2. There’s no getting away from the fact that US
expats are currently under siege from the IRS.
However, there are still ways we can cut your
tax bill significantly.
3. With recent changes in global reporting this is now more
important than ever. The purpose of this document is to
highlight some of the reporting and compliance requirements
for US taxpayers under current legislation and also what
can be done to save in a tax efficient manner for later
retirement.
With a reported 7 million non resident US taxpayers, the
introduction of the Foreign Account Tax Compliance Act
(FATCA) in 2008 under the HIRE act demonstrated the
intentions of the US government to actively seek out
individuals who weren’t meeting their US responsibilities
by forcing global reporting.
FATCA, which became live on 1 July 2014, introduced the
requirement for all overseas financial institutions to report
information on any account held by, or for, a suspected
American to the IRS. Often this is done via
Intergovernmental Agreements which supersede any local
data protection or bank secrecy laws.
This has resulted in many overseas financial institutions
not wanting to establish or maintain accounts for US
taxpayers due to the increased reporting burden and
significant expense. Some US taxpayers have looked to
renounce their Citizenship however this in itself will be a
costly process as it will trigger a US tax charge – and the
individual must have Citizenship confirmed in another
jurisdiction already.
What you should be doing:
All US taxpayers must report annually all earned and
unearned income and worldwide assets. On top of this
you must also disclose the details of every bank account
that you have power of signatory over if the total value of
your overseas bank accounts is in excess of $10,000. From
2013 this is now an online process under the “FBAR”
requirements. In addition to this, it is also worth noting that
any investments held in non US funds will likely be classified
as Passive Foreign Investment Companies (“PFICs”) and
subject to higher rates of US tax and interest than if the
investments were into US mutual funds or companies or
in a tax efficient wrapper.
As one of only two countries in the world that tax non resident taxpayers on their worldwide
income it is imperative that US taxpayers understand what is expected of them by the
Internal Revenue Service (the “IRS”) and how to remain compliant.
4. Recently released statistics suggest that more than
6.5 million of the 7 million non resident US taxpayers
are not compliant for US taxes. This means that you
are certainly not alone – but help is at hand.
Keep calm and plan.
We at Guardian Wealth Management work
with specialist US tax attorneys and filing
agents to help our clients remain compliant
whilst also considering all Financial Planning
opportunities that are available.
We have designed this primer to support you, and help you
understand what you need to be doing for your US tax returns.
This brochure will also direct you to investment vehicles that
are not only US tax compliant but also tax efficient.
Before you make any decisions regarding your finances use
this step-by-step guide to update yourself on key financial
points. We have offered some recommendations on a potential
course of action to ensure that your wealth aspirations and
ambitions can remain compliant without veering off your
chosen course. .
5. Tax efficiency
From 2013 the top rate of income tax increased from 35%
to 39.6% along with short term capital gains tax and the
tax on dividends whilst long term capital gains tax remained
at 20%. Therefore the most basic planning advice would
be to structure your investment portfolio to give rise to
long term capital gains – rather than short term.
As non residents it is also possible to benefit from tax relief
on ‘earned income’ (i.e. the money you go to work for –
not your investment income). The first $99,200 of earned
income is exempt from US tax however the income should
still be reported to the IRS in order to claim the relief. It is
also possible to claim tax relief against renting property
overseas that you use as your primary residence which we
would fully urge clients to do.
Pension Funding
Whilst overseas, US taxpayers can continue to contribute
to Individual Retirement Accounts (“IRAs”) back in the US.
You have a choice whether to fund a Traditional or Roth
IRA and either claim tax relief on the way into the pension
– or on the way out. For those individuals who are self
employed, or employed by a US company, it can also be
possible to fund a 401k pension back in the States. However
with Member funding limits of $17,500 to this and $5,500
to an IRA a significant amount of clients ask us at Guardian
Wealth Management to assist in funding other US tax
efficient retirement plans.
Whilst it is possible for US taxpayers to obtain tax deferral,
using traditional qualified deferred variable annuity contracts,
the costs of these contracts can be significant and often
require invasive medical underwriting.
As an alternative we advise clients to consider using
International Pension Plans which are designed specifically
for US taxpayers. These plans often offer the ability to at
least defer the US tax on the investment growth made
inside the plan until such time that you need to draw the
pension income in your retirement when you will naturally
be at a lower income tax bracket. Unlike the 401(k) plan,
these plans are not bound by contribution limits or earning
constraints.
Our preferred plan is established in Malta, an EU Member
State, and structured around the signed tax treaty with the
US. Under the terms of the Treaty, growth made within
the plan is not subject to US Federal taxes. Furthermore,
is a qualifying plan for US tax purposes.
Action Points:
Explore double tax agreements to increase
tax efficiency as well as wrapping up
investments in compliant structures.
Ensure any realised income and gains
benefit from tax relief.
6. FINANCIAL
PLANNING
PRIMER
For US taxpayers
Long term savings options.
Building up a substantial savings pot is a key priority and best achieved
using a wide range of investment opportunities.
Such a strategy introduces diversity into a savings plan, which in turn
can reduce risk.
However, for US expats the need to comply with IRS tax reporting along
with the introduction of FATCA means the underlying structure of the
plan is an additional consideration. For
long term savings or retirement plans
check for any restrictions on
withdrawals i.e. age and percentage of
the value you are able to withdraw.
US savers using a 401(k) plan can only
access their funds from age 59 and a
half, however the International plans
allow you to start drawing income from
age 50.
Withdrawals can be taken as an initial
lump sum of up to 30% of the total
value of the plan which is paid with no
Maltese or US federal taxes due. After
which income can be drawn directly
from the pension and taxed as an
annuity in the US.
Action Points:
Ensure your savings plan has as much diversity as possible to capture market
gains, balance volatility and reduce risk.
Verify that your savings vehicle complies with reporting obligations and does
not either penalise you for withdrawals or compromise your tax position.
Check any savings plans are held in politically stable jurisdictions on good
terms with the US.
7. Retirement Planning
There is still a level of uncertainty around how FATCA could impact certain company
or state sponsored retirement funds of US employees working abroad. Reports on the
news may result in providers adapting their plans to suit the changes, potentially applying
restrictions on underlying investments in order to comply. It is important not to panic,
stop your pension payments or change any investment strategy without reviewing the
implications. At present we would recommend supplementing company schemes with
savings plans designed for retirement planning.
While contributions made to such a Plan will not receive US tax relief, they can be made
in various forms such as cash, existing investment portfolios, life assurance policies
or shares in mutual funds.
If you would like to make an appointment to talk about any of the points made in this
primer, or if you favour an informal chat with our experts about our financial planning
services for US expats, please contact us on + 41 (0) 22 710 7876.
Action Points:
In the light of FATCA, keep an eye on any potential changes to company or state
sponsored pension plans to which you contribute.
Think about supplementing existing retirement plans with vehicles that offer diversity
and are more tax efficient.
8. Information correct as of 8th November 2014. The information provided is for guidance only and advice should be sought before making any financial decisions.
Guardian Wealth Management Ltd cannot be held responsible for any errors or omissions which result in financial loss.
About Us
Guardian Wealth Management is one of the few
wealth management firms that are fully regulated
and operate in a range of jurisdictions including
the UK, Qatar, Hong Kong, Dubai and Switzerland.
We only work with a select group of regulated
partners who are experts in their field.
General Enquiries +44 800 779 7028
Switzerland +41 22 710 7864
Dubai +971 4450 9700
Hong Kong +852 3796 3555
Qatar +974 4491 5355
United Kingdom +44 1302 703 2128
