If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside. People like the Mayor of London, Boris Johnson, was born in the USA and holds a US passport. He therefore has to complete an annual US tax return and pay taxes due even though he has never lived in the US as an adult or worked there.
If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing a Report of Foreign Bank and Financial Accounts (FBAR).
Passive Foreign Investment Companies (PFICs).
A PFIC is, in broad terms, any non-US company or fund that does not distribute income to the US on an annual basis. This means 99% of non-US funds are deemed to be PFICs and US taxpayers cannot structure a globally diverse investment portfolio without suffering penal tax charges and reporting responsibilities.
A PFIC has been referred to as a “toxic” investment by the US government and to many Non Resident Americans (NRA’s) it could turn out this way in the future as administrators that hold these investments or portfolios on their behalf, will have to start reporting to the IRS as well. These assets face high additional taxes.
Foreign Account Tax Compliance Act (FATCA) and it’s effects
- FATCA came into effect on 1st July 2014.
- Aimed at global compliance for US taxpayers.
- Many financial institutions do not want to have any US taxpayers because of extra work.
- Many US taxpayers have had existing accounts liquidated and/or closed down.
- Details of many non-US taxpayers being disclosed to IRS under tax treaty exchange of information agreements as suspected Americans.
What are the retirement savings options for U.S tax payers resident abroad?
- Limited to a US Compliant, Qualifying Retirement Plan & Individual Retirement Accounts (IRAs).
- 401(k) – providing working for US parent Company. Employee limit USD17,500 p.a. Members aged over 50 can add a further USD5,500.
- No US tax on realised income and gains within the plan. Benefits from age 591/2.
- IRA Under 50 $5,500 pa Over 50 $6,500 pa.
What products can we offer our Non-Resident American clients?
Subject to obtaining supporting tax advice, the following financial arrangements are available:
- QROPS where NRAs have deferred pension benefits in the UK.
- International Pension Plans (IPPs)- both Regular Contributions and Single Contribution. “Toxic” assets held in PFICs can be transferred into an IPP removing them from the additional “Toxic” tax charges and allowing tax free growth.
- Bespoke US SIPPS where NRAs have deferred pension benefits in the UK.
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