If you are a U.S. citizen living abroad, you must report all of your income to the U.S. taxman annually. Failing to do so or getting it wrong can lead to fines, unexpected bills and a huge headache that will require the aid of a knowledgeable U.S. licensed accountant to sort out for you.
Many people are lucky to be able to build up an investment portfolio over time. For U.S. citizens living abroad, making sure that you are fully compliant with all U.S. tax laws and reporting this income correctly is rather complicated. Often we make investments without realizing their implications, or a local broker does it on our behalf, not knowing the possible consequences for a U.S. citizen. You may not realize it, but you could be holding PFIC investments in your portfolio, which could be a problem!
The IRS has been focusing on the reporting requirements of PFICs (Passive Foreign Investment Companies) and making investments in foreign countries more complicated. Most people have no idea what qualifies as a PFIC, and it is all too easy to declare income from PFICs incorrectly.
For an investment to be a PFIC, it needs to 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. so heavily taxes these that sometimes the tax can outweigh the profit on 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. Taking advice from an expert specializing in U.S. citizens living abroad before investing in PFICs would, of course, have been a good idea, but unfortunately, many people are unaware of the potential problems of investing before they do so.
PFICs – WE CAN HELP YOU
If you find yourself in a situation whereby you hold an investment portfolio, and you know that they contain PFICs, or you are not sure if any of the investments are PFICs, Phillip Stein and Associates can help you. First, we can carefully analyze your entire investment portfolio and identify all PFICs held in your holdings. After we have identified your PFICs, we can use our expert knowledge to reduce your PFIC exposure using the best methods available. Finally, we can help minimize the effective tax on newly acquired PFICs.
Of course, it is always a good idea to discuss investments with a U.S. licensed accountant with knowledge of the issues relevant to a U.S. citizen living abroad before taking them out. They can tell you if any of them are PFICs and discuss the implications of taking out that investment.
Whether you know you have PFICs, are not sure, or are thinking of possibly investing in PFICs, Phillip Stein and Associates would be happy to assist you in making sure that your tax liabilities are as low as possible.
