U.S. Taxation of Foreign Mutual Funds and IRS Tax Treatment

U.S. Taxation of Foreign Mutual Funds and IRS Tax Treatment

U.S. Taxation of Foreign Mutual Funds

U.S. Taxation of a PFIC: A PFIC is a Passive Foreign Investment Company. It is codified under 26 U.S.C. section 1291 et seq. The goal of the PFIC regime is anti-deferral of tax on certain investment income from overseas. In general, the U.S. taxation of Foreign Mutual Funds is complicated because they are considered PFIC.

Even if a Taxpayer has fractional ownership, the PFIC rules kick in unless there is applicable exception, exclusion or limitation.

This makes it unnecessarily difficult for taxpayers to realize they may even have a PFIC, or that it is reportable and taxable. 

Also, with the IRS taking an aggressive position on matters involving foreign accounts compliance — which includes investment accounts — taxpayer compliance is crucial.

Important Tax Tips for Taxpayers with Foreign Mutual Funds

Here are some important tips for Taxpayers with foreign mutual funds who are subject to U.S. tax:

Growth within the PFIC

Generally, the growth within the PFIC is generally not taxable when it is growing within the fund.  In other words, if it is a foreign mutual fund for example that is accruing income, then the general rule is that the growth is not taxed.

First Year Distribution

Practice Pointer: A first-year distribution is not taxed as an excess distribution in the first year of the investment. For example, Melissa buys a foreign mutual fund on 2/1/2019. It distributes a dividend on 11/10/2019. This is not an excess distribution, because it is in the first year of the investment. Therefore, it is not “in excess” of any other prior year non-distribution.

Subsequent Distributions

Subsequent distributions are complicated. The distributions will be taxed as either a distribution or excess distribution. If it is a distribution, it is taxed at a regular rate. When it is an excess distribution it is taxed at the highest tax rate for all prior years (plus interest). The current year is taxed at the Taxpayer’s current progressive rate.

Excess Distributions

Excess Distributions are very complicated.

Golding & Golding: About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.