US Expat Tax Planning: FATCA, PFIC and Year-end planning
FATCA – Foreign Account Tax Compliance Act
Many Americans living overseas are unaware of the potential tax liabilities they could be facing in near future. US citizens have a permanent obligation with the IRS to file an annual tax return and a foreign asset statement (FBAR), above a certain threshold).
FATCA regulations have resulted in many financial institutions closing their doors to US citizens due to concerns about increased reporting to the US tax authorities, even though many such institutions do not operate on US soil.
Therefore US citizens find themselves in an unsettling situation when trying to open accounts overseas. US citizens also include Green Card holders and ‘Accidental Americans’ – either born in the US or born to a parent who was naturalized in the US.
Many US citizens, seeking global investment exposure, innocently invest in mutual funds and pension plans outside the US. However, such assets may be subject to unfavourable taxation, based on PFIC rules whereby the capital gains could be taxed at the highest rate of US income tax.
We recommend that US citizens seek financial and tax advice together rather than risk making a careless investment decision and facing the potential tax implications in the future.
We offer a select few overseas solutions, suitable for US expatriates, which offer US-compliant reporting, global investment exposure and secure asset protection. Our recommendation of investment vehicle and underlying asset strategy is tailored to the profile and objectives of each client
PFIC – Passive Foreign Investment Company
US expats often find themselves in confusing and costly situations when trying to hold non-US collective or pooled funds, known as PFICs.
You can fall into the PFIC trap if you invest in a fund which has been recommended by your overseas bank manager or decide to start an offshore savings plan. These innocent actions will result in a higher tax charge.
The holder of a US-incorporated fund pays the low long‐term capital gains rate of 15% if held for more than a year. Buying a virtually identical fund listed outside the US will result in both income and capital gains being classified as ordinary income and automatically taxed at the top rate of 39.6%. In some cases, the total tax on a PFIC investment may rise to above 50%.
While most US advisors prefer to recommend US-based solutions, there are more dynamic solutions available outside the US which offer significant investment and currency diversification.
Certain jurisdictions offer IRS-compliant fund platforms and if investors focus on ETFs, direct assets and other recognized assets, they will not have PFIC issues.
Such fund platforms offer an IRS-compliant reporting format to ensure a smoother dialogue with your accountant when preparing your tax return. Bear in mind that your US accountant may still be learning how to apply FATCA rules for international clients. Sometimes paying for additional support is worth it for a lower tax bill and greater peace of mind.
Year-end planning 2019/2020
US citizens who are resident in Brazil face demanding reporting requirements as they have to file income and asset declarations with both the IRS and Receita Federal.
Employees may wish to defer the receipt of a 2019 year-end bonus to 2020 if they believe their tax liability may be lower next year. In the same way, self-employed people may choose to delay collection of payment and debts.
Conversely, if one predicts their income and tax liability as being higher in 2020, then consider accelerating income into 2019, which may include the sale of an asset which may result in a large gain.
The same concept applies to expenses, such as mortgage interest and medical expenses, which can be accelerated into 2019 or deferred into 2020.
We encourage my clients to carry out an annual review, including budgets for retirement, children’s education planning and medical cover to take advantage of tax incentives. Remember that certain tax incentives in Brazil are not recognised by the IRS, so be sure to take professional advice.
Disclaimer: Ipanema Wealth provides an advisory service and does not engage in capital markets or the selection of financial instruments.
US Flag by Andrew Neel at Unsplash
US Flag on Boat by Ipanema Wealth (in-house, 2015)
2020 sign by Stuart Miles at Stockvault