The main document most firms will send you is your form 1099. This is the document you will need to file taxes.
If you have an online account with your current broker, you should be able to download it sometime in February. If you did not give the broker your overseas address, they might mail one to you at the address of record.
This document will be sent to you if you have a taxable brokerage account or if you took a distribution from a retirement account. You would not receive one if you only had a retirement account (IRA, 401k) and did not take any distribution.
It is possible that you will receive a corrected 1099 form later in February or March. It is not generated because of an error of the custodian. It is not a problem but this is a reason why I would not file taxes until the end of March. If you are a business owner with income in the US you will need to wait to file until you receive your form K-1.
Tax Filing Deadlines
The federal individual income tax filing deadline is April 18th, 2023. Expats have an automatic extension to June 15th.
As an expat you are able to request a 6-month extension from April 18th. You have until June 15th to request that extension by filing form 4868 with the IRS.
You have to remember that even if you have an extension, you still need to pay any tax owed by April 18th so you don’t have to pay any penalties and interest.
IRA contributions limits
IRA contributions deadline for 2022 tax year is on tax day which is April 18th, 2023. The individual contribution amount in 2023 is going up to $6500 from $6000 in 2022. There is still a possible catch up contribution for anyone age 50 and over. It is important to be up to date with the new changes since you are still able to contribute to your IRA while being abroad.
Tax Strategies to utilize as an expat.
Here are a few strategies to explore:
The back door Roth is a great tax strategy. Make sure to double check the current tax treaty of your country with the USA so you get all the benefits of using this strategy.
- Conversion needs to happen by December 31st of the same year. It is not tax day.
- Eliminates the Required Minimum Distribution
- No residency requirement
- No income requirement or limitation
- No age limit for conversion
- Tax-free growth and withdrawal
Net Unrealized Appreciation
There is a hidden tax strategy that can be done only once at the time of the 401k rollover. The NUA is only if you have company stock inside your 401k.
For example, if you worked for Apple and you have a 401k worth $1 million and half of it is in Apple stock, then you could use this strategy when rolling over your 401k to an IRA. $500 000 would go to the IRA as a rollover and the $500 000 of Apple stock would leave the IRA and go directly in a taxable brokerage account.
The tax event would be only on the cost basis of the stocks. If your cost basis (value of the stock when purchased or received) is $100 000. You would add only $100 000 to your taxable income for that year.
It is a great estate planning tool since you can leave the stocks to your beneficiaries tax free and you don’t have any more RMD (required minimum distribution) on that portion.
- Can only be done once at the time of the 401K rollover
- Reduces the amount of yearly Required Minimum Distribution at age 72
- Only the cost basis of the company stock is taxable on the year it is done
- Potential Tax-Free stock distribution
- Available to ex-pats that hold a 401K with company stock
This strategy is only if you hold investments in a taxable account. At the end of each year, you can choose to sell stocks that have a loss and reinvest the funds in similar investment securities so you keep the same asset allocation.
It can be a great strategy to use in order to take advantage of the volatility on your portfolio. It is possible to incur a capital loss and use it to offset current year income. You can also carry the loss forward to offset future capital gains.
Most people forget to review their asset allocation at an account level as well as the overall portfolio. The asset allocation on a taxable account should be different than on a qualified account (IRA).
If you can have a lower tax rate than your marginal tax rate it is advantageous to have securities in a Taxable account. All withdrawals from a Tax-Advantaged account is taxed at your marginal tax rate.
|Taxable Accounts (e.g., brokerage accounts)||Tax-Advantaged Accounts (e.g., IRAs and 401(k)s)|
|Individual stocks you plan to hold for at least a year||Individual stocks you plan to hold for less than a year|
|Tax-managed stock funds, index funds, exchange traded funds (ETFs), low-turnover stock funds||Actively managed stock funds that generate substantial short-term capital gains|
|Qualified dividend-paying stocks and mutual funds||Taxable bond funds, inflation protected bonds, zero-coupon bonds, and high-yield bond funds|
|Series I bonds, municipal bond funds||Real estate investment trusts (REITs)|
Expats living abroad benefit from the same tax-efficient strategies offered in the United States.
At Harrison Brook, we specialize in helping Expats wherever they are currently living with great investment strategies that take into consideration the tax implication.
If you would like us to review your situation and see how we can bring value to your investment accounts, don’t hesitate to get in touch.