- 1 How To Invest as an American Expat
- 2 The Worldwide Income Tax Rules
- 3 What About Foreign Pension Plans
- 4 Foreign Tax Credits
- 5 Treaty Elections May Help
- 6 Foreign Investments Expats Should Research Before Investing
- 7 Foreign Investment Funds
- 8 Foreign Holding Companies
- 9 Grantor/Non-Grantor Foreign Trusts
- 10 International IRS Reporting Requirements
- 11 Late Filing Penalties May be Reduced or Avoided
- 12 Current Year vs Prior Year Non-Compliance
- 13 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 14 Need Help Finding an Experienced Offshore Tax Attorney?
- 15 Golding & Golding: About Our International Tax Law Firm
How To Invest as an American Expat
When a U.S. person resides outside of the United States, they are referred to as an expat. Sometimes, the term ‘expatriate’ is used interchangeably with the term expat, but they are very different from a U.S. tax perspective. Whereas a U.S. expatriate has formally renounced their US citizenship or relinquished their Long Term Lawful Permanent Resident Status — an expat is simply a US taxpayer who resides outside of the United States. As an expat of the United States and not an expatriate, the person is still deemed to be a U.S. Person for tax purposes and therefore still taxed on their worldwide income. The question then becomes which type of investments are good or bad for expats.
The Worldwide Income Tax Rules
Since expats are still taxed on their worldwide income — whether or not they invest in assets located in the United States or abroad – they are still typically subject to U.S. tax on their worldwide income, which would include income generated from foreign assets as well as domestic assets.
What About Foreign Pension Plans
If a taxpayer works in a foreign country that is not a treaty country, there is generally no tax benefit to the Taxpayer. If the Taxpayer works in a treaty country and they are earning a pension then they may receive tax treatment like the United States, but that depends on the specific tax treaty. In other words, just being in a foreign country in a treaty country does not mean all of the income associated with the pension (contributions vs. growth vs. distributions) will be taxed the same as if they were contributing to for example a 401K.
Foreign Tax Credits
One important aspect for expats who invest in foreign countries is whether the income is taxed in the foreign country or not. For example, even if the interest income in the foreign country is considered tax-exempt in the foreign country — that does not mean it will be tax-exempt in the United States. Therefore, taxpayers need to be aware of whether they will have any foreign tax credits to apply to their U.S. tax liability for income generated from overseas.
Treaty Elections May Help
For taxpayers who reside outside of the United States for the majority of the time, they may want to consider making a treaty election to be treated as a foreign person. There are various strict requirements to consider at the time of making the election that taxpayers should be aware of – and it generally does not apply to U.S. citizens. Likewise, there are various pitfalls and traps to be aware of as well that could lead to significant tax implications if they are not handled correctly before making the election.
Foreign Investments Expats Should Research Before Investing
While these events may be beneficial for taxpayers in the foreign country, these types of investments may have U.S. tax implications that make the investment less beneficial.
Foreign Investment Funds
If a taxpayer invests in certain foreign pooled funds, the funds could be considered to be PFIC — this could lead to a significant tax implication unless certain elections are made in the first year. Noting, that not all foreign pooled funds will qualify for these elections.
Foreign Holding Companies
If a US expat is considered an owner of a controlled foreign corporation, which typically means that the corporation is owned more than 50% by US persons who are each U.S. shareholders, then that means the company may be considered a CFC. This may lead to various tax issues involving GILTI, Subpart F, and other tax implications.
Grantor/Non-Grantor Foreign Trusts
A U.S. expat who is considered a grantor of any portion of a foreign trust is considered to be an owner of that portion of the trust and has to pay U.S. tax on income attributed to that portion of the trust. Likewise, if the taxpayer is considered to be an owner of a non-grantor trust, then the two may lead to tax implications in situations in which the non-grantor trust makes certain distributions that may be tax-exempt overseas but that could lead to a significant tax liability in the United States — along with having to file various international information reporting forms.
International IRS Reporting Requirements
The IRS requires U.S. tax Pats taxpayers, including U.S. expats to file certain international information reporting forms each year to report their ownership interests in certain foreign accounts, assets, investments, and the corresponding income. The failure to timely and accurately file these forms may lead to significant fines and penalties although it may be abated or avoided by submitting to one of the offshore tax amnesty programs.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely report their income and file the necessary 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.