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Moving to the US for 2-3 years - PFICs and ISA rules

Moving to the US for 2-3 years - PFICs and ISA rules

Old Jan 15th 2024, 6:49 pm
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Default Moving to the US for 2-3 years - PFICs and ISA rules

Hi,

Just wanted to clarify a few things regarding my investments into PFICs. I have multiple investments in these types of financial instruments and have read conflicting statements regarding their tax implications.

If all of my PFIC investments are in accumulating funds and I do not realise any of these gains am I exempt from the tax on these ? Obviously I would still have to fill out the complex forms but I am sure an accountant would be able to do this on my behalf.

Some posts on this website suggest that unrealised gains are taxable, whereas some sites such as FT with an article from 2015 suggest the opposite is true.

It would be a shame if my only option is to sell and rebuy in the US as my tax free allowance would be lost and have to be restarted once I return back to the UK again in a few years.

Any help is appreciated!
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Old Jan 16th 2024, 1:01 am
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Default Re: Moving to the US for 2-3 years - PFICs and ISA rules

Accumulation units simply reinvest distributions back into the fund, and although no cash is directly received there is still a taxable distribution in the eyes of the IRS, and therefore there is no tax exemption.

The complex form you refer to is Form 8621 which is extremely time consuming to complete. You likely would need a specialist to complete first time around and those guys are not cheap. The IRS estimates 20 hours per form, one form for each fund, and while I think those estimates are excessive each form will take many hours to complete, and therefore using a professional will cost an arm and a leg.

The taxation of PFICs is complex, but in summary the two main options are to go with the default method or to elect MTM taxation. The former does not tax unrealized gains but will tax realized gains at the highest published income tax rate, currently 37%, plus compound interest on the gains pro rata’d back to the date of purchase. You can avoid that if you don’t sell but still have Form 8621 to deal with, and tax to pay on all dividends and distributions. MTM taxation will tax unrealized gains as ordinary income (essentially at your highest marginal tax rate) but all gains attained before becoming subject to US taxation will be taxed at ordinary capital gains rates if the Incoming Transition Rule is invoked. If you can deal with Form 8621 and do not sell the funds while subject to US taxes then that will likely create the best tax outcome, however do not underestimate the time and expense involved in preparing that form and the penalties for getting it wrong. Also take into account the fact that many plan only to be here for a few years but for one reason or another end up staying for a lot longer. If that happens the PFIC taxation upon sale can become very punitive because of the compound interest charges when the funds are eventually sold, on top of the tax rate of 37% plus state and city tax.

You will also have FBARs to file, and Form 8638 if you meet the relevant thresholds. Those forms are a walk in the park when compared to Form 8621. Try and complete one of those forms (don’t just review it) and decide it that is something you really want to mess with on an annual basis, one per fund.

Last edited by Glasgow Girl; Jan 16th 2024 at 1:04 am.
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Old Feb 11th 2024, 12:42 pm
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Default Re: Moving to the US for 2-3 years - PFICs and ISA rules

Thanks for explaining. It seems simpler to sell in my scenario then. It is definitely an interesting and complicated tax system the US have adopted!
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