Building a profitable investment portfolio while navigating complex dual tax issues can be stressful for U.S. citizens living abroad. You want to secure your financial future, but the fear of making a costly mistake looms large. Many unknowingly invest in Passive Foreign Investment Companies (PFICs), only to face unexpected tax burdens and administrative nightmares. The IRS has stringent reporting requirements for PFICs; even a tiny oversight can lead to significant penalties.
We understand the emotional toll this uncertainty can take on you. You deserve to invest confidently, knowing you fully comply with all U.S. tax laws. At Philip Stein & Associates, we specialize in helping U.S. citizens living abroad manage their investments and minimize their tax liabilities. We are here to clarify the complexities of PFIC taxation and guide you toward better investment decisions. Our expertise ensures that your investments are optimized for profitability and compliance, giving you peace of mind.
Whether you already have PFICs in your portfolio or are considering new investments, we are committed to helping you achieve your financial goals without the stress of unexpected tax issues. Let us assist you in making informed, confident investment choices.
WHAT IS A PFIC?
Passive Foreign Investment Companies (PFICs), are investment vehicles, often a foreign mutual fund or pooled investment, that meet specific criteria and fail a PFIC test as mentioned below.
Examples include kranot neemanut, kranot sal, ETFs, and various pooled funds like kupot gemel l’hashka’a. Even private keren hishtalmut accounts fall under this category.
PFIC TESTING
For an investment to be a PFIC, it must be considered a ‘passive corporation.’ It passes this test if it meets one of the following requirements:
- 75% or more of the gross income of the investment is passive income.
- 50% of assets held by the investment produce passive income or are held for the production of passive income.
Most non-U.S. mutual funds fall under this definition. The problem with this is that the U.S. heavily taxes PFICs, and often, the PFIC tax can outweigh the profit of the investment. Additionally, even if you only own these investments and don’t sell any, you may still have to report numerous annual forms listing their values.
CHALLENGES FOR U.S. CITIZENS
PFICS – WE CAN HELP YOU
If you find yourself in a situation where you hold an investment portfolio containing PFICs or are unsure if any of the investments are PFICs, Philip Stein and Associates can help you.
We have years of experience handling PFIC tests with our hi-tech corporate department.
Additionally, we advise clients on how to structure their investments to avoid PFICs while giving them flexibility in investing.
If you find yourself already holding potential PFICs, we can carefully analyze your entire investment portfolio and identify all PFICs held in your holdings. After identifying your PFICs, we can use our expert knowledge to reduce your PFIC exposure using the best methods available.
Whether you know you have PFICs, are not sure, or are thinking of possibly investing in PFICs, Philip Stein and Associates would be happy to assist you in making sure that your PFIC taxation liabilities are as low as possible. Read more about 3 Top PFIC alternatives.
FAQ ABOUT PFIC
A PFIC annual information statement could be two different things.
The first is an annual Form 8621 that you may need to file to report your basis in a PFIC. This form gets filed along with your U.S. federal income tax return.
The second is a report you can get from specific PFIC funds, allowing you to make special elections on how to treat your PFIC income.
PFICs are taxed at the highest U.S. tax rates applicable to the taxpayer for each year in which gains are allocated. Additionally, interest charges are applied to the allocated gains for each prior year. For a complete description of how they are taxed, we suggest you read our PFIC tax blog.
Yes, a Controlled Foreign Corporation (CFC) can also be classified as a PFIC if it meets specific criteria. Usually, if a company is first a CFC, then it cannot be considered a PFIC to the same taxpayer. However, the technicalities can be complex, so we suggest discussing them in more detail.
To avoid a PFIC tax, we advise investing in alternative funds. If you are already invested in PFICs, we can help you sell them strategically to minimize your tax exposure.