2023 Tax Updates & Planning for U.S. Taxpayers Living Abroad

 

With 2023 quickly coming to an end, we want to ensure you are aware of your U.S. tax responsibilities and required filings for the upcoming year. Outlined below are helpful updates and tax planning ideas.

Considerations for 2023:

• Net Investment Income Tax (NIIT) and Foreign Tax Credits: We are monitoring the ongoing court case regarding the application of foreign tax credits to offset net investment income tax on net investment income. Prior to being challenged, foreign tax credits were not able to offset NIIT. We will be sending an update when a conclusion is reached and alerting clients of any actions to take.
• Access IRS Tax Records in Online Account: Taxpayers living abroad may now view, print, or download their IRS tax transcripts online, provided they have a U.S. Social Security Number.  This service is not yet available to taxpayers with  ITINs. Taxpayers must first create an ID.me account and verify their identity. ID.me is an IRS-trusted technology provider. This link provides helpful information on how to navigate ID.me and verify your identity for the  IRS.
• IRS Identity Protection PIN (IP PIN): An IP PIN is a six-digit number that  prevents someone else from filing a tax return under your Social Security number or Individual Taxpayer Identification Number (ITIN). If you have an IP PIN, it must be used when filing any federal tax returns to avoid electronic filing rejections and delays. An incorrect or missing IP PIN will result in the rejection of your e-filed return. An IP PIN is valid for one calendar year and a new IP PIN is generated each year for your account. FAQs about the IP PIN can be found here.
• IRS Scrutinizes Foreign Trust Reporting Compliance: The IRS has identified foreign trust information reporting as an area in which the IRS detects a significant increase in abuse by taxpayers. As a result, the IRS plans to scrutinize more closely the reporting of foreign trusts and their activities and is actively working to identify and examine individuals who may have foreign trust reporting requirements.
• Beneficial Ownership Information (BOI) Reporting goes into effect in 2024. This is not part of a tax return filing. US businesses and non-US businesses that are registered to do business in the US are subject to filing. Reporting goes into effect January 1, 2024 for newly formed businesses. Existing businesses have until January 1, 2025 to file their reports. Penalties apply for late filing. Additional information can be found at: https://www.fincen.gov/boi-faqs#B_1

Tips & Planning:

• Consult your investment advisor if you have non-U.S. mutual funds or exchange traded funds, TFSAs, or RESPs and inform them of your status as a U.S. person. Determine if restructuring your investments is necessary to reduce tax compliance burdens.
• If you are considering making a large contribution to your RRSP consider how this will affect your U.S. tax liability before the Canadian tax return is filed. Contributions to RRSPs are not deductible in the U.S.
• If you are a U.S. citizen or a resident alien of the United States and you live abroad, you may qualify to exclude your foreign earnings from your taxable income. The foreign earned income exclusion increased in 2023 from $112,000 to $120,000.
• The $10,000 annual limit on state and local taxes included in an individual’s itemized deductions applies to tax years 2018 through 2025. Multiple states have enacted elective pass-through entity-level taxes to work around the limitation. The pass-through entity-level tax election allows states to tax directly on the pass- through entities rather than the individual owners. The tax paid by the entity may be allowed as a credit to the owner’s share of the taxes or alternatively utilized as a reduction to state taxable income on their individual state return. Keep in mind that this varies by state.
• The Inflation Reduction Act changed the requirement for the electric vehicle tax credit. The tax credit for qualifying electric vehicles is available for only vehicles in which the final assembly occurred in North America. The US Department of Energy has provided a list of 2023 qualifying vehicles.
• Consider U.S. estate and gift tax planning and ways to maximize transfer benefits. The estate tax exemption for U.S. citizens and a U.S. domiciliary is $12.92 million for 2023. The annual gift tax exclusion is $17,000 for 2023.
• Consider if downward attribution may apply to your cross-border organizational structure. VSH’s international team can assess whether you or your business is considered to own a controlled foreign corporation (CFC) and what filing requirements and tax implications may apply. Proactive planning may be needed to mitigate the tax effects of this issue.
• Disclosures of non-U.S. corporations are generally required to be based on calendar-year financial information. Consider adopting a year end of December 31st to streamline the preparation of annual disclosures.
• Avoid loans from non-U.S. corporations to U.S. owners, as they may be considered income to the owner for tax purposes and subject to U.S. tax.
• Depending on filing status and income amounts, it may be advantageous  for U.S. tax purposes to pay wages instead of dividends from a controlled foreign corporation. Additional analysis would be needed, so please contact your VSH tax advisor.
• Consult a VSH tax advisor if you are considering owning a foreign entity (or a personal business).

 

These suggestions are only an overview and would need further examination for your unique scenario before implementation. Please also note these suggestions are for U.S. tax planning purposes only and should be reviewed with your Canadian accountant to determine the effect in Canada.