Are Foreign Investments Worth it From a Tax Perspective?
Life insurance, mutual funds and ETFs are popular investments for US persons living abroad. However, if not properly executed they can fall under the rules of a “Passive Foreign Investment Company”, aka THE PFIC. If this happens, expenses can rise dramatically, and the investment can become more costly than beneficial.
Understanding PFIC’s requires hours of study and calculations to determine if one is subject to PFIC treatment. However, we will leave the links below for those who, like us, are fascinated by esoteric tax rules.
One example of PFIC’s that we see often in our practice is foreign
life insurance. As the US tries to discourage Americans from making foreign investments, it issues complex rules with punitive consequences on these investments. Income from these investments can be subject to the highest US marginal income tax rate as well as interest that accrues from the first day of ownership. When adding all this together, easily 50% of the gains from foreign investments can be lost in taxes and interest charges.
Is there any way to prevent this?
Besides obvious options such as expatriation or not making foreign investments, there is another way to avoid these excess taxes and interest.
Electing the “mark-to-market” treatment. Once this election is made, it is possible to “include in income each year an amount equal to the excess, if any, of the fair market value of the PFIC stock as of the close of the tax year over the shareholder’s adjusted basis in such stock.” In layman’s terms, this means you include the yearly income from these investments in your taxable income, even if it wasn’t actually paid out to you.
The earlier this is done, the less tax and interest one must pay each year and at the date of distribution. It is a simple election
that could result in huge savings in the long run. The only
catch is that before you can put this election into action, there must be a deemed sale of this foreign investment. But imagine how much you can save if you make this election in the first year of owning the PFIC rather than waiting until it appreciates in value.
At US Tax Services, we can help you identify potential PFIC exposure, minimize the risks, calculate the effects, and make
informed decisions to help you safely avoid unnecessary
taxes.
Please contact us with questions or to learn more. Our email is info@ustaxservices.ch
tax corporations partnerships taxes #ustax#ustaxation americansabroad
Thanks to Hien T. Nguyen, CPA for putting this article together!
Reference Links
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Section 1297 – Passive foreign investment company https://lnkd.in/eH9FsqTP
Section 1296 – Election of mark to market for marketable stock https://lnkd.in/eGFRZqsq
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