There are an estimated nine million Americans living overseas, and all of them who earn over $12,200 (in 2019, globally), or just $400 of self-employment income, are required to file a US federal tax return.
Expats investing abroad also often have additional reporting requirements, and understanding these may affect their investment decisions, as US tax rules can have a significant impact on expats’ tax and US reporting burden depending on how they invest abroad. Here are our top 5 tips for expats investing abroad.
1 – Understand US reporting requirements
As well as filing the forms mentioned above, expats investing abroad often have to report their foreign investment (and bank) accounts, and foreign registered financial assets, in both cases depending on minimum thresholds.
Expats who have over $10,000 in total in foreign bank and investment accounts at any moment during a year are required to report all their foreign financial accounts . This includes accounts that they control in any way, even if not registered in their name, such as business or trust accounts. Expats report their foreign financial accounts on FinCEN Form 114, otherwise known as a Foreign Bank Account Report (FBAR).
The IRS is receiving the same information from almost all foreign banks and investment firms, so they can verify the information provided on FBARs, or see if an FBAR should have been filed but wasn’t.
Separately, expats with over $200,000 of foreign financial assets are required to report them on IRS Form 8938 when they file their US tax return.
“If you are a US expat looking to invest in equity funds away from home, you may not know where to begin.” – ft.com
Expats who have (or control) foreign registered corporations or trusts are also required to report them when they file their US taxes.
2 – Claim US tax credits
Expats are required to report their foreign investment income on Form 1040 every year along with all of their global income, however those who pay foreign income taxes on their investment income can claim US tax credits to the same value as the foreign income tax that they’ve paid abroad.
They achieve this by filing IRS Form 1116 with their US return. In this way, expats who pay a higher rate of foreign income tax won’t owe any US tax. If they pay less foreign tax though, they will have to pay the difference to the IRS.
3 – Beware of foreign mutual funds
Mutual funds offer a convenient way to invest in global markets, however the US treats foreign registered mutual funds very differently to those registered in the US.
Foreign registered mutual funds with at least one US shareholder are considered to be PFICs (Passive Foreign Investment Companies) by the IRS. While the rules surrounding the classification and treatment of PFICs are complex, the net result is additional filing requirements and a high tax on income from these vehicles.
For these reasons, expats should be wary of investing in foreign mutual funds.
4 – Don’t forget US Capital Gains Tax
The US charges capital gains tax on Americans’ worldwide asset disposals. This includes foreign investment disposals, and also property, including a primary residence (although expats who sell their primary residence can exclude the first $250,000 profit before capital gains tax is due). So expats should be aware of the possible capital gains tax implications when selling their foreign as well as US investments and property. A good expat specialist financial advisor will be able to help minimize capital gains liability.
Expats who pay foreign capital gains tax can normally claim US tax credits for the same value, however if the US capital gains tax bill is higher than the foreign one, again expats will have to pay the difference.
5 – Always seek advice
Always seek advice from both an expat specialist financial advisor, and an expat tax specialist, to ensure that you both invest and file to your maximum benefit and creating the minimum US tax and reporting liability.Expats who are behind with their US tax filing because they weren’t aware that they had to file from abroad may be able to catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure.