Year-End Tax Planning for Expats – Basic Tax Planning Strategies

Year-End Tax Planning – The Basics

With the end of the year, it is time to think about year-end tax planning. Tax planning for the end of the year generally focuses on two primary strategies :

1. Income acceleration/deferral such as:
   • Holding or selling appreciated assets such as stocks and bonds
   • Maximizing or minimizing retirement distributions
   • And more…
2. Acceleration/deferral of deductions and credits such as:
   • Bunching itemized deductions into the current tax year
   • Paying or deferring bill payments, such as medical payments
   • And more…

With our tax planning services, we perform a thorough review of your situation and identify year-end expat tax planning strategies. If you’d like to talk through your options, please contact us and we’ll be happy to answer questions about whether tax planning is a good fit for you.

Why Year-End Planning Matters for Expats

Year-end tax planning helps U.S. expats avoid surprises and lower their tax bills. Recent tax law changes and ongoing adjustments to credits, deductions, and income thresholds require both individuals and business owners to carefully evaluate their financial situation before the year closes. Taking action now can help you prepare for next year and stay on the IRS’s good side.

Tax rules keep changing, and the right move depends heavily on your circumstances. If your income, deductions, or business results have shifted this year, now is the time to look closely at strategies to improve your outcome. That includes managing investment gains, evaluating charitable contributions, optimizing credits and deductions, and watching income thresholds that can trigger additional taxes such as the Additional Medicare Tax or the Net Investment Income Tax.

For expats specifically, understanding how foreign-earned income, tax treaties, and credits like the Foreign Tax Credit or the Foreign Earned Income Exclusion (FEIE) interact with your U.S. return can make a significant difference. If you expect your income to change next year, whether from bonuses, investments, a new posting abroad, or business growth, you may want to accelerate or defer income to optimize your overall tax position. The strategies below are broken into two groups: planning moves for individual expats, and planning moves for expat business owners.

One decision that deserves special attention before year-end is whether to claim the FEIE, the Foreign Tax Credit, or some combination of the two. The FEIE lets you exclude a set amount of foreign-earned income from U.S. tax, while the Foreign Tax Credit gives you a dollar-for-dollar credit for income taxes already paid to a foreign government. Depending on where you live, your income level, and whether you have investment income that falls outside the FEIE’s reach, one approach can produce a meaningfully better result than the other. Because switching between the FEIE and the Foreign Tax Credit isn’t always a simple year-to-year choice under IRS rules, it’s worth reviewing this decision before you file rather than after.

Year-End Tax Planning for Individual Expats

Individual expats have their own set of levers to pull before December 31. Below are the areas we review most often when we sit down with clients for a year-end planning session.

Accelerating Income

If you expect to be in a higher tax bracket next year, accelerating income into the current year can help reduce your overall tax liability. This might include receiving year-end bonuses, exercising stock options, or collecting client payments before December 31. Self-employed individuals should also consider invoicing clients early to recognize income this year rather than next.

However, accelerating income isn’t always beneficial. If it pushes you into a higher tax bracket or triggers additional taxes, such as the 3.8% Net Investment Income Tax (NIIT) or the 0.9% Additional Medicare Tax, it could reduce or even eliminate the benefit of this strategy. Be cautious of large, one-time income events like Roth IRA conversions or asset sales that could unexpectedly increase your taxable income and trigger these additional taxes.

Maximizing Deductions

Deductions are equally important for year-end tax planning. If you itemize, prepaying certain expenses can help lower your taxable income. For example, you can pay property taxes or a state income tax installment due next year before December 31. Just make sure your property taxes aren’t held in a mortgage escrow account, since those payments are made by your lender on its own schedule.

Bunching medical expenses into a single year can also help you clear the deduction threshold. Medical and dental expenses are only deductible to the extent they exceed 7.5% of your adjusted gross income (AGI). By consolidating elective treatments or large medical bills into one year, you may qualify for a larger deduction than if the same expenses were spread across two tax years.

Additional Medicare Tax

The Additional Medicare Tax of 0.9% applies to individuals with income over $200,000 (single filers) or $250,000 (married filing jointly). This tax isn’t split with your employer, so you need to plan carefully if you’re close to these income thresholds.

Unexpected income, like a year-end bonus or a large one-time payment, can trigger this tax. To prepare, consider increasing your wage withholding before the year ends. This helps ensure you’ve withheld enough to cover the tax and reduces the risk of an underpayment penalty.

For self-employed individuals, the Additional Medicare Tax must be included in your estimated quarterly tax payments. Reviewing your income and adjusting your final estimated payment before the January deadline can help you avoid surprises when you file your return. If you expect your income to approach the threshold, carefully review any additional income or deductions to minimize your exposure to this tax.

Alternative Minimum Tax (AMT)

The AMT, a parallel tax system with its own rules and exemptions, remains an important consideration for higher-income individuals. Certain deductions that reduce your regular tax liability, such as state and local taxes and some miscellaneous itemized deductions, may not be allowed under AMT.

For tax year 2025 (returns filed in 2026), AMT exemption amounts are indexed for inflation:

• Single filers: $88,100
• Married filing separately: $68,500
• Married filing jointly: $137,000

If you anticipate being subject to AMT, carefully evaluate how your deductions and income affect both your regular tax and your AMT liability before making any year-end moves.

Strategize Tuition Payments

If you or your dependents are pursuing higher education, the American Opportunity Tax Credit (AOTC) remains a valuable benefit, offering up to $2,500 per student. To maximize the credit, consider paying spring tuition for the next term before December 31. This strategy allows you to claim the credit this year and potentially reduce your current tax liability.

The Lifetime Learning Credit is another option for expats seeking continuing education, since it applies to both undergraduate and graduate-level coursework and doesn’t require the student to be pursuing a degree.

Residential Energy Tax Credits

Tax credits for residential energy efficiency continue to encourage homeowners to make eco-friendly upgrades. The two main credits are:

1. Non-Business Energy Credits. This credit applies to energy-efficient improvements such as insulation, energy-efficient windows and doors, and certain heating systems. While some of these credits carry a lifetime cap, others allow you to claim a percentage of the cost for qualifying upgrades made to your primary residence. Check the current limits and be sure to keep manufacturer certifications for any eligible improvements.
2. Residential Energy Efficient Property Credits. If you install alternative energy equipment like solar panels, solar water heaters, geothermal heat pumps, or small wind turbines, you may be able to claim a credit of 30% of the cost. This credit has no dollar cap for most technologies except fuel cells, and it applies to primary residences, second homes, and new construction, but not to rental properties.

Charitable Contributions

Year-end giving is a win-win strategy: you support causes you care about while potentially reducing your tax liability. To qualify, make sure you have written documentation that includes the organization’s name, the date, and the amount donated. Contributions of appreciated property, like stocks, provide an added benefit by allowing you to avoid capital gains tax while still claiming a deduction for the fair market value.

If you plan to donate substantial amounts, consider a donor-advised fund, which allows you to distribute contributions over time while taking an immediate deduction in the year you fund the account.

Investment Gains and Losses

Managing investment gains and losses before year-end can help reduce your tax bill. Short-term gains from investments held for one year or less are taxed at ordinary income rates, which can run as high as 37% for higher earners. Long-term capital gains, by contrast, are taxed at more favorable rates of 0%, 15%, or 20%, depending on your income.

If your taxable income is below roughly $48,350 for single filers or $96,700 for married couples filing jointly, you may qualify for the 0% rate on long-term capital gains and qualified dividends. Above those levels, the maximum long-term capital gains rate is 20%, which still offers a meaningful advantage over short-term rates.

To minimize taxes, consider selling underperforming investments to generate losses that offset your gains. Losses offset gains dollar-for-dollar, and if your losses exceed your gains, you can deduct up to $3,000 against ordinary income, with any unused losses carried forward to future years.

If you plan to repurchase a sold investment, be aware of the IRS wash-sale rule, which disallows the loss if you buy back the same or a substantially identical investment within 30 days before or after the sale. To maintain your market position without running afoul of the rule, you can purchase a similar but not identical investment instead.

Net Investment Income Tax (NIIT)

The 3.8% NIIT applies to net investment income, including interest, dividends, capital gains, and rental income, once your modified AGI exceeds $200,000 for single filers or $250,000 for married filers. For expats with meaningful investment income, this tax can significantly impact your overall return, so careful management of gains and losses can help reduce your exposure.

Year-End Giving to Reduce Estate Tax

For individuals with significant assets, year-end gifting can reduce the size of your taxable estate. The annual gift tax exclusion allows you to give up to $19,000 per recipient in 2025 without triggering gift tax. Married couples can double that to $38,000 per recipient by splitting gifts, with each spouse consenting to allocate part of the gift. While not required, filing a gift tax return for split gifts is a good practice, since it creates clear documentation and helps avoid potential IRS challenges later.

If you’re considering gifts of appreciated property, such as stocks, this strategy can further benefit your heirs by allowing them to assume a higher cost basis and avoid capital gains tax down the road. Filing a gift tax return, even for gifts below the threshold, can also be a useful tactical move to establish clear reporting and prevent future disputes over the value of the gift.

Other Year-End Moves for Individuals

• Retirement Contributions: Maximize contributions to retirement plans like 401(k)s or IRAs to lower your taxable income. If you’re self-employed, consider establishing a SEP IRA or solo 401(k) before year-end.
• Health Savings Accounts (HSAs): If you have a high-deductible health plan, contributions to an HSA are tax-deductible and grow tax-free when used for qualified medical expenses.
• Roth IRA Conversions: Converting a traditional IRA to a Roth IRA may increase your income this year but could provide tax-free withdrawals in the future.

Year-End Tax Planning for Expat Businesses

There are a number of end-of-year tax strategies expat business owners can use to reduce their tax burden. Here’s the lowdown on some of the best options available heading into year-end.

Maximize Section 179 and Bonus Depreciation

If you plan to purchase equipment for your business, the timing couldn’t be better. Section 179 allows you to deduct the full cost of qualifying new or used equipment placed in service before December 31, up to the annual deduction limit, with the deduction phasing out once total qualifying purchases exceed the phase-out threshold for the year. This includes machinery, software, and business-use vehicles, provided they’re used at least 50% for business purposes.

In addition to Section 179, businesses can take advantage of bonus depreciation, which was permanently restored to 100% under the One Big Beautiful Bill Act (OBBBA) for qualifying property acquired and placed in service after January 19, 2025. Unlike Section 179, bonus depreciation isn’t limited by your business’s taxable income and can even be used to create or increase a net operating loss, though it’s generally applied after the Section 179 deduction.

When purchasing equipment, understanding depreciation conventions is key, since these rules determine how much depreciation you can deduct in the first year based on the purchase date:

• Half-Year Convention: Most equipment is treated as though it was placed in service at the midpoint of the year, no matter when you actually purchased it.
• Mid-Quarter Convention: If more than 40% of your equipment purchases occur in the final quarter, this rule applies instead, reducing your first-year depreciation by assuming the equipment was placed in service mid-quarter.
• Mid-Month Convention: This applies to real property, like buildings, and assumes the property is placed in service at the midpoint of the month.

For the best results, plan your purchases early. Waiting until the last quarter can trigger the mid-quarter convention, limiting your available first-year deductions.

Partnership or S-Corporation Basis Adjustments

If your partnership or S-corporation experienced losses this year, you’ll only be able to deduct those losses up to your basis in the business. Your basis reflects how much you’ve invested in the business, and it’s critical to keep it sufficient to claim the deductions you’re otherwise entitled to. To increase your basis before year-end, you can contribute additional capital to the business or lend money directly to it.

However, adding to your basis means putting more funds at risk, so it’s important to weigh this decision carefully. If you’re unsure how to proceed, we’re here to help you figure out the right move for your situation.

Retirement Contributions for the Self-Employed

Contributing to a retirement plan is a simple yet effective way to reduce your taxable income. For self-employed expats, options like the Solo 401(k) or SEP IRA allow you to make significant contributions while planning for the future.

• A Solo 401(k) allows total contributions (employee deferrals plus employer contributions) of up to $70,000 for 2025, or as much as $77,500 if you’re 50 or older, depending on your income.
• A SEP IRA permits contributions of up to 25% of your net earnings, capped at $70,000 for 2025.

Remember that a Solo 401(k) must be established by December 31 to take advantage of this year’s deductions, even if the actual contributions are made after the year ends. Acting early ensures you don’t miss out.

Dividend Planning for C-Corporations

If your business is structured as a C-corporation, now is a good time to consider issuing dividends. Holding on to excessive profits can attract IRS penalties under the Accumulated Earnings Tax, and issuing dividends reduces your accumulated earnings while providing a benefit to shareholders.

Qualified dividends are taxed at favorable rates, generally 15% for most taxpayers and 20% for higher-income earners. Issuing dividends before year-end can help you optimize your tax position while staying compliant.

Review and Update Your Business Budget

Year-end is the ideal time to take a hard look at your business finances and plan for the year ahead. Compare your actual revenues and expenses to your current budget and identify areas that need improvement. If you didn’t have a formal budget this year, now’s the time to create one.

A well-prepared budget helps ensure healthy cash flow, cut unnecessary expenses, and set realistic growth goals. By tracking monthly progress against your budget, you can quickly spot and address shortfalls. If you’re not sure where to start, we can help you put together a budget that makes sense for your business.

Check Your Estimated Tax Payments

If you’re self-employed or running an expat business, you likely need to make quarterly estimated tax payments. If your income fluctuated this year, it’s important to review your payments to make sure they’re accurate. Underpaying can lead to penalties, while overpaying ties up cash that could be used elsewhere in your business.

The final quarterly payment for the year is typically due in mid-January of the following year. A quick review before year-end can help you avoid surprises and penalties down the road. This is especially important for expat business owners whose income may be paid in a foreign currency, since exchange-rate movements over the course of the year can leave your dollar-denominated estimates out of sync with what you actually owe.

Foreign Tax Considerations for Expat Businesses

As an expat business owner, you may be eligible for the Foreign Tax Credit, which allows you to offset taxes paid to foreign governments against your U.S. tax liability. It’s important to keep detailed records of any taxes paid abroad to maximize this benefit. Additionally, fluctuations in exchange rates can create taxable gains or losses, so review your financials carefully before year-end.

Coordinating Personal and Business Tax Planning

Many expats wear both hats: employee or investor on the personal side, and owner or partner in a business on the other. When that’s the case, personal and business year-end moves shouldn’t be planned in isolation. A retirement contribution decision, a Section 179 purchase, or a decision to issue a dividend from a C-corporation all flow through to your personal return, and each can push you closer to, or further from, thresholds like the Additional Medicare Tax, the NIIT, or the AMT.

Before finalizing any single move, it’s worth running the numbers on your combined personal and business picture. Accelerating business income to smooth out a slow year, for example, can look attractive on its own but may not make sense once you factor in the personal-side tax it triggers. This is exactly the kind of interaction we review with clients each December.

Frequently Asked Questions

Consult with Tax Professionals

Tax laws are complex and subject to change, and that’s especially true for anyone navigating both U.S. and foreign tax rules at the same time. Consulting with a tax professional who specializes in expat taxation can provide personalized advice tailored to your unique circumstances, whether you’re an individual weighing the Foreign Earned Income Exclusion against the Foreign Tax Credit or a business owner deciding whether to accelerate an equipment purchase.

Year-end tax planning is a great way to get ahead and make sure you’re in line with IRS rules. Whether it’s bringing in income sooner, paying deductible expenses early, maximizing retirement and Section 179 deductions, or making smart contributions to charity or investments, having a solid plan in place can help you save on taxes and avoid unpleasant surprises come filing season.

At Tax Samaritan, our team of Enrolled Agents specializes in helping U.S. expats, both individuals and business owners, navigate complex tax laws and identify planning opportunities tailored to their situation. If you need personalized guidance, contact us for a consultation today.

Every effort has been made to provide accurate and current tax information. This article is not a substitute for professional tax advice based on your individual circumstances. Tax law changes frequently. Please consult a qualified tax professional before making decisions based on this content.