Choosing Investment Advisor as an Expat with Offshore Investments
If you are a US Expat, an American Citizen, or a United States Green Card Holder with offshore investments, it’s imperative that you’re getting the absolute best tax advice on your US expat tax liabilities. If your US based or foreign financial advisor is not well-versed in complicated tax matters surrounding international investments, you could be paying more US taxes than you should be.
There are many good reasons to take advantage of international investments. You may have a foreign employer with an attractive contribution matching retirement plan or perhaps you’re just interested in diversifying your assets as much as possible for better security. Whatever your motivation(s) for seeking offshore investments, it’s important to understand that US taxation of income from these investments can greatly reduce your profit and future distributions. Furthermore, failure to report income from and contributions to foreign investment accounts can result in extremely punitive fees.
There are a variety of ways to ensure that you’re liable for as little tax debt as possible, but it requires an intimate knowledge of different types of foreign investments and how they can be set up and managed to favor the United States’ method of taxation. Many foreign tax advisors are great at helping you get the best results on your foreign tax returns, but most of them are not well equipped to help you save money on your US expat taxes. At the same time, many US tax advisors are kept busy enough trying to stay updated on changes to US tax laws and regulations; so they have little knowledge of international accounts and how to manipulate them in a way that’s most beneficial to you.
Whether you rely on a foreign or US based financial advisor, you want to make sure that he/she is educated and experienced in international tax matters and the complicated procedures of US tax laws surrounding foreign investments. Here’s why:
Understanding Foreign Investments
Much like the investment accounts, retirement plans, and trusts established in the United States, foreign financial accounts are setup to be most beneficial to taxpayers in the country in which they were designed. As such, there is little consideration for US tax liability, and these foreign accounts are established with basic parameters which are not as ideal for US Taxpayers as they could be. The primary reason many of these foreign financial accounts are not fiscally ideal for US Taxpayers is that they are generally taxed by the IRS at the highest tax rate – even if your income level puts you in a lower tax bracket. Another reason is that the more foreign investments you have, the more likely it is that you’ll be required to file multiple US tax returns – increasing the chance of costly mistakes.
There are a variety of foreign retirement plans which may be offered through your foreign employer that allow you to make tax deductible and/or deferred contributions. In most of these circumstances, the IRS does not recognize the tax deferral status of these accounts and taxes you on both your contributions and contributions made on your behalf by your foreign employer.
With almost every foreign financial account, there are account settings which can be adjusted to minimize your US tax liability. The account manager of your foreign investment account, however, is probably not the best candidate to give you advice. Your best bet is to make your plan with an international tax consultant and use the advice you receive to instruct your foreign financial account manager exactly how to set up your investment plan.
Your host country may have an active tax treaty with the United States in which the terms make certain allowances and exceptions for foreign investment account contributions or distributions on your US expat tax return, but – again – this requires an intimate knowledge of international tax laws. In order to benefit from tax treaty guidelines, you will be required to not only file a treaty claim, but also know how to navigate through the complicated tax treaty agreement to ensure prompt and accurate filing.
Tax Forms You May be Required to File
Investing money in offshore accounts almost always means that you will be required to file one or more additional forms with your US tax return. At minimum, you will be required to file Form TD F 90-22.1 if the total balance of your foreign financial accounts exceeds $10K at any point during the taxable year.
If you have…
- Financial Interest in One or More Foreign Trusts, you will be required to File Form 3520 or Form 3520A;
- Financial Interest in One or More Foreign Business Enterprises, you will be required to file Form 5471;
- Financial Interest in One or More Foreign Partnerships, you will be required to file Form 8865;
- Investments Through One or More PFICs (Passive Foreign Investment Companies), you will be required to file Form 8621; or
- High Foreign Account Balances, you will be required to file Form 8938.
Each one of the aforementioned forms has strict non-compliance penalties including failure to file fees of up to $10K for every foreign financial account, penalties of up to 50% of the balance of your foreign financial assets, and the possibility of criminal pursuit.
With all these considerations in mind, it only makes sense to see to it that you’re getting the absolute best tax advice so you get as much out of your investments as possible. If you’re thinking about making foreign investments part of your portfolio or you want to see if there are adjustments you can make to your foreign investments to reduce your US tax liability and increase your profit, make sure to get in touch with an international tax expert at Taxes for Expats.
I.J. Zemelman, EA is the founder of Taxes for Expats