10 Tips for Americans Abroad to Prepare for the Upcoming 2017 US Tax Season
We are in the midst of the holiday season, and a new year is upon us. A new year means tax time. The best way to have an easy tax season is to prepare for it now!
Sure, the last thing you want to think about this holiday season is your taxes, but it’s the perfect time to make last minute moves and preparations. You can increase your tax refund by performing a few simple actions right now before the year is over. While you’re working on optimizing your tax refund, you can take a few extra steps to prepare for the upcoming tax season so the process of filing your US income tax return runs smoothly.
1. Take the time to prepare your documents, local tax forms and bank statements in one convenient place.
It may seem a bit early to start gathering your tax documents for next year, but end of tax year is the best time to begin compiling everything you will need to have a hassle-free tax filing experience. Preparing everything now will make sure you don’t forget anything. Create a file specifically for the tax year, and put everything inside. When the time comes to file your US tax return early next year - you will be prepared.
For an overview of the documents we advise Americans living abroad to have, please see: Documents we need to prepare your US expat tax return.
Also have a think about all the changes that took place during the year. Did you have moving expenses related to a new job location? Did you have any unreimbursed employee expenses? Did you have to pay for child care? These and other situations will allow you to take even more deductions.
2. Take Required Minimum Distributions (RMD) from your retirement account to avoid 50% penalty
Taxpayers who are over age 70 ½ are generally required to receive payments from their individual retirement accounts and workplace retirement plans by the end of 2016, though a special rule allows those who reached 70 ½ in 2016 to wait until April 1, 2017 to receive them. Most workplace retirement account contributions should be made by the end of the year, but taxpayers can make 2016 IRA contributions until April 18, 2017
3. Important change affecting holders of ITIN (Individual Taxpayer Identification Number)
Effective Jan. 1, 2017, any Individual Taxpayer Identification Number (ITIN) not used at least once on a tax return in the past three years will no longer be valid for use on a return. In addition, an ITIN with middle digits 78 or 79 will also expire on Jan. 1. Those with expiring ITINs who need to file a return in 2017 must renew their ITIN. Affected ITIN holders can avoid delays by starting the renewal process now.
Taxpayers should allow seven weeks from Jan. 1, 2017, or the mailing date of the Form W-7, whichever is later, for the IRS to notify them of their ITIN application status - nine to 11 weeks if taxpayers wait to submit Form W-7 during the peak filing season, or send it from overseas. Those who fail to renew before filing a return could face a delayed refund and may be ineligible for some important tax credits.
4. Consider making a charitable donation to a qualifying charity.
It’s time to dig deep into that closet and find clothes that you haven’t worn in a while. Clothing is a great donation, and you will be able to deduct it on your US income tax return. You may also have a variety of household goods that you can donate -- it all adds up! Remember when you’re donating goods, you must make a list of the items you’re donating in order to have a verifiable record.
For most taxpayers, Dec. 31 is the last day to take actions that will impact their 2016 tax returns. For example, charitable contributions are deductible in the year made. Donations charged to a credit card before the end of 2016 count for the 2016 tax year, even if the bill isn’t paid until 2017. Checks to a charity count for 2016 as long as they are mailed by the last day of the year.
Although every charitable donation is a blessing to the giver, from the IRS standpoint you can take deductions only to the IRS qualified charity. . Aside from that, you can deduct donations made to charities in three countries: Canada, Mexico and Israel.
5. Do not forget to notify the authorities of important life changes.
Taxpayers who have moved should tell the US Postal Service, their employers and the IRS. To notify the IRS, mail IRS Form 8822, Change of Address, to the address listed on the form’s instructions. For taxpayers who purchase health insurance through the Health Insurance Marketplace, they should also notify the Marketplace when they move out of the area covered by their current Marketplace plan.
For name changes due to marriage or divorce, notify the Social Security Administration (SSA) so the new name will match IRS and SSA records. Also notify the SSA if a dependent’s name changed. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.
6. Add to your retirement plan now to not only invest in your future, but also to defer taxes until you start receiving distributions.
You can reduce your taxable income while setting aside funds for your retirement by making an extra contribution into your retirement savings plan. It doesn’t matter whether you’re making contributions to a traditional IRA or a 401(k); you are allowed to take a dollar-for-dollar reduction in your taxable income. Contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged for 2016 at $18,000.:
- 401(k) under 50 years of age: $18K
- 401(k) over 50 years of age: $24K
- Traditional IRA under 50 years of age: $5,500
- Traditional IRA over 50 years of age: $6,500
NB: If you live abroad and claim the Foreign Earned Income exclusion, postpone contributions to your traditional IRA or ROTH IRA until the time when you have a preliminary draft of your U.S. tax return for 2016. Contributions towards the prior year made between January 1 and April 15 of the following year are still deductible. If you make contributions early, before you know how much you can deduct considering the Foreign Earned Income exclusion, you may end up having excess contributions.
7. You can take losses on your capital gains and sell losing stocks to offset your gains for the year.
Healthy tax management of your investments can greatly increase your return. If you are an investor, chance are that some of your investments have gone down in value since you’ve acquired them. If this is the case, you can realize your losses by selling off your diminished investments and count them against your taxable income. If your losses wind up exceeding your gains, you can only apply $3K against your taxable income in one year. Any extra losses will be passed on to the next tax year.
8. If you’ve recently had an addition to your family, be sure to obtain a social security number for the little one.
A child does not only bring joy, but from a US tax perspective, sizeable credits and deductions such as the child tax credit, the dependent exemption, and the earned income tax credit. In order to qualify for these credits and exemptions, however, you will need a social security number for your little bundle of joy. Make sure to get in touch with the Social Security Administration as soon as possible.
9. If you have moved from a country with high tax rates to another country with low tax rates or tax-free country, try to postpone payment of final tax bill through the following year.
If your earned income remains the same or has increased, while you pay less tax in your country of residency, you may find yourself short on foreign tax credit to offset U.S. taxable income. It is possible that you may have an unpaid final tax bill from your former country of residency (i.e. Australia), and an option to pay this bill after December 31 without penalties. Do not send the check before January 1. Then you will be able to add this payment to the amount of foreign tax paid in the low tax country and increase your foreign tax credit, getting far more ‘bang for your buck’
10. If you experienced any changes with your income over the past year, you may need to adjust your W-4 withholding.
If you receive income from a U.S. employer you may need to review and make adjustments to form W-4 to ensure the correct amount of tax is withheld. Such review is particularly important if you anticipate change in residency, i.e. returning from the foreign job assignment to the United States or changing your U.S. home of record.