With the holidays upon us once again, it’s an ideal time to review your finances to explore tax-saving opportunities and generally ensure that you’re in the best possible shape before the end of the year. In this article, we highlight some of the most important year-end financial planning considerations for US expats. Once you’re up to speed, the next step is to consult with your professional advisors and review your finances together.
- Review your portfolio and cash position
- Check your retirement accounts
- Review your life insurance policies
- Gifts to family
- Strategic donations
Review your portfolio and cash position
Late in the year is a good time to review your portfolio and cash position. It’s always worth holding some cash, ideally, between 6 months and 3 years worth of income, just in case your income is unexpectedly interrupted or a significant unexpected expense occurs. In a time of higher interest rates, banks are offering better interest rates in their savings accounts, allowing savings to more or less keep up with inflation.
In terms of reviewing your portfolio, consult with your financial advisor, as there may be opportunities to adjust your investments that could also have tax benefits, as selling losses can offset capital gains.
Lastly, if you believe that your income will be higher next year, and you are taking distributions from tax-deferred accounts, it could be worth taking a planned withdrawal before the end of this year to reduce the income tax payable on it. Conversely, if you think your income will be lower this year, it could be worth deferring a withdrawal until next year, if possible.
Fine-tune your risk exposure
While your portfolio should be aligned with your risk tolerance already, your approach to risk may have evolved since you began investing, and it’s worth having periodic discussions with your financial advisor to ensure your exposure to risk is still aligned with your goals and appetite for risk.
Strategically align your portfolio
Some of the questions you ought to consider in this regard are:
– Is your investment mix well-optimized across equities, fixed income, and alternatives
– Has the wider economics landscape (or markets) changed recently?
– Is your portfolio still aligned with your long-term objectives?
Consider investing surplus cash and repositioning equities, shifting focus from sectors that have outperformed to those with growth potential.
Enhance the tax efficiency of your portfolio
Ensure that you are taking advantage of tax incentives and company matching related to retirement accounts like 401(k)s or IRAs. Note however that as an expat, there may be local tax implications in the country where you live when investing in US retirement accounts. As mentioned above, it’s also worth exploring the tax advantages of selling positions at a loss to offset gains, being mindful of the “wash sale rule.” Implementing a loss-harvesting strategy can help you preserve more returns throughout the year.
Check your retirement accounts
Besides exploring the tax advantages of both US and foreign retirement saving accounts, it’s also worth exploring the potential advantages of converting traditional IRAs to Roths.
If applicable, don’t forget to take the required minimum distributions (RMDs) from your retirement accounts before the year-end to avoid penalties. Note that in 2023, the starting age for mandatory withdrawals was raised to 73, having previously been 72.
If your income was lower in 2023 then you expect it to be in future years and you have funded US retirement accounts, consider a conversion strategy that aligns with your financial goals. However, if you are considering converting from a Traditional to a Roth IRA and you live outside the USA, it is important to ascertain whether a Roth is considered a tax-deferred account in your country of residency since many US tax treaties are silent when it comes to Roth accounts.
Review your life insurance policies
Is your life insurance coverage due for an update? For policies that combine an investment component with a death benefit, some benefits may be calculated based on past interest rate assumptions, potentially impacted by recent Federal Reserve rate hikes. Review your policy to ensure that it’s still aligned with your initial goals, and adjust it if necessary. Beyond cash value, ensure the owner, beneficiaries, and death benefit meet your goals and are optimized for tax efficiency.
Gifts to family
In 2023, the lifetime transfer tax exclusion for US citizens is set at $12.92 million per person ($25.84 million for married couples if both are US citizens), however it’s due to revert back to $6.7 million per individual in 2026. If this decrease in estate tax exemption may affect you and you have the capacity and inclination to make significant family gifts during your lifetime, it could be sensible to do so before the existing limits potentially decrease.
Also, consider utilizing your $17,000 per person (in 2023) US annual gift allowance ($34,000 for a married couple) to make gifts to family members, ensuring proper recording. Another idea could be to use your annual gift allowance to make a gift if you have a non-US citizen spouse, such as facilitating property transfers over time.
Strategic donations
You can also use your annual gift allowance to make donations to charities. If you donate to US charities, some or all of the donation may be tax-deductible. Different countries have different rules relating to deducting charitable donations and which charities qualify though, so check the tax implications of your planned donations with both your US and local tax advisors.
Final thoughts
Good year-end planning requires timely evaluation before the end of year festivities distract us, so go ahead and book a consultation with your expat financial advisor in good time to ensure you reap the potential benefits of their expertise. They will also help you lay the groundwork for the coming year, and beyond.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
