Good Housekeeping – make use of your losses

It may be the case that you are sitting with an activity, it may be a partnership, LLC, rental activity, which you have held for years and has built up losses for US tax purposes.  These investments would often be considered “passive” and are subject to several constraints about when you are able to use them against income from other sources. In general terms, these can be used against other “passive” income and against any other income when you dispose of the activity.

For UK residents, the UK tax treatment is even more restricted. It is more than likely that you will get no UK tax benefit, whatsoever, from these losses.

Put the above together in a glass and mix them up, and the recognition of US losses on these types of activity will provide little actual benefit if it happens while you are UK resident. This is because your US tax will already be mitigated by claiming foreign tax credits, leaving only a small amount of actual Federal tax to be saved as a result of claiming the losses.

Returning to the US and recognizing losses after that time will obviously give you a bigger bang for your losses, but is there another way?

Well, maybe there is for someone in the right circumstances.  The way to optimize the use of these losses is to have US income in the same year as losses become fully deductible.  One option that may be available to many taxpayers is where they have money in an IRA or 401K that they built up while working in the US before they moved to the UK. Converting these monies to a Roth IRA would generate US taxable income which would soak up the losses (US income gets matched up with US losses first).  There would be no early withdrawal penalty and likely no UK tax and therefore the Roth conversion can be achieved at a lower tax cost. You would also need to consider any gain realized on the disposal of the activity and also any other losses that may be available..

The ability to use this will obviously depend crucially on your personal circumstances and you should see professional advice on these matters.  We, at PJD Tax, would always be happy to assist in these types of matters.  If you are unsure if this applies, have a look for form 8582 in your Federal Tax Return, which shows your unused passive losses.