Blog - SDC Global

What could go wrong with investing in a mutual fund? PLENTY if you're an American living abroad. I was on the Goldstein on Gelt Show to help you understand why.

Listen here: http://goldsteinongelt.com/investing-basics-strategies/the-dangers-of-pfics-passive-foreign-investment-company

Virtually any investment made by a US person outside the US will have US tax and/or reporting obligations. Here is a link to the foreign investment chart we put together to help US citizens navigate the myriad of potential reporting obligations.


Have questions? Contact us today to schedule a consultation.

©2018 SDC, LLC    www.sdcglobalcpa.com

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult tax, legal and accounting advisors before engaging in any transaction.

 

The Tax Cuts and Jobs Act was passed by both the House and Senate on December 20, 2017.  Most provisions of the Act become effective January 1, 2018.  Here is a look at many (but not all) of the provisions of the bill that affect individuals.  

For tax years 2018 through 2025, the following rates would apply to individual taxpayers:

Single taxpayers
Taxable Income Over
But not over
is taxed at
$0
$9,525
10%
$9,525
$38,700
12%
$38,700
$82,500
22%
$82,500
$157,500
24%
$157,500
$200,000
32%
$200,000
$500,000
35%
$500,000
 
37%


Heads of households

Taxable Income Over But not over is taxed at
$0 $13,600 10%
$13,600 $51,800 12%
$51,800 $82.500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $500,000 35%
$500,000   37%


Married taxpayers filing joint returns and surviving spouses

Taxable Income Over But not over is taxed at
$0 $19,050 10%
$19,050 $77,400 12%
$77,400 $165,00 22%
$165,000 $315,000 24%
$315,000 $400,000 32%
$400,000 $600,000 35%
$600,000   37%


Married taxpayers filing separately

Taxable Income Over But not over is taxed at
$0 $9,525 10%
$9,525 $38,700 12%
$38,700 $82,500 22%
$82,500 $157,500 24%
$157,500 $200,000 32%
$200,000 $300,000 35%
$300,000   37%

Special brackets would apply for certain children with unearned income.

The U.S. taxes U.S. persons (U.S. citizens and greencard holders) on their worldwide income regardless of where they live.  A U.S. person owning a business abroad will likely have U.S. tax and/or reporting obligations related to the business.

Freelancer, Limited Company, Partnership.  What is the best way to structure your business abroad and what are the U.S. tax implications of the structure?

The U.S. taxes U.S. persons (U.S. citizens and greencard holders) on their worldwide income regardless of where they live.  A U.S. person owning an interest in a foreign (formed outside the United States) partnership will likely have U.S. tax and/or reporting obligations related to the business.

The U.S. taxes U.S. persons (U.S. citizens and greencard holders) on their worldwide income regardless of where they live.  A U.S. person owning a foreign (formed outside the United States) corporation can likely defer the U.S. taxation of the Foreign Corporation income until it is distributed to the U.S. shareholder. However, any interactions between the U.S. person and the foreign corporation will likely have U.S. tax implications, regardless of the level of ownership. So, what is the best way to withdraw money from the foreign corporation?  Should you take a wage or dividend?

The U.S. taxes U.S. persons (U.S. citizens and greencard holders) on their worldwide income regardless of where they live.  A U.S. person owning a foreign (formed outside the United States) corporation will likely have U.S. tax and/or reporting obligations related to the business.

Freelancer, sole-proprietor, self-employed.  All these terms have the same meaning from a U.S. tax perspective.  Americans residing abroad who freelance do have additional tax implications in the United States. It is important to understand how these implications will affect you.

Mistakes are inevitable; it’s a fact of life. But, when it comes to taxes, mistakes can be costly.  As an American abroad, your tax requirements are much different than those of U.S. residents.  Here are some pitfalls to avoid to ensure you don't face any unnecessary penalties.

The bona fide residence test is one of two tests that can be used to qualify for the Foreign Earned Income Exclusion.  The bona fide residence test is a higher standard to acheive than the physical presence test, but does not require tracking of days in U.S.  You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. However, you do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. 

The physical presence test is one of two tests that can be used to qualify for the Foreign Earned Income Exclusion.  The physical presence residence test is the easier threshold, but does require tracking of days in U.S.  You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and U.S. resident aliens.

FATCA, the Foreign Account Tax Compliance Act, is fully implemented this year.  This means foreign banks will be reporting to the IRS the bank account details of U.S. persons. For 2016, this will include your name, address, SSN, bank account number, account balance, interest/dividend income received and gross proceeds from the sale of assets (i.e., stocks/funds).  This information will be in the IRS hands on September 30, 2017.  

Happy New Year!  With tax season just around the corner, here are some important dates to keep in mind.  Also remember that all deadlines are for filing the tax returns, not paying the tax due.  Tax is due as the income is incurred (either through withholding or estimated tax payments).

U.S. citizens or Resident Aliens (greencard holder) with financial accounts located outside the U.S. have to consider additional reporting requirements.  The Foreign Bank Account Report, or FBAR, is one of these additional reporting requirements. 

As a U.S. citizen residing and working abroad you are subject to taxation in both the country of your residence and the United States.  The U.S. is the only developed country in the world to tax its citizens regardless of residency.  This means you are subject to taxation in the U.S. on your WORLDWIDE income, regardless of where you live. 

There are several mechanisms in place to avoid “double taxation” between the U.S. and your resident country.  This article will take a look at the foreign earned income exclusion and foreign tax credit.  It is important to fully understand both the foreign earned income exclusion and the foreign tax credit before deciding how to proceed.

As a U.S. citizen residing abroad you have to be particularly careful with respect to your investments and assets.  One particular “thorny” issue is that of foreign mutual funds. 

The problem with foreign mutual funds is they are Passive Foreign Investment Companies, or PFICs.  The tax treatment of PFICs is extremely punitive compared to similar investments that are incorporated in the U.S.  Combining the high tax rate with the cost of complying with IRS reporting rules on PFICs and the investment may quickly lose any appeal it once had. 

As a U.S. citizen residing abroad you have to be particularly careful with respect to your investments and assets.  One particular “thorny” issue is that of passive foreign investment companies, or PFICs. 

The tax treatment of PFICs is extremely punitive compared to similar investments that are incorporated in the U.S.  Combining the high tax rate with the cost of complying with IRS reporting rules on PFICs and the investment may quickly lose any appeal it once had. 

As a U.S. citizen residing abroad you have to be particularly careful with respect to your investments and assets.  One particular “thorny” issue is that of foreign life insurance.  Specifically, life insurance issued by a non-U.S. insurance company.

The problem with foreign life insurance policies is there is an excise tax to pay every time you pay a premium on a foreign life insurance policy, annuity or accident/sickness insurance.  In addition, investments in life insurance policies are subject to reporting on Form 8938 and FinCen Form 114 (FBAR) and they are likely PFICs…which means even more reporting.  And then there’s estate tax issues.

U.S. Citizens and Permanent Residents have a myriad of tax, reporting and investment considerations while residing outside the U.S.  It is important to fully understand these obligations to ensure compliance and effective tax and investment planning. Click here to download a list of considerations.





©2017 SDC, LLC    www.sdcglobalcpa.com
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult tax, legal and accounting advisors before engaging in any transaction.

Tax season is just around the corner.  Here are some common mistakes or misunderstandings expats have regarding their US taxes that could be costly.

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