Struggling to understand the implications of the introduction of the Foreign Account Tax Compliance Act (FATCA)?
The unintended impact of FATCA means US expats have an ever decreasing number of places to turn to for financial advice and a dwindling number of investment products to choice from.
The introduction of the Foreign Account Tax Compliance Act (FATCA) from 1st July 2014 is causing widespread panic among US expats.
Under FATCA, non-US banks and financial institutions with American clients must separately report those account details directly to the IRS. This is leading to many offshore banks, providers and other institutions refusing to deal with wealthy US expats, because they do not have to deal with the cost, complexity and risk of dealing with the IRS.
This means that US expats now have fewer and fewer choices when it comes to financial advice and wealth management. And this reduction in the choice of investment vehicles and savings options is becoming problematic. The number of cases where Americans have given up their citizenship because they’ve felt overwhelmed by this new tax law and incensed by having to consider financial options that are not only tax inefficient have risen sharply over the last 3 years and we foresee this figure only getting bigger – http://www.bbc.com/news/35383435
The US is virtually unique in requiring all US citizens wherever they are in the world to report their income to the IRS at an individual level. And with top rates of income tax up from 35% in 2012 to 39.6% today, ditto capital gains tax and the tax on ordinary dividends also now 39.6% (up from 15% in 2012), the challenge, particularly for high net worth US expats, is to achieve a tax advantage on savings that is otherwise subject to the above rates, while at the same time remaining FATCA compliant.
While it is possible for US taxpayers to obtain income and capital gains tax deferral using traditional qualified variable annuity contracts, the costs of these contracts can be quite significant.
The solution is built around the US/Maltese double tax treaty, which means income and gains within the plan are not subject to US Federal taxes. What’s more, as a qualifying plan for US tax purposes, members can claim relief on realised income and gains generated within the plan, saving between 20% and 39.6%.
As an American expat you are still liable to pay tax on your worldwide income, albeit with some additional benefits to mainland residents. With the introduction of FATCA, international financial institutions now have to report any US tax-paying clients to the IRS, resulting in burdensome reporting and often unprofitable business. The result being that US expats are now being shunned by many financial institutions leaving it difficult to find advice or support.
Despite the new rules though, there are still many ways you can legally minimise your tax liability, often through the use of Double Taxation Agreements (DTA’s), recognised by the IRS as compliant savings schemes. The use of such schemes in safe jurisdictions can result in greater flexibility over your savings, including access and investment choice along with the massive benefits of Gross Roll-Up or Deferred Taxation.
- 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 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.
What should I be doing?
All US taxpayers must report all earned and unearned income and worldwide assets every year. 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.
How do I remain tax efficient?
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.
How can I use my pension?
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 as you draw income.
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 and reduces risk. However, for US expats the need to comply with IRS tax reporting as well as the introduction of FATCA means the underlying plan structure is an additional consideration. For long term savings or retirement plans you need to check on any restrictions on withdrawals in terms of age and percentage of the plan’s value which you are able to take out.
Withdrawals can be taken as an initial lump sum of up to 30% of the total value of the plan or as part of ongoing programmed withdrawals. This approach not only provides gross roll up to defer US tax on realised income and gains on investments, but an absolute saving can be achieved through paying untaxed income and gains in the form of a lump sum and/or programmed withdrawals, which will not be subject to either US Federal taxes or Maltese withholding taxes.
How will FATCA affect my Retirement?
There is still a level of uncertainty on how FATCA could impact certain company or state sponsored retirement funds of US employees working abroad. News reports pointing out restrictions on underlying investments may result in changes to member plans in order to comply.
By structuring plans as a Foreign Grantor Trust, the IRS accepts that the value of the plan forms part of the member’s estate for US Estate Tax on death. This means there is no limit on the level of savings which can be contributed to the plan as contributions are not removed from the member’s US estate.
While contributions made to such a Plan will not receive US tax relief, they can be made in a wide variety of forms such as cash, existing investment portfolios, life assurance policies or shares in mutual funds.
All the best and if you would like any further information please let me know as this subject can get extremely complicated.
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