Hi ,

The big Trick or Treat for Expats is knowing a PFIC when you see one in the flesh. PFICs are simply “pooled investments” registered outside of the United States encompassing mutual funds, non-US pension plans, hedge funds, and insurance products.

The Passive Foreign Investment Company (Form 8621) Guide By Ines Zemelman, EA, is the perfect primer for Expats living overseas.

A mutual fund that is invested in European stocks, but incorporated in the US may be taxed at a long term capital gains rate of 15%, but if the US taxpayer buys an identical fund listed outside the US, they will find their investment may be taxed at up to 50%

The first de minimis rule applies if the aggregate value of all of the PFIC stock owned by the shareholder (directly or indirectly) does not exceed $25,000 ($50,000 for joint filers).

The second de minimis rule applies if the PFIC stock is owned indirectly by the shareholder through another PFIC and is valued at $5,000 or less.

The de minimis rules apply only if the shareholder: (i) has not made a Qualifying Electing Fund ("QEF") election, (ii) has not received an excess distribution during the year, and (iii) does not recognize gain treated as an excess distribution during the year.

Understand PFIC and make wiser investment decisions

As a U.S. Expat working overseas, you have a wide variety of domestic and foreign investment options at your fingertips. If you are like most US Expats, you may believe: “As long as I report all of my foreign financial accounts on FBAR, it doesn’t matter where I keep my money.”

Technically speaking, that’s true; the Department of Treasury isn’t interested in taking your money or dictating the place(s) in which it can be held or invested. The IRS, on the other hand, is not only interested in your reporting foreign financial account information; it’s interested in taxing your income from foreign investment accounts at the highest possible percentage – even at a rate of up to 50%!

This article will focus on a common type of foreign investment known as PFIC (Passive Foreign Investment Corporation).

Understanding PFIC’s and how they can affect your U.S. expat tax return will help you make wiser investment decisions and save money both now and in the future.

Definition of PFIC

• At least 75% of its income is generated passively. Different types of passive income include: Capital gains, dividends, interest, royalties, and a variety of other types of income for which continuous work is not required.
• At least 50% of its funds and assets are being held for the sole purpose of manufacturing passive income.

History of the United States and the PFIC

Before 1986, investing in foreign mutual funds was all the rage; and the United States wanted a way to make U.S.-based mutual funds the preferred method of investing for U.S. taxpayers. You see, mutual funds that were created and held in the United States had an imposition of mandatory distribution which resulted in IRS taxation; non-U.S.-based mutual funds were allowed to defer distribution and therefore defer tax liability, as well.

Additionally, the United States at the time had very limited resources for tracking offshore investments. To encourage United States Citizens to invest in U.S.-based mutual funds rather than foreign mutual funds, the U.S. enacted The Tax Reform Act of 1986. This legislation imposed additional reporting requirements on all PFIC’s and designed a tax structure that was extremely burdensome to U.S. Citizens and Green Card Holders.

Mark-to-Market Accounting Method

With the Mark-to-Market Accounting Method, all of your PFIC gains will be taxed at the marginal tax rate determined by your income level. This applies to both realized and unrealized gains, so you won’t accumulate interest for distribution deferral. Also by using this method, you will be able to claim your losses attributable to your investment in one or more PFIC’s. This will allow you to lower your taxable income, possibly placing you in a lower marginal tax bracket.

Even though you will qualify to have your PFIC capital gains taxed at your marginal tax rate, you will still not qualify for the preferential long-term capital gains rates. Even when using the Mark-to-Market Accounting Method, PFIC capital gains are still viewed by the IRS as regular income and taxable as such.

To elect to have your PFIC taxed with the Mark-to-Market Accounting Method, you will need to elect this method with your PFIC account manager and file Form 8621, Information Return for Passive Foreign Investment Company with your U.S. expat tax return. These steps ARE NOT only taken once; in order to have this treatment on your PFIC account, you will be required to repeat these steps every year.

Final Considerations

For most U.S. Expats, the reality is that PFIC’s are simply not as profitable investment options as those based in the United States. Even by changing the structure of your PFIC, the best tax rate you can get is your marginal tax rate for regular income. There is no tax deferral, there are no special capital gains tax rates, and you’re at a higher risk of being charged excessive interest and penalties. For some U.S. Expats in certain financial situations, it may make sense to invest in a PFIC. To see if this is an ideal investment strategy for you, compare your prospective PFIC(s) with other investment options, taking time to calculate your profit after taxes, fees, and interest.

Don’t leave your current and future financial health to chance. Remember that many of the tax rules and regulations pertaining to U.S. Expats are somewhat vague and the details aren’t clear to many U.S.-based tax advisors. Filing a U.S. expat tax return and saving as much as possible when investing in PFIC’s can be an extremely complicated process. Make sure you’re working with an international tax expert who is experienced in working with PFIC’s so you can avoid unnecessarily high fees and tax rates and get the most back from your investment portfolio.

Even if you prepared your own taxes when you lived in the US you should really consider hiring an expat tax expert while you are living abroad. Expatriate tax return is significantly more complicated than a normal U.S. tax return. We recommend Ines (IJ) Zemelman MBA, EA President and Founder. Ines (IJ) Zemelman is a renowned tax expert. She leads the team of tax advisors for Taxes for Expats.

Ms. Zemelman has over 25 years experience in international tax preparation, helping clients manage their unique tax situations that arise for U.S. citizens living abroad. Her area of specialization is resolving complex international tax issues for individuals and small business owners, such as FBAR and foreign information reporting, IRS voluntary disclosure program participation, and U.S. taxation of foreign trusts and retirement arrangements.

Ines is an Enrolled Agent and has also received an MBA in International Taxation from the Zicklin School of Business . She has lived in various European countries and is fluent in five European languages. In her spare time away from the office, she enjoys gardening and interior design.

The IRC 402(b) income plan

Income Deferred on Gains and Accumulations

Issue: How many people have enough savings for retirement now?

Today's statistic is that a person over age 50 who loses his job will have a 90% chance of not finding a job.

Please give consideration: to my talking about a pre-tax contribution, internationally registered and recognized, foreign retirement plan that is compliant internationally continuously

has simple one form reporting

is a tax free roll up investment account

is specifically recognized as deferred income on FOUR IRS reporting forms

At this point, many are thinking, ''Why have I never heard of this before?'' and my answer to them is ''You don't know that you don't know because you never read the information sheet on how to complete those FOUR IRS forms!''

At this point just take it that you read the IRS information sheets:

We will show you that investing pre-Tax with tax free roll up means that your retirement savings has two tax affected benefits immediately

1. increases yield continuously so that future after tax values later beat anyone's yield and
2. deferring large chunks of income pre-tax you can reach your retirement savings goal

The reason those two benefits are important is because:

Taxing your income later means that your net future value result is much higher, which is the result of tax affected yield increasing the speed to your retirement savings goal and This deferred income plan also permits an increased size of savings contribution to make retirement the best years of your life!

Control over your tax position is only what your investment account allows it to be.

Everyone has heard about a 401k, everybody knows about that, the 401k was never designed in 1974 to be the one retirement fund.

It was designed as a supplement to the old company final salary plan which has gone the way of the dodo bird.

The 401k ceiling on contribution size is too low.

It was never designed to be the one source of retirement income.

There is a ceiling on contribution size which means if you are behind in saving for retirement than you can never catch up!

US-based plans are not globally functional.

A 401k plan requires U.S. sourced employment income.

Do you work overseas? Foreign employment contributions to a U.S. 401k plan are not allowed.

By contrast,

The IRC 402(b) income plan is the one plan that delivers a truly international U.S. and Foreign employee solution to retirement savings without contribution size restrictions and with tax and reporting compliance globally.

This deferred income plan is not new, it was launched by Internal Revenue Service Tax Code back in 1986, Yes 30 years ago, and is recognized internationally as a compliant and excluded financial account. That is what we provide

OK, So, everyone wants to ask us: what are the benefits your plan delivers to me immediately?

Tax affected yield that beats anyone's yield

what are my benefits along the way?

Simple tax and reporting compliance continuously

what are my benefits down the road?

Reduces the cost of tax by 50% and more

and what are my benefits upon disbursement?

You control your rate of withdrawal at your own retirement life style rate-Go-Go, Slow-Go and No-Go

Get the IRC 402(b) income plan Free White Paper

Q: Is now a good time to be buying gold share or bullion? You have still not issued a buy signal. When do you think you will be able to give a buy signal on the Fixed System?

A: January or February 2017 is the target now.

Q: Are you expectation the gold market to go down from here?

A: I am expecting 2 weeks up and 3 months down from here.

Q: Do you have a wave count you can share?

A: Yes, but please remember that the wave count is not predictive. It is confirming. So if the price action, 2 weeks up and 3 months down, goes as expected then, at the low in January or February, we will have the end of wave 2 from the gold price low of 1045. If so then we should expect a strong wave 3 to the upside thereafter. That is not a prediction. When the time is right, the market will signal us. If we get the 2 weeks up and 3 months down, that will be a strong indication that the suggested wave count is correct.

Q: How are political events impacting your analysis?

A: It appears that Trump will win in a landslide. I am not expecting it to be close. A Trump landside would be an indication that the general public is distrustful of government. That is a plus for the price of gold.

The Fixed System

All securities and cash stay with client’s broker or bank. We provide buy and sell orders to client. Client transmits the orders to his bank or broker for execution.

Q: What is the Fixed System?

A: The Fixed System is the application of economic law in a manner consistent with the scientific method to profit from price changes.

Q: What do you mean by scientific method?

A: Using observation to establish facts and then logic to reach useful conclusions that follow from the factually correct premises.

Q: What do you mean by economic law?

A: A useful description of human action related to economic activity. See Human Action by Ludwig von Mises and Man, Economy, and State by Murray Rothbard.

Q: Where do I begin if I want information about how to apply economic law?

A: Start with The Art of Speculation during Civil War — Sun Tzu Meets Jesse Livermore.

Q: These three books amount to over 2,000 pages and the material is sometimes difficult. Do I need to understand all of it before I can use the Fixed System?

A: No, but you'll get better results if you do. If you want to base your speculation on facts and not falsehoods, on valid conclusions and not fallacious reasoning, then read and study these three books.

Q: Which of the three should I read first?

A: Start with the Q&A in Sun Tzu Meets Jesse Livermore (Appendix A). Then read the entire book, then Mises, and then Rothbard.

Q: I understand that all value is subjective and that in a market economy, the current price will be bid up to the expectation of future price less cost of carry. The same process occurs in reverse when market participants expect the future price to be lower. You use four criteria to measure this and to call the low in the gold market: 1. a break to the downside in the general securities market, 2. extremely negative sentiment indicators, 3. ending wave pattern, and 4. specialist short covering. Is all of this part of the Fixed System?

A: Yes. That all value is subjective is a fundamental law of economics. The system is fixed because economic law and facts are fixed. You can ignore the facts and law but you will suffer the results of ignorance never the less. Economic law is just a binding as the law of gravity.

We invite you to request a Arthur Fixed Consultation at your convenience.

by Arthur Fixed

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