Wiki (?) - Investing as an expat (US citizen living abroad)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
LadyGeek
Site Admin
Posts: 45025
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Wiki (?) - Investing as an expat (US citizen living abroad)

Post by LadyGeek » Wed May 08, 2013 9:17 pm

We're getting a number of new members requesting help who are US citizens, but reside outside the US. Known as an Expatriate ("expat"), there are a number of additional considerations which must be taken into account compared to investing inside the US.

The heavy hitter here is taxes, both from the IRS and the resident country. Additionally, there is a difference in available funds (e.g. Vanguard will not sell funds without a US address).

With the large number of different countries, taxes, regulations, and their interactions with the US versions, is it possible to write a wiki article to provide guidance? Currently, the wiki only addresses this aspect: International Domiciles. Canada questions are better answered by our sister Canadian forum Financial Webring Forum.

A google search shows what's being discussed: expat - Google Search

Recent threads: Help w/ investing in Taxable accounts [US citizen in Sweden], [US Citizen in Europe] So I read a fair share of books and..

A helpful post: Re: Seeking investing advice from abroad... <-- links to good resources

And then there's the IRS: FBAR and back tax returns for expat, and then how to handle the situation when the investor returns to US turf.

BTW, we also have a UK expat living in the US.
====================================================

Since this topic is recurring, having a wiki article to provide initial guidance would save everyone a lot of work. I'm not sure where to start. Comments / questions / suggestions (especially) are welcome. If it's too diverse a topic to compile an article, post that as well.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

canga
Posts: 71
Joined: Thu Nov 26, 2009 7:50 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by canga » Mon Oct 21, 2013 7:18 am

I just found this post -- hopefully a bump brings more feedback. It's very difficult to get accurate investing and tax advice for expats so I would certainly welcome a wiki article. Here are a few basic concepts to get the ball rolling (highest priority first):

1. Overview of the foreign earned income exclusion (FEIE) and foreign tax credit (FTC), and a few examples to indicate which may be the more appropriate option.

2. Overview of Foreign Housing Exclusion or Deduction and limitations by country of residence:
http://www.irs.gov/Businesses/Foreign-H ... eduction-1

3. Overview of tax resources when living in a US territory outside of the USA (i.e. Puerto Rico or Guam).

4. Indicate income minimums required to invest in a Roth IRA when taking the FEIE.

5. Discuss investing in 401(k) and Roth 401(k) as an expat. For example, you may wish to invest in a 401(k) until you no longer have taxable income (FEIE, Standard Deduction, Personal Exemption, etc.).

6. Discuss the possibility of "tax gain harvesting" as an expat using the FEIE, 401(k), Personal Exemption, Standard Deduction, etc.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Mon Oct 21, 2013 8:26 am

Thanks for bumping this one, canga. And thanks originally proposing it, LadyGeek.
I noted the suggestion with interest when it first came out, but didn't have time then to write up some starter text.

Unfortunately, I still don't have time to get the ball rolling, but would be happy to contribute edits and tidbits if someone else gets something out there to start.

(Would you be willing to get something started, canga?)

canga
Posts: 71
Joined: Thu Nov 26, 2009 7:50 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by canga » Mon Oct 21, 2013 7:41 pm

bpp wrote:Thanks for bumping this one, canga. And thanks originally proposing it, LadyGeek.
I noted the suggestion with interest when it first came out, but didn't have time then to write up some starter text.

Unfortunately, I still don't have time to get the ball rolling, but would be happy to contribute edits and tidbits if someone else gets something out there to start.

(Would you be willing to get something started, canga?)
I will need to give this some thought. I usually develop an outline before I start writing.

Here are a few more thoughts:

1. Expatriation tax for renouncing citizenship.

2. Investing with non-US spouse.

Does anyone else have any other contributions? It does not have to be very developed at this stage.

User avatar
LadyGeek
Site Admin
Posts: 45025
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by LadyGeek » Mon Oct 21, 2013 8:02 pm

This just came up in another thread, which goes with the ex-pat tax: Re: Complicated: Expat American with dual citizen wife (this situation didn't apply to the OP, as stated in the later posts):
LadyGeek wrote:...From the IRS: Expatriation Tax Pay special attention to the "mark-to-market regime" defined in Notice 2009-85.

SECTION 6. SPECIFIED TAX DEFERRED ACCOUNTS deals with IRAs, 529 plans, etc. These accounts are considered to be fully distributed the day before your ex-patriation.

You may want to take a look at the link I posted in your other thread, which is recommended quite a lot for cross-border US / Canada tax questions: Serbinski Accounting Firms - Canada / United States Tax & Accounting
If you want to edit the wiki yourself, just PM me. Alternatively, post in this thread and a wiki editor will put it in the wiki for you.

We have at least 2 wiki editors posting in this thread. :wink:

Update: Inserted post content directly.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Jonhello
Posts: 185
Joined: Wed Oct 03, 2007 3:10 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by Jonhello » Tue Oct 22, 2013 1:59 am

canga wrote:I just found this post -- hopefully a bump brings more feedback. It's very difficult to get accurate investing and tax advice for expats so I would certainly welcome a wiki article. Here are a few basic concepts to get the ball rolling (highest priority first):

1. Overview of the foreign earned income exclusion (FEIE) and foreign tax credit (FTC), and a few examples to indicate which may be the more appropriate option.

2. Overview of Foreign Housing Exclusion or Deduction and limitations by country of residence:
http://www.irs.gov/Businesses/Foreign-H ... eduction-1

3. Overview of tax resources when living in a US territory outside of the USA (i.e. Puerto Rico or Guam).

4. Indicate income minimums required to invest in a Roth IRA when taking the FEIE.

5. Discuss investing in 401(k) and Roth 401(k) as an expat. For example, you may wish to invest in a 401(k) until you no longer have taxable income (FEIE, Standard Deduction, Personal Exemption, etc.).

6. Discuss the possibility of "tax gain harvesting" as an expat using the FEIE, 401(k), Personal Exemption, Standard Deduction, etc.
Wow. This would be fantastic. I know that this will become more relevant as we become more mobile and the world smaller. I myself could learn a great deal from such a wiki and point other colleagues to it. Thanks, Canga and LadyGeek.

User avatar
Barry Barnitz
Wiki Admin
Posts: 2998
Joined: Mon Feb 19, 2007 10:42 pm
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by Barry Barnitz » Tue Oct 22, 2013 3:40 am

I have added some supporting IRS informational links to canga's embryonic outline.

--->Home page IRS
canga wrote:I just found this post -- hopefully a bump brings more feedback. It's very difficult to get accurate investing and tax advice for expats so I would certainly welcome a wiki article. Here are a few basic concepts to get the ball rolling (highest priority first):


1. Overview of the foreign earned income exclusion (FEIE) and foreign tax credit (FTC), and a few examples to indicate which may be the more appropriate option.
2. Overview of Foreign Housing Exclusion or Deduction and limitations by country of residence:
3. Overview of tax resources when living in a US territory outside of the USA (i.e. Puerto Rico or Guam).
4. Indicate income minimums required to invest in a Roth IRA when taking the FEIE.

5. Discuss investing in 401(k) and Roth 401(k) as an expat. For example, you may wish to invest in a 401(k) until you no longer have taxable income (FEIE, Standard Deduction, Personal Exemption, etc.).

6. Discuss the possibility of "tax gain harvesting" as an expat using the FEIE, 401(k), Personal Exemption, Standard Deduction, etc.
Image | blb | December Birthday Celebration: Ludwig van Beethoven

gd
Posts: 1307
Joined: Sun Nov 15, 2009 8:35 am
Location: MA, USA

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by gd » Tue Oct 22, 2013 5:40 am

Related and probably often applicable to expat US citizens-- issues with non-citizen spouses, including special conditions on spousal gift tax and inheritance (unlimited spousal exemption does not apply), considerations about spouse establishing permanent residency in US, either from past residence or for future planning (exit tax will apply on worldwide assets).

FlyingMoose
Posts: 344
Joined: Wed Mar 04, 2009 10:48 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by FlyingMoose » Tue Oct 22, 2013 9:05 am

One suggestion I saw is that if you're using the Foreign Earned Income Exclusion, you can do a Roth conversion in the lower tax brackets, especially 0% (which I believe would be $10,000 this year with the standard exemptions and deductions).

Edited to add link to the article:

http://premieroffshore.com/expats-convert-to-roth/
Last edited by FlyingMoose on Tue Oct 22, 2013 11:38 am, edited 1 time in total.

User avatar
Barry Barnitz
Wiki Admin
Posts: 2998
Joined: Mon Feb 19, 2007 10:42 pm
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by Barry Barnitz » Tue Oct 22, 2013 10:59 am

HI:

I have sketched a very tentative outline, based on current suggestions, in the wiki sandbox, where it can be temporarily edited until fleshed out for transfer to an independent page:

Bogleheads:Sandbox - Bogleheads

regards,
Image | blb | December Birthday Celebration: Ludwig van Beethoven

User avatar
LadyGeek
Site Admin
Posts: 45025
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by LadyGeek » Mon Nov 04, 2013 9:50 pm

The wiki article now has its own page: Taxation as a US person living abroad (under development)

Those wishing to add content (and are not wiki editors) are welcome to post here.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
market timer
Posts: 5877
Joined: Tue Aug 21, 2007 1:42 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by market timer » Mon Nov 04, 2013 10:15 pm

Another complicated topic: Taxation issues on having a primary residence abroad (marked-to-market mortgage FX tax liability, capital gains, mortgage interest deduction).

User avatar
market timer
Posts: 5877
Joined: Tue Aug 21, 2007 1:42 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by market timer » Mon Nov 04, 2013 10:17 pm

Issues to consider on whether to file as Head of Household, MFS, or MFJ with nonresident alien spouse.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Mon Nov 04, 2013 11:58 pm

market timer wrote:Another complicated topic: Taxation issues on having a primary residence abroad (marked-to-market mortgage FX tax liability[...]).
Do you have any references for this? What I recall reading is that if one were to follow the letter of the law, one is supposed to calculate an FX gain or loss for every single mortgage payment relative to when the principle was borrowed. In practice, this would be a ludicrously complicated thing to even attempt to do, so nobody does it, and the IRS doesn't expect people to do it. But... I have no reference for that assertion either.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Tue Nov 05, 2013 6:41 am

bpp wrote:
market timer wrote:Another complicated topic: Taxation issues on having a primary residence abroad (marked-to-market mortgage FX tax liability[...]).
Do you have any references for this? What I recall reading is that if one were to follow the letter of the law, one is supposed to calculate an FX gain or loss for every single mortgage payment relative to when the principle was borrowed. In practice, this would be a ludicrously complicated thing to even attempt to do, so nobody does it, and the IRS doesn't expect people to do it. But... I have no reference for that assertion either.
Yikes, Mr. Google found it for me, and it is even worse than I remember hearing. Imaginary mortgage repayment gains due to exchange rate fluctuations are supposed to be declared as ordinary income, but corresponding imaginary losses cannot be claimed at all: http://www.uniset.ca/other/cs5/1996WL33658419.html

(There is also mention of Revenue Ruling 90-79, 1990-2 CB 187, but I cannot seem to find a link to that.)

I think I will go have a drink and forget I ever read this...

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Wed Nov 06, 2013 3:42 am

LadyGeek wrote:The wiki article now has its own page: Taxation as a US person living abroad (under development)

Those wishing to add content (and are not wiki editors) are welcome to post here.
The page feels like it may have reached some kind of minimal critical mass for launch. What do folks think?
Not every suggestion from this thread is yet incorporated on the page, but they can be gradually added over time...

If Barry Barnitz and LadyGeek agree it is so, might it make sense to link it under both "International Domiciles" and "Tax Considerations"?

User avatar
market timer
Posts: 5877
Joined: Tue Aug 21, 2007 1:42 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by market timer » Wed Nov 06, 2013 3:46 am

bpp wrote:Yikes, Mr. Google found it for me, and it is even worse than I remember hearing. Imaginary mortgage repayment gains due to exchange rate fluctuations are supposed to be declared as ordinary income, but corresponding imaginary losses cannot be claimed at all: http://www.uniset.ca/other/cs5/1996WL33658419.html

(There is also mention of Revenue Ruling 90-79, 1990-2 CB 187, but I cannot seem to find a link to that.)

I think I will go have a drink and forget I ever read this...
Probably worth borrowing in US dollars just to avoid the hassle, then hedge the FX risk in a tax deferred account.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Wed Nov 06, 2013 4:49 am

market timer wrote:
bpp wrote:Yikes, Mr. Google found it for me, and it is even worse than I remember hearing. Imaginary mortgage repayment gains due to exchange rate fluctuations are supposed to be declared as ordinary income, but corresponding imaginary losses cannot be claimed at all: http://www.uniset.ca/other/cs5/1996WL33658419.html

(There is also mention of Revenue Ruling 90-79, 1990-2 CB 187, but I cannot seem to find a link to that.)

I think I will go have a drink and forget I ever read this...
Probably worth borrowing in US dollars just to avoid the hassle, then hedge the FX risk in a tax deferred account.
How on earth would one do that...?

I can't picture the mechanics of either getting a US bank to loan to a non-resident citizen (heck, I don't even know of any that will let one open a checking account) on collateral that is located in another country's jurisdiction, or of doing the FX hedge (though the latter may just be my ignorance).

User avatar
Methedras
Posts: 167
Joined: Mon Apr 15, 2013 5:30 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by Methedras » Wed Nov 06, 2013 6:29 am

I am a US citizen who lived in Sweden for two years, and now is living and working in the UK.

I have developed a Boglehead-sh approach to handling the investing situation, and I will refer those principles here, so that hopefully others can put them to good use.

Priority #1: Simplicity!

The tax laws which one has to face if you have complicated investment situations as an expat are daunting! You want to avoid them if at all possible. Seeking simplicity may even cost you a bit of money, but in my experience, it is worth it. DO NOT invest your money in foreign funds. My suggestion would be to find a good exchange broker, and repatriate your funds to the US. Then, use these funds to purchase ETFs in non-taxable space (if possible), but mostly you will be relegated to investing in taxable accounts. There are many good low-free exchange services (especially in the UK), and I will gladly take the conversion hit to avoid the perils of complicated taxation.

Priority #2: Finding Non-Taxable Space

This will be quite difficult, because if you are opting to take the Foreign Earned Income Exclusion or FEIE (which often has the best tax outcome), you will not have earned income in the US, which is necessary for making use of IRAs/non-taxable vehicles. If you earn a certain amount, the FEIE is capped, and you will then have some US earned income to work with. An alternative is to utilize the Foreign Tax Credit or FTC, but nothing can be said in general about which situation is best for you. I guess if you ONLY earn your foreign income, it is a pretty safe bet that the FTC will be the better option, because then your foreign income is not excluded from earned income, but you receive the tax credit. However, if you, at the same time, have some US earnings, then the FTC might lead you to pay excessive tax rates on your US earned income. It gets a little complicated, is all I am saying. You just need to get accustomed to the idea that you will be doing primarily taxable investing.

Priority #3: Use US-based Vanguard ETFs

This might only apply to UK residents, but I know there are a number of complicated inter-country reporting rules established between these nations, and the reporting requirements are only growing. If a fund you own in the US does not appropriately report their data to the UK, then you may be obligated to pay a tax on your earnings in both the US and the UK. I am not going to claim to have detailed knowledge of the inner workings of this structure, but I know that Vanguard claims that all of their ETF products are compliant with the UK-US inter-reporting rules, allowing you to avoid the double tax. It is highly likely that other ETF products exist which also comply, but I have not researched them.


I know these are very simply rules, but they will help you to avoid a lot of trouble and confusion if you adhere to them.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Wed Nov 06, 2013 7:30 am

bpp wrote:
LadyGeek wrote:The wiki article now has its own page: Taxation as a US person living abroad (under development)

Those wishing to add content (and are not wiki editors) are welcome to post here.
The page feels like it may have reached some kind of minimal critical mass for launch. What do folks think?
Not every suggestion from this thread is yet incorporated on the page, but they can be gradually added over time...

If Barry Barnitz and LadyGeek agree it is so, might it make sense to link it under both "International Domiciles" and "Tax Considerations"?
And I see it has gone live!
:thumbsup

User avatar
jidina80
Posts: 729
Joined: Wed Feb 24, 2010 5:05 pm
Location: Fiji

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by jidina80 » Wed Nov 06, 2013 9:43 am

Glad to see the beginnings of a Wiki page on taxation for U.S. expats. Do most foreign countries recognize and respect the tax status of Roth and Traditional IRAs? For many expat retirees it would be devastating if a foreign country could tax, say, Roth withdrawals as ordinary income.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Wed Nov 06, 2013 5:50 pm

jidina80 wrote:Glad to see the beginnings of a Wiki page on taxation for U.S. expats. Do most foreign countries recognize and respect the tax status of Roth and Traditional IRAs? For many expat retirees it would be devastating if a foreign country could tax, say, Roth withdrawals as ordinary income.
In general, no. And the US does not recognize other countries' tax-advantaged accounts, either.

There are some limited exceptions, depending on tax treaty. For example, I understand that the US-Canada tax treaty provides for cross-recognition of some (but not all) tax advantaged accounts in either country, as does the US-UK treaty. But the US-Japan treaty, for example, has no such provisions, so Japan will treat a Roth IRA as just another taxable account, and the US will do the same with a NISA (Japan's rough equivalent to a Roth IRA).

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Fri Nov 08, 2013 12:00 am

Pub. 54 states:
If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other is a nonresident alien, you can choose to treat the nonresident as a U.S. resident. This includes situations in which one of you is a nonresident alien at the beginning of the tax year and a resident alien at the end of the year and the other is a nonresident alien at the end of the year.

If you make this choice, the following two rules apply.

--You and your spouse are treated, for income tax purposes, as residents for all tax years that the choice is in effect.

--You must file a joint income tax return for the year you make the choice.

This means that neither of you can claim under any tax treaty not to be a U.S. resident for a tax year for which the choice is in effect.
Clear enough so far.

Now under, for example, the US-Japan treaty, if a US citizen who is a resident of Japan is sent to the US on business, that income is to be treated as Japan-source income. Normally, one would then apply an "Additional Foreign Tax Credit" against one's US taxes on such income to get a credit for the Japanese taxes paid on that income. (Note that this is not the regular FTC, but a special case. See worksheet at end of Pub. 514.: http://www.irs.gov/publications/p514/ar ... 1000244962)

However: does the bolded and underlined (by me) part in the quote above mean that if one had treated an NRA spouse as US resident for tax purposes, then one could not take that tax credit, since it is predicated on the application of a tax treaty?

And if so, what other unforeseen gotchas may be lurking in making that choice?

sjones
Posts: 3
Joined: Fri Nov 29, 2013 10:03 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by sjones » Fri Nov 29, 2013 10:14 am

bpp wrote:But the US-Japan treaty, for example, has no such provisions, so Japan will treat a Roth IRA as just another taxable account, and the US will do the same with a NISA (Japan's rough equivalent to a Roth IRA).
Do you know how Japan views any income inside of a Roth IRA? For example, dividends from any stock held within an IRA.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Sat Nov 30, 2013 1:18 am

sjones wrote:
bpp wrote:But the US-Japan treaty, for example, has no such provisions, so Japan will treat a Roth IRA as just another taxable account, and the US will do the same with a NISA (Japan's rough equivalent to a Roth IRA).
Do you know how Japan views any income inside of a Roth IRA? For example, dividends from any stock held within an IRA.
They view it the same as income inside an ordinary taxable account. It is just an offshore taxable account as far as they are concerned.
(There is some discussion on how offshore and Japanese accounts are treated in the the following thread, if you have not seen it: http://www.bogleheads.org/forum/viewtop ... 2&t=111555 )

lazyday
Posts: 3296
Joined: Wed Mar 14, 2007 10:27 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by lazyday » Sat Nov 30, 2013 1:47 am

LadyGeek wrote:Wiki
Surely there are HR people in big US multinational corporations who are well versed on this topic. Part of determining pay and stock based compensation for high paid executive expats should include adjusting for taxes.

They might not be easily able to provide free advice for people outside their company, but if someone here has a connection, maybe could be reasonable to ask to find mistakes or problems in the wiki.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Sat Nov 30, 2013 7:41 pm

lazyday wrote:
LadyGeek wrote:Wiki
Surely there are HR people in big US multinational corporations who are well versed on this topic. Part of determining pay and stock based compensation for high paid executive expats should include adjusting for taxes.

They might not be easily able to provide free advice for people outside their company, but if someone here has a connection, maybe could be reasonable to ask to find mistakes or problems in the wiki.
If anybody knows someone with such connections, it would be great to get more eyeballs on the subject.
I suspect they would be used to looking at things differently than the majority of expats who aren't big earners, and so have somewhat different tax issues and possible solutions available. Still, more expertise brought to bear is always a good thing.

marcos123
Posts: 137
Joined: Sun Sep 18, 2011 10:35 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by marcos123 » Sun Dec 01, 2013 1:01 pm

jidina80 wrote:Glad to see the beginnings of a Wiki page on taxation for U.S. expats. Do most foreign countries recognize and respect the tax status of Roth and Traditional IRAs? For many expat retirees it would be devastating if a foreign country could tax, say, Roth withdrawals as ordinary income.
Like most other countries (including the US), Brazil does not recognize the status of foreign tax advantaged accounts. Sure, there will be asymmetric tax treatment as far as Roth distributions go. Depending on your resident country's tax rules, however, with a bit of planning you may be able to obviate, or at least mitigate, that issue.

When I converted my Traditional IRAs to Roths I naturally treated those as distributions for local tax purposes as well, and with some modeling of appropriate conversion amounts ensured that the US foreign tax credit fully offset local taxes on those distributions. (That possibility will naturally depend on the interaction of your resident country's tax rates with those of the US.) In exchange for not being taxed at Brazil's high ordinary tax rates on future distribution of both principal and earnings, I lose the tax-deferred benefit of earnings compounding going forward, but am much better off by the Roth conversion amounts as the local tax basis, with the bulk of future distributions to be treated as local capital gains from that basis and taxed at the country's lower capital gains rate. YMMV.

TedSwippet
Posts: 1631
Joined: Mon Jun 04, 2007 4:19 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by TedSwippet » Sun Dec 01, 2013 5:50 pm

lazyday wrote:...Surely there are HR people in big US multinational corporations who are well versed on this topic. Part of determining pay and stock based compensation for high paid executive expats should include adjusting for taxes.
These people may be in shorter supply than one might suspect. I have transferred internationally twice, with different companies. In both cases HR entirely outsourced all tax and compensation issues to one of the big four accountancy firms.

Also, and somewhat depressingly, the big four accountancy firm staff assigned to my transfers seemed to know somewhat less about the ins and outs of international tax than I did.

Karamatsu
Posts: 1327
Joined: Mon Oct 27, 2008 2:42 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by Karamatsu » Sun Dec 01, 2013 10:26 pm

Seconding that, unfortunately. The truth is that you can ask two Big Four tax accountants (in my case BDO and KPMG), both with US CPA accreditation, the same question about the practical tax implications of the treaty and be given entirely different answers, in large part because the IRS provides no general guidance and refuses outright to give any. Instead they issue private letter rulings, which give hints but aren't legally applicable to anything other than the case in question, so each firm seems to have its own standard way of dealing with such things. For an individual it seems like the best you can do is be reasonable, provide documentation and a rationale, and try to get some sleep despite that out-on-a-limb feeling. That or, as I did last year, simply throw up your hands and not take credits you're plainly entitled to, on the grounds that aggravation, fines, and interest on back taxes would probably cost more than the credit is worth.

Karamatsu
Posts: 1327
Joined: Mon Oct 27, 2008 2:42 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by Karamatsu » Sun Dec 01, 2013 10:30 pm

But we do face a serious problem in trying to provide tax hints to expats, given that the rules are different in every country, and change year to year. There are some general guidelines, like watching out for IRA contributions and the evil PFIC rules, but the devil is very much in the details. Also there was that issue... I think Ted mentioned it... about the estate situation and the fact that a US citizen needs to take special steps to ensure that his/her assets will go to a foreign spouse upon death, rather than being confiscated by the IRS.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Sun Dec 01, 2013 10:52 pm

Karamatsu wrote:But we do face a serious problem in trying to provide tax hints to expats, given that the rules are different in every country, and change year to year. There are some general guidelines, like watching out for IRA contributions and the evil PFIC rules, but the devil is very much in the details.
I think the best we can do is put US-specific stuff that applies to all or many (ex-US) expats on the US persons abroad page, and put country-specific stuff (including interactions with US tax law, for those to whom it is applicable) on each country-specific page.
Karamatsu wrote:Also there was that issue... I think Ted mentioned it... about the estate situation and the fact that a US citizen needs to take special steps to ensure that his/her assets will go to a foreign spouse upon death, rather than being confiscated by the IRS.
This is one of those things I keep meaning to try to figure out some day, but never seem to manage. Would a will drawn up in Japan have legal force in the US, for example? Any pointers?

Karamatsu
Posts: 1327
Joined: Mon Oct 27, 2008 2:42 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by Karamatsu » Sun Dec 01, 2013 11:04 pm

I haven't acted on that issue either, but should. At the moment of my death the last thing I want to have to think about is the IRS. One alternative option I've considered if the legal costs of a trust are too high is to take out life insurance in Japan with my wife as beneficiary. The IRS might attempt to confiscate that, too, but they'd have to come over here to do it and since (a) the governing law of the contract would be Japan, and (b) in Japan, as I understand it, the spouse automatically inherits, my guess is that Japanese courts would side with her. But I'd hate to put her through that.

The other option sometimes mentioned is to transfer assets to the spouse now, but someone told me that the tax agency places a fairly low limit on how much you can do tax-free in any given year, which seems odd... you can't give her money when you're alive but she gets it all when you're dead? No wonder Japanese wives tend to outlive their husbands ;-)

lazyday
Posts: 3296
Joined: Wed Mar 14, 2007 10:27 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by lazyday » Mon Dec 02, 2013 2:32 am

TedSwippet wrote:(snip) I have transferred internationally twice, with different companies. In both cases HR entirely outsourced all tax and compensation issues to one of the big four
I was mostly thinking about those helping set executive compensation levels. Including things like restricted stock grants, ESOP, etc. Possibly adjusting amounts for tax status of employee.

But maybe that's outsourced too these days!

Anyway, just an idea. I used to know someone who would have known someone. Too long ago now.

Karamatsu
Posts: 1327
Joined: Mon Oct 27, 2008 2:42 am

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by Karamatsu » Mon Dec 02, 2013 6:32 am

Actually come to think of it my wife should take out the insurance on me. Then I'm neither I nor the IRS would be involved in any way. But I'd rather just have my assets go to her as, by rights, they should.

marcos123
Posts: 137
Joined: Sun Sep 18, 2011 10:35 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by marcos123 » Mon Dec 02, 2013 7:28 am

Bpp, good to find you here on this thread. Speaking of the estate situation for US expats, in particular making sure loved ones in your resident country receive your US assets, I also have no idea whether the US would recognize a will or estate plan drawn up in one's resident country.

So what I am in the process of doing, to avoid any potential conflict of laws between the two countries and/or hefty legal expenses and significant time burden for myself or loved ones, is to draw up a US estate plan on those US assets with them as foreign beneficiaries.

A will would be simplest of course, but the whole probate process could significantly delay the eventual transfer of those assets, not to mention the attendant costs. If the bulk of one's US assets are held in US financial accounts, then one could in theory simply name beneficiaries for those accounts where the financial institutions allow that, which would mean POD accounts for traditional bank accounts, TOD accounts for brokerage accounts, and naturally naming individual beneficiaries for TIRAs and Roth IRAs. As we know, naming beneficiaries on such accounts trumps the will anyway and would in theory mean a much quicker payout.

The potential issue with this simple arrangement is operational, and I would be interested to see how others here are handling that.

ALL of the banks and brokerages that I have spoken with, and have accounts at, for control purposes, will insist on eventually mailing out the proceeds of the account via bank draft to the foreign beneficiary. A foreign wire is absolutely out of the question. Procedurally, those cashier checks could get lost in the mail, or land with your local customs agent in need of personal funds, and just never arrive. If those checks do eventually reach your intended beneficiaries, what are they supposed to do with them? Most probably send them out for collection, via their local bank branch, which would involve potential discounting, foreign exchange, and sundry fees, on top of (further) delays.

So what are fellow expats doing in this case?

An alternative is making a Revocable (Living) Trust the beneficiary of all of these accounts, with a (trusted) Successor Trustee eventually wiring out the funds, but this, aside from the significant added complexity, costs, and potential delays, may also have very adverse tax complications (fodder for a future post).

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Tue Dec 03, 2013 4:16 am

Hi marcos,
So what I am in the process of doing, to avoid any potential conflict of laws between the two countries and/or hefty legal expenses and significant time burden for myself or loved ones, is to draw up a US estate plan on those US assets with them as foreign beneficiaries.

A will would be simplest of course, but the whole probate process could significantly delay the eventual transfer of those assets, not to mention the attendant costs.
I'm not entirely clear on the terminology. Does "estate plan" include a will? Or does it consist primarily of assigning POD/TOD to one's family members?

Perhaps the easiest thing for me is to keep assets in Japan, so that the Japanese legal system gets first crack at divvying them up (which it would do in more or less the way I would want done anyway, by default). Though I can see this may not be a good solution for some countries.

I agree that anything with the word "Trust" in it sounds like something I don't want to touch. Just sounds like something that mainly benefits lawyers.

marcos123
Posts: 137
Joined: Sun Sep 18, 2011 10:35 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by marcos123 » Tue Dec 03, 2013 4:19 pm

bpp wrote:Hi marcos,
So what I am in the process of doing, to avoid any potential conflict of laws between the two countries and/or hefty legal expenses and significant time burden for myself or loved ones, is to draw up a US estate plan on those US assets with them as foreign beneficiaries.

A will would be simplest of course, but the whole probate process could significantly delay the eventual transfer of those assets, not to mention the attendant costs.
I'm not entirely clear on the terminology. Does "estate plan" include a will? Or does it consist primarily of assigning POD/TOD to one's family members?

Perhaps the easiest thing for me is to keep assets in Japan, so that the Japanese legal system gets first crack at divvying them up (which it would do in more or less the way I would want done anyway, by default). Though I can see this may not be a good solution for some countries.

I agree that anything with the word "Trust" in it sounds like something I don't want to touch. Just sounds like something that mainly benefits lawyers.
Hey bpp, actually I will probably end up with two estate plans: a foreign estate plan for my foreign assets, and a US estate plan for my US assets.

What do I mean by US estate plan? This is now a work in progress and initially it was going to be extremely simple: composed of just a will, and POD/TOD accounts.

However, as noted above, I am very concerned that the standard for US institutions for foreign beneficiaries is to mail out offical bank drafts for the account values. They generally will never agree to a wire transfer of those funds.

As a result, I may well end up using a Revocable (Living) Trust structure so that a trusted Successor Trustee could eventually wire out the funds to the intended foreign beneficiaries. This would entail having financial acounts converted to Trust Accounts, In Trust For (or FBO) accounts, or a personal account with the Trust as beneficiary (this last option raises some very complex tax issues for IRAs which I can post about later).

Before I finalize the US estate plan, I would really like to also hear from other Bogleheads living outside the US who have US financial accounts and see how they intend to eventually get those funds over to a foreign beneficiary.
Last edited by marcos123 on Wed Dec 04, 2013 6:06 am, edited 1 time in total.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Tue Dec 03, 2013 5:58 pm

Just thinking out loud, but: would it work to set up a bank account in the US in your beneficiaries' names (if you can -- big if!), and leave instructions in the will for the executor to have the other US financial institutions to wire funds to that account? Then the executor (or beneficiaries) can wire the proceeds back home from there.

User avatar
LadyGeek
Site Admin
Posts: 45025
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by LadyGeek » Tue Dec 03, 2013 7:51 pm

Also thinking - May I recommend starting a thread in the Personal Finance (Not Investing) forum, which is targeted for this type of question? If there is a good response, consider writing a wiki article...

Update to address bpp's post below: Starting a new thread in the Personal Finance (Not Investing) forum will draw the attention of our estate planning / taxation experts.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

bpp
Posts: 1907
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by bpp » Tue Dec 03, 2013 10:21 pm

LadyGeek wrote:Also thinking - May I recommend starting a thread in the Personal Finance (Not Investing) forum, which is targeted for this type of question? If there is a good response, consider writing a wiki article...
I was kind of thinking this thread is a place to bat around ideas for possible inclusion in the "expat" wiki page, though I guess this particular question is going off into a non-investing/taxation direction, so perhaps makes sense to move to another forum. (And start a new wiki page, as you suggest, if any good suggestions come up...) It might draw more attention that way, too, as a stand-alone question title.

Since this is marcos123's topic, do you want to start a new thread as suggested, marcos?

marcos123
Posts: 137
Joined: Sun Sep 18, 2011 10:35 pm

Re: Wiki (?) - Investing as an expat (US citizen living abro

Post by marcos123 » Wed Dec 04, 2013 5:55 am

Hello LadyGeek, it is very good to see that this thread you initiated has been getting traction from us BH expats who have been dealing with these issues for years and are sharing here our experiences (and issues) with each other and the overall BH community.

As bpp mentioned, I also thought this thread a space for brainstorming on potential topics for inclusion in the wiki. From the natural give-and-take of this thread for instance I was pleased to share how I was dealing with country taxation issues relative to Roth account distributions, which might be replicated in other jurisdictions, and also the subject of Estate Planning which had come up. As this latter topic should definitely be taken into consideration by expats (as it should for investors in general) as they invest, but is all too often overlooked, I feel strongly that expat estate planning should definitely be included in the wiki. As part of that I wanted to share a specific issue that I was now facing, how I was dealing with it, and to seek other expat input. As such, I do not feel it off-topic at all and would very much like it to remain on this thread. However, I can also see the specific operational issue I have raised here should be continued on a Personal Finance thread, and as such I will start one shortly. After that has been done later today perhaps then you could provide a link here. Thanks and looking forward to further contributing to this and other threads relative to expat issues here on BH.

edit: I have just initiated a new thread for continuation of the part of the discussion related to US expat estate planning:

http://www.bogleheads.org/forum/viewtop ... st=1874431

sean.mcgrath
Posts: 105
Joined: Thu Dec 29, 2016 6:15 am
Location: US in NL

Re: Wiki (?) - Investing as an expat (US citizen living abroad)

Post by sean.mcgrath » Fri Dec 30, 2016 9:11 am

Hi LadyGeek,

After reading your terrifying Wiki on US citizens residing abroad, I have dived deep into the PFIC topic. Below is a proposed edit to this section of your Wiki page -- I am not in any way a financial / legal expert, but have researched thoroughly and provided the links.

p.s. In general I think it would be useful to include the three “Tax issues” links ( Nonresident alien taxation, Nonresident alien with no US tax treaty & Irish ETFs, Taxation as a US person living abroad) at the top of each regional investing page. If you go directly to the regional page as I did, vital context is lost.

p.p.s. It looks like my links and formatting don't paste here from my Word document. If you tell me how, I can send you the original Word file.

Sean


Passive foreign investment company (PFIC)
Mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs) and other collective investment vehicles, if they are not registered with the US Securities Exchange Commission (SEC), are classified under US tax law as Passive Foreign Investment Companies, or PFICs. Although the taxation on these under US law can be extremely unfavorable, and are generally described as “to be avoided at all costs,” there is flexibility in taxation method that may prove beneficial in some circumstances.
PFICs require the submission of Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund [32] with one's tax return, which can be an extremely time consuming task, [33] particularly if many investments are involved (as each investment requires its own 8621 submission). On form 8621 PFICs may be treated in one of three ways: section 1291 taxation (default); Mark to Market; and Qualified Electing Fund. If no choice is made on a timely filed (including extensions) tax return for the year that the investment is made, 1291 is valid for this and all future years. The only way to change this is to “purge” the PFIC.
Regarding the choices, both section 1291 and purging appear quite complex; however, the other two options are feasible:
• Mark to market: the investment needs to be marketable and on a qualified exchange (one that “the IRS determines has rules sufficient to ensure that the market price represents legitimate and sound fair market value.” Presumably all major exchanges qualify. Each year the gains are treated as ordinary income; losses up to the value of accumulated gains are also ordinary income (losses). Losses greater than the gains are not claimed in that tax year, but will reduce gains in future years (example). Each block of shares purchased at a different time need to be accounted for and reported separately – “This becomes tedious and overwhelming when the fund reinvests dividends monthly to purchase more shares,” but for many buy and hold strategies this would not involve significant record keeping. Mark to market therefore taxes at your rate of ordinary income, rather than at the rates of capital gains and dividends (which are often, but not always, lower).

For a US citizen working and living in a high tax country (e.g., a large part of Western Europe), the higher rate of local income tax can provide sufficient tax credits to cover a large investment gain without any US taxes. This brings an additional advantage that, upon eventual return to the United States, the investment can immediately be sold with no capital gain, as the gains have already been marked to market.
Qualified Electing Fund (QEF): in many cases this is the best option. “A shareholder of a QEF must annually include in gross income as ordinary income its pro rata share of the ordinary earnings and as long-term capital gain its pro rata share of the net capital gain of the QEF. The shareholder may elect to extend the time for payment of tax on its share of the undistributed earnings of the QEF (Election B) until the QEF election is terminated.” However, you must pay interest to the IRS if you elect to extend the time for payment.

The QEF approach is basically the same as how the IRS taxes US mutual funds. In order to follow the QEF method, information similar to a mutual fund 1099 form is required. The best way is for the foreign fund to provide this information (typically in what is called a “PFIC Annual Information Statement”). Many Canadian funds do this, but so far we have not found an example of a European based fund providing the information. If the investor can gather the proper information, this would be acceptable, but perhaps difficult to accomplish in practice.

Until European funds provide this PFIC statements, Mark to Market might often be preferable for US persons resident in Europe -- especially given the differential on tax rates in many European countries.

In general, to avoid having to deal with PFIC issues requires investing only through SEC-registered investment vehicles (which may in turn incur tax problems with the local tax authorities), or else through individual stocks and bonds.
For a discussion of how to invest using individual stocks, see the Wiki page on passively managing individual stocks.
See also
Passive foreign investment company

User avatar
LadyGeek
Site Admin
Posts: 45025
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abroad)

Post by LadyGeek » Fri Dec 30, 2016 10:04 am

For reference, the wiki page is here: Taxation as a US person living abroad

Thanks! I have sent you a Private Message to answer your questions.

To be clear, the wiki is collaborative effort. Several wiki editors have revised this page, which can be seen by clicking on the View history tab in the top-right corner.

(This is how Wikipedia works, we use the same software.)
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
LadyGeek
Site Admin
Posts: 45025
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abroad)

Post by LadyGeek » Fri Dec 30, 2016 1:57 pm

sean.mcgrath has supplied the Word document. Thanks! There's enough content to create a stand-alone page.

I've transcribed the document to a new draft page: User:LadyGeek/Passive foreign investment company

How's it look? Comments / questions / corrections are welcome. Wiki editors should edit the page directly.

Once the content is agreed upon, we can turn it into a "live" page and update: Taxation as a US person living abroad (Passive foreign investment company (PFIC)) to reference the new page.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

sean.mcgrath
Posts: 105
Joined: Thu Dec 29, 2016 6:15 am
Location: US in NL

Re: Wiki (?) - Investing as an expat (US citizen living abroad)

Post by sean.mcgrath » Fri Dec 30, 2016 6:35 pm

Wow, that looks great LadyG! Amazingly official :happy

Extremely minor edits: "Each block of shares purchased at a different time need to be" should be ""Each block of shares purchased at a different time needs to be"" and "In many cases, a Qualified Electing Fund is the best option.From" needs a space after the period.

Also, I would make the summary a bit more positive: e.g., "Due to tax constraints, US citizens abroad cannot simply invest in local funds as they would in the US, and need to find the best solution for their personal situation. One option is to invest in local funds while electing the Mark to Market or QEF option. If this is not preferred, PFIC issues can be avoided only by investing through SEC-registered investment vehicles (which may in turn incur tax problems with the local tax authorities), or else through individual stocks and bonds. "

Cheers,
Sean

User avatar
LadyGeek
Site Admin
Posts: 45025
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abroad)

Post by LadyGeek » Fri Dec 30, 2016 7:42 pm

Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
grabiner
Advisory Board
Posts: 21922
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Wiki (?) - Investing as an expat (US citizen living abroad)

Post by grabiner » Sun Jan 01, 2017 7:41 pm

I added a note on how Section 1291 taxation works, and why it is so unfavorable. The gain on a sale, and occasional irregular dividend payments, are prorated over all past years, and past years' gains are taxed at that year's maximum personal tax rate plus interest.
Wiki David Grabiner

marcos123
Posts: 137
Joined: Sun Sep 18, 2011 10:35 pm

Re: Wiki (?) - Investing as an expat (US citizen living abroad)

Post by marcos123 » Sun Jan 01, 2017 8:56 pm

Looking good. Under Mark to Market,since both realized and unrealized capital gains are subject to ordinary income taxes each year, I would just recommend the following underscored revision. Each year the gains - whether realized or unrealized - are treated as ordinary income.

I would suggest maintaining the underscore in the actual text since this is such an important - and potentially negative - characteristic for the potential PFIC holder.

User avatar
Peculiar_Investor
Posts: 1095
Joined: Thu Oct 20, 2011 12:23 am
Location: Calgary, AB
Contact:

Re: Wiki (?) - Investing as an expat (US citizen living abroad)

Post by Peculiar_Investor » Sun Jan 01, 2017 9:56 pm

I've added a number of references to the U.S. Code that covers this subject, changed some external links to references and done some general wiki housekeeping.
Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams

Post Reply