This article is specifically for American Expats. If that's not you, stay tuned for future more universally relevant posts. Why just for Americans? Expats from other countries can "reset their basis" when moving from a tax-free jurisdiction to a taxable one. Americans can't do this all in one go, but if they're aware, they can "harvest" a few thousand in gains each year.
Ever heard of Capital Gains Harvesting? Jenny hadn't either.
Jenny hasn't paid any U.S. taxes for 15 years. Since moving overseas, her earned income from teaching has been below the Foreign Earned Income Exclusion ($126,500 in 2024). As a result, she owes no taxes...and has left thousands of dollars in future tax savings unclaimed.
Each year, the IRS provides a Standard Deduction based on one's filing status. The standard deduction is a specific dollar amount that reduces the amount of income on which you are taxed. For example, Jenny's filing status is Single. In 2024, she is eligible for a standard deduction of $14,600.
Why should Jenny consider the standard deduction, given she does not have a tax liability due to using the Foreign Earned Income Exclusion? Jenny could sell $14,600 of appreciated gains in her brokerage account. This would normally have cost her $2,190 in taxes. Instead, using her unused (you read that correctly) standard deduction would cost her nothing. Multiply these savings by the 15 years she has been overseas, and the math adds up quickly. If Jenny had children under 17, she could add an additional $13,333 of harvesting for each child.
This is counterintuitive thinking for most of us. We wouldn't normally try to create tax liabilities, but expats should. If you want to take advantage of these opportunities, you must do so during the current tax year (in this case, between now and December 31st).
The Standard Deduction amounts for 2024 are as follows:
-Single: $14,600
-Married Filing Jointly: $29,200
-Married Filing Separately: $14,600
-Head of Household: $21,900
Primer on harvesting gains
When I purchase an asset like an Index fund, stock, bond, or mutual fund, the price I pay for this is my BASIS.
If I purchased $10,000 of an index fund, my basis would be $10,000. If the next day I decided to sell this and there was no gain in my basis ($10,000), I would owe NO taxes as there was no gain; however, if I hold on to the investment for 1,2,5,10,15 years, there will be growth (termed Capital Gains). When I sell the investment, I will have to pay taxes on the gains of this investment, not the basis. For example, that index fund I purchased for $10,000 has now grown (appreciated) to $15,000. If I were to sell this, I would owe taxes on the $5,000 of growth (gains). The tax on this amount would be $750.
I could use a portion of my unused standard deduction ($5,000) to offset taxes owed, resulting in no taxes. I can now take this $15,000, purchase the same index fund (or purchase something else, take the money out, pay for college for my son, or use this for retirement), and re-set the basis. My "new" basis is $15,000. In the eyes of the IRS it appears I paid $15,000 for that index fund. In the future, I will only be taxed on the gains (growth) of the $15,000, not the original amount ($15,000) I invested.
*Note: we are not selling anything for a loss. We are looking for gains and creating taxable events, then using various deductions (like the stand deduction) and credits to offset the taxes owed
If you are an American married to a non-American and you have a dependent child, then you are eligible to file as "Head of Household" on your taxes each year, increasing your standard deduction and therefore your potential tax savings. A huge thank you to Jeff Devens for sharing this information about capital gains harvesting to reduce US expat taxes.
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