No matter where you’re living and working, you’ve probably thought about planning for retirement by choosing to make investments in some form. However, when living abroad, understanding the ins and outs of investments outside the US might be a bit more complicated as banking and tax laws can differ from those in the US – meaning foreign investment accounts may not always be the best way to save. Here are a few considerations you should make when it comes to US expat tax return reporting requirements for foreign investments.
Understanding a PFIC
With foreign investment account – mutual funds, hedge funds, insurance, money market savings, or a non-US pension – you should be aware that there are some severe tax treatments that can occur with your US expat tax return. These types of accounts are often considered to be Passive Foreign Investment Companies (PFICs), and most of the time, non-US persons own them without even knowing it.
The concern with owning a PFIC is the potential for steep US expat taxes and rigorous reporting requirements each year. Coupled with the fact some US expats don’t realize they own a PFIC – which means the potential for not filing necessary forms or incorrectly reporting finances – and you can see how this can be a sticky situation!
High Tax on PFICs
Foreign investment accounts tend to hold a much more aggressive tax treatment than US accounts, which most US citizens may not realize until they’ve already made an investment. US mutual funds (which invest in foreign stocks) would have a long-term capital gains tax of 15%; however, a similar fund in the UK or anywhere outside the US for that matter would produce “ordinary income” in the eyes of the IRS, meaning you would be taxed at your top individual rate of 39.6%. Yikes! Additionally, PFICs don’t have the same advantages when it comes to capital losses, which can’t be carried forward or used to lower other capital gains.
Filing Form 8621
As if the high tax isn’t enough, there’s also the fact you’ll need to use Form 8621 “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” to report each separate PFIC you own along with your US Tax Return annually. Because of the complexity of this form, it’s always recommended to work with a tax professional – but that will still require a significant amount of time from both parties when it comes to research and preparation.
You will be required to file Form 8621 if you’re a direct or indirect shareholder of a PFIC and you:
- Recognize gain on a direct or indirect disposition of PFIC stock
- Receive certain direct or indirect distributions from a PFIC
- Make an election reportable on Form 8621
It’s also worth noting that you must file separate 8621s for each fund. Often, foreign investment accounts may have 3-4 different funds that make up the investment – which means 3-4 8621s you’ll be responsible for preparing for and filing. This can get costly and very time consuming, so it’s clear why you’ll want to carefully consider making foreign investments. If you do need to file Form 8621, learn more about the specifics here.
And Don’t Forget…
If your PFICs exceed a certain balance threshold, you may also need to report them on FATCA Form 8938 along with your expatriate tax return. The current FATCA reporting thresholds are:
- Single/Married Filing Separately: $200,000 at the end of the year or $300,000 at any point during the year
- Married Filing Jointly: $400,000 at the end of the year or $600,000 at any point during the year
Keep in mind, these balances are the aggregate total of all of your accounts – not only investments in PFICs! You can learn more about filing Form 8938 in this article. You can also download a US expat tax guide to learn more about filing your US expat tax return, including deadlines, ways to save and more.
Need Help Understanding How Foreign Investments Will Affect Your US Expat Tax Return?
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