Advice from a certified financial planner to help you simplify your US tax reporting requirements.
Expatriate life offers us many benefits, and opportunities to explore Asia and beyond. It’s easy to get carried away, fulfilling our bucket list of experiences and forget that we need to continue to plan for a future that may feel very distant. Whether that be saving for a home or retirement, funding a child’s education, ensuring appropriate life & health insurance, or estate planning.
Let’s discuss some common pitfalls for Americans investing from abroad
I often meet with clients who have been steered towards offshore insurance & investment products by financial advisors with limited experience involving US taxation requirements. These products, often labeled savings plans, portfolio bonds or executive investment bonds are sold as investment accounts with a life insurance component and are referred to as “wrappers.” Within these insurance policies it is possible to dollar-cost-average monthly into mutual funds or invest lump sums into stocks, bonds, mutual funds, ETFs or alternative investments.
At first glance they appear to be a great solution for a US taxpayer working and living abroad to help them save for their life goals. Until tax time.
Foreign life insurance policies usually don’t meet the strict criteria of life insurance as defined by the Internal Revenue Code. Instead they often are considered to be a taxable financial account by the IRS. A tax-punitive financial account. These types of investments are usually defined by the IRS as a PFIC.
What is a PFIC
Passive Foreign Investment Companies PFICs can include offshore mutual funds, other financial products such as hedge funds, non-US pension plans, foreign REITS and maybe even your bank’s money-market account. PFICs are subject to extremely complex US tax rules and many unsuspecting US taxpayers find themselves facing unexpected and significant filing requirements come tax time. For example: Each PFIC should be reported on IRS form 8621 and CPAs charge up to $250 USD per form. Additionally, unrealized gains may be taxed up to 39.6%, possibly up to 50% if there are state tax obligations, and gains and losses cannot be offset.
FATCA compliant ≠ US personal tax compliance
Most foreign life insurance companies are FATCA compliant. The law requires all non-US (foreign) financial institutions (FFI's) report the assets and identities of US persons to the US Department of the Treasury. FATCA requires US taxpayers to file yearly reports for their non-US financial accounts on IRS form 8938. FATCA compliance is separate from the actual tax liability & reporting of holdings.
My advice for all US tax-payers is to invest globally, only through US registered investments on a US platform that generates an IRS 1099.
Ann Marie Regal, CFP® is an American who holds the US Certified Financial Planner designation. She is a licensed financial advisor in both Singapore & America. All opinions are expressed solely from a US taxpayer’s perspective.