Common Hurdles for American Expat Investors Living Abroad

The Challenges for American Expat Investors, Is it Worth it?

Challenges for American Expat Investors, Is it Worth it?

Last year we authored an article about American expats making investments overseas, and now we will supplement that article by explaining what some of the different challenges are for the American expat investor. When a U.S. person for tax purposes relocates outside of the United States for work or other purposes, they are generally referred to as an expat. One of the benefits of being an expat is the U.S. Taxpayer gets the opportunity to live outside of the United States and experience life in a foreign country. But, just because a person is an American expat does not mean the rest of their life ceases to exist. Thus, many American expats will of course want to still invest and expand their portfolio while living and working overseas. Unfortunately, The United States follows a worldwide income/citizenship-based taxation model. In addition, with the introduction of FATCA, many foreign countries have become less ‘friendly’ to Americans when it comes to opening accounts and investing in different funds. Let’s take a look at five challenges for American expat investors.

Citizenship Based Taxation

The United States follows A citizenship-based taxation model. That means that individuals who are considered to be U.S. persons for tax purposes come with taxes on their worldwide income and are required to report their foreign accounts, assets, and investments on various international information reporting forms even if they are technically considered expats and live outside of the United States for a majority of the time. In many foreign countries, incomes such as interest, dividends, and capital gain are not taxed so the U.S. person will not derive the benefit of this type of investment.

FATCA

FATCA is the Foreign Account Tax Compliance Act. The United States has entered into more than 110 different FATCA agreements with foreign countries across the globe. With FATCA, foreign financial institutions report U.S. account holders to the U.S. government each year, and usually multiple times a year. As a result, taxpayers need to be aware that if they open an account overseas, they will be required to report this account to the U.S. government and once the foreign financial institution learns that the taxpayer is an American expat — they may not want to extend an opportunity to invest or even open an account at that institution.

Buying a Home with a Mortgage

Many taxpayers like to invest in real estate. Depending on how low mortgage rates are, some taxpayers prefer to purchase a home with a mortgage and then rent out that home with the idea that renters will inevitably end up paying for the mortgage. The problem is, that many foreign countries will not offer mortgages to American expats, so if an American expat is considering relocating to a specific foreign country and intends on investing in real estate in that foreign country with a mortgage they willl want to research the specifics before taking the plunge.

Foreign Pension

Many countries offer tax-deferred retirement schemes similar to a 401K. But for the American expat, it can get more difficult because oftentimes foreign pension plans are invested in different types of funds. For the American expat, and especially when it is a non-treaty country mutual funds, ETFs, and other types of pooled funds are considered to be PFIC. With a PFIC, alternately, the taxpayer will be taxed at a significantly higher tax rate than they would be taxed on the U.S. equivalent version of the investment. While the taxpayer may qualify to make certain elections, more often than not the foreign financial institutions would rather not deal with the American expat, which may limit the taxpayer’s ability to obtain a pension through the company they work for or if they do they may be limited to having their money in a regular non-interest bearing account.

PFICs and Elections

Expanding upon the mutual fund and ETF issue, many taxpayers prefer to invest in pooled funds such as mutual funds and ETFs. Typically, these will qualify as passive foreign investment companies or PFICs. Since the taxpayer will ultimately be taxed at a higher tax rate than they would otherwise be taxed on the American equivalent of the investment they may want to make certain elections such as the QEF and the MTM election. In most situations, the QEF election is preferred, however, it requires cooperation from the foreign institution — and oftentimes the institutions do not want to cooperate. Therefore, taxpayers who are considering making foreign investments and funds may want to consider opening a U.S. account and investing in U.S. funds instead. Noted and, that even if the American expat lives overseas they’re still considered a U.S. person for tax purposes so opening up an account should not be a problem.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other 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.