- 1 Important Tax Tips for Managing Your U.S. Expat Investments
- 2 Understand the U.S. Tax Rules
- 3 Don’t Forget About IRS Foreign Reporting Rules
- 4 Foreign Mutual Fund/ETF Elections
- 5 Foreign Treaty Election
- 6 Foreign Holding Companies & Per Se Corporations
- 7 Beware of Foreign Trusts
- 8 Late Filing Penalties May be Reduced or Avoided
- 9 Current Year vs Prior Year Non-Compliance
- 10 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 11 Need Help Finding an Experienced Offshore Tax Attorney?
- 12 Golding & Golding: About Our International Tax Law Firm
Important Tax Tips for Managing Your U.S. Expat Investments
When U.S. Taxpayers move abroad, oftentimes one of the most complicated aspects of being a U.S. person who lives outside of the United States is managing their investments during the time they are considered an expat. It is important to note, that the term expat connotes that the person is still a U.S. person, as opposed to being an expatriate who has formally relinquished their long-term lawful permanent residency status or renounced their US citizenship. Unfortunately for taxpayers, many fraudsters and shysters try to goad taxpayers into foreign investments that are not good for them by failing to disclose the pitfalls of the investment when the taxpayer is still considered a U.S. person for tax purposes. Let’s look at some of the basics with six important tax tips for managing your investments as a US expat.
Understand the U.S. Tax Rules
Unlike almost every other country across the globe, the United States follows a Citizenship Based Taxation model, which can be confusing because Citizenship Based Taxation is not limited to just citizens but also includes lawful permanent residents and other residents who qualify as U.S. persons for tax purposes. As a result, taxpayers who are considered expats and live overseas are still required to report their worldwide income on their U.S. tax return each year. This is true, even if all the income is foreign-sourced. Some taxpayers may be able to circumvent the worldwide income tax rules if they can make a treaty election to be treated as a foreign person for tax purposes and file annual IRS Form 8833.
Don’t Forget About IRS Foreign Reporting Rules
In addition to the complicated tax rules, the IRS requires US persons, including expats who live overseas to file various international information reporting forms each year to disclose their foreign and overseas accounts, assets, investments, and income. Two of the most common forms taxpayers should be aware of is the FBAR and Form 8938 — noting, that these are just two of many foreign IRS tax forms that may be required depending on which class of assets the taxpayer has and the value of their investments.
Foreign Mutual Fund/ETF Elections
For taxpayers who are expats and investing in foreign mutual funds and other pooled funds such as ETF, it is crucial to keep aware of the fact that these types of foreign investments are typically considered to be PFIC by the US government. As a result, it subjects them to much harsher taxes than if the same pooled funds were domestic funds. Some taxpayers may qualify for various elections such as the MTM election or the QEF election, but they are time-sensitive. Late PFIC. elections typically require a purging election as well which can be very costly to the taxpayer.
Foreign Treaty Election
Some taxpayers may qualify for a treaty election to be treated as a foreign person for U.S. tax purposes. It is important to note, that not all taxpayers will qualify, and they must meet the specific and rigid requirements of being considered a foreign person for tax purposes under the specific treaty. Not all treaties are the same and some treaties may require a more complicated analysis than other treaties, so the taxpayers must analyze the specific treaty before making such an election.
Foreign Holding Companies & Per Se Corporations
It is not uncommon for expats to form holding companies in the country they live in because in many countries it is difficult to own certain categories of assets if the person is not a citizen of that country. Forming a foreign company or entity in that country can substitute for being a citizen of the country to invest in certain classes of assets. If the taxpayer owns the company or is a US shareholder in a company in which more than 50% is owned by US persons, the entity may become designated as a Controlled Foreign Corporation and lead to many different tax consequences, such as Subpart F, GILTI, and more.
Beware of Foreign Trusts
Another common technique that U.S. persons use to hold assets in a foreign country is to form a foreign trust in that country. However, the reporting and taxation by the US government of foreign trusts are very onerous and may require the taxpayer to file several forms each year to not only report the foreign trust but to calculate the taxes as well. This is especially true in situations in which the taxpayer may not have received distributions in the early years of the foreign trust but then received large distributions later — which may subject the taxpayer to interest in addition to taxes under the throwback rule.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.