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FATCA

L
Lucy Huntington

The document provides a financial planning primer for US taxpayers living abroad. It highlights reporting and compliance requirements for US taxpayers under current legislation. It also outlines strategies for saving in a tax efficient manner for retirement. Key points include understanding FATCA global reporting rules, reporting annual income and worldwide assets, and exploring tax treaties and structures like International Pension Plans to maximize tax efficiency and flexibility. Overall the document aims to help US taxpayers living abroad understand their obligations while pursuing wealth accumulation and retirement planning goals.

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A FINANCIAL PLANNING PRIMER FOR US TAXPAYERS
Theres 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.
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 werent 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.
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. .
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.
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.
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.
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

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FATCA

  • 2. Theres 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 werent 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