adamas

I have just moved to the USA in July and I am now a LPR. I am in the process of planning what to do with my savings and investments that I still have in the UK and in Italy, whether to keep them there or move them to the USA, and I have a few questions:

- My savings are invested in a range of mutual funds, bonds, insurance, in excess of the $50,000 threshold for singles. Some of this have monthly distributions, some others would have a capital growth (hopefully), but I won't be realizing the capital gains unless I sold the investments. My understanding is that I have to report all these assets on form 8938, but do I have to pay taxes in the USA on the capital gains or just for owning foreign assets?

- If I decide to liquidate some or all of the foreign investments and bring the money to the USA to invest here, are there taxes or penalties that I need to pay in the USA? Can I have trouble in moving to the USA money from abroad?

- If I move the money before the end of the year, do I still need to report in form 8938 that I had assets abroad during tax year 2018, even if on the last day of the year the money is in the USA?

- Finally, could you recommend CPAs who have experienced with expats tax returns? Location does not matter since I figure I can liaise with them over the phone or by email.

Thanks.

Glasgow Girl

Here is my understanding, but I am not a financial professional.

Be aware that you have to report your mutual funds on an FBAR as well as Form 8938. Not sure about the bonds or life insurance but there is no harm in reporting them even if you don't need to, whereas there are penalties if you don't report what you do need to.

With regard to mutual funds, you pay taxes on the income and capital gains when you realize them but you may also need to pay tax on the capital gains each calendar year even if you do not sell the assets. It depends upon how you elect to have your foreign mutual funds taxed. You will want to do detailed research yourself on this (Google PFIC as foreign mutual funds are identified here) or get the help of a good accountant. But the layman description is that you can either elect to pay taxes on the gain every calendar year whether your realize it our not (in other words you are taxed on the increase in value of your investments even if you do not sell) and you pay tax at your ordinary income tax rate on those gains; or you pay tax only when you sell but in that case you need to prorate the tax over every calendar year that you held the assets, even the years before you came to the USA, then you have to pay tax at the highest income tax band rate for that year (regardless of your own personal rate) and you have to add interest to each of the years that you pro rata'd the interest over at rates published by the IRS. Clearly paying tax at the highest rate (about 39% on average) and paying compound interest on top of that will quickly erase any gains that you may have made. The first method is bad, the second is punitive, so neither is a good option. Better to sell and reinvest in funds over here. In either case you cannot deduct any losses. If you go with the first method you must declare that in the first year in which you file taxes, you cannot change it later.

Since you are now in the USA and will be filing taxes for 2018 I believe that if you sell in this tax year you will need to pay taxes on any gains at your ordinary rate of tax, which may not be too bad since it sounds like you will only have worked for half of a tax year, and your best option may be to sell them all now in 2018.

I believe the taxation system was put in place to deter US residents from investing abroad, however unfortunately expats and immigrants with existing investments get unfairly caught up in these regulations. For anyone moving here, sell your investments before you move.

I cannot help you with a CPA, perhaps others can.

If you do need to transfer money into the USA I have found TransferWise to be excellent on service and exchange rates. I am not aware of any issues moving money into the USA so long as the money was lawfully attained in the first place. TransferWise will authenticate you first (its a fast painless process). Google them and you will find their website.

adamas

Thanks for the reply. I am looking for a CPA indeed to do my tax return.

So if I sell the funds now, would I have to pay taxes only on the gains realized from the day I became a US resident in July 2018 or on all the gains since I first held the funds years ago? This makes a huge difference...I am not even able to track the history of the funds over the past years.

What about foreign bank accounts? Are there taxes to be paid on those?

I have a Santander UK account that bears interest, very small though (probably less than 100 pounds in the whole year), and I have been progressively transfering that money to my US bank checking account through Transferwise already. I plan to move all the money and close the account by November 2018. In this circumstance, do I need to report it anyway? And how much if the amount had varied throughout the year?

Glasgow Girl

Yes, you have to pay tax on foreign bank account interest. Rest assured, the IRS will tax every penny wherever it comes from!

If you received the interest after you moved here, then you need to report all that was paid after you arrived. I would just use the exchange rate on December 31st and apply that to the total interest your received since you moved.

adamas

But if in 12/31 the account is closed, do I still need to report it and what amount?

Also, do you know about the taxes on capital gains of funds if they are calculated from my entry date in the US or since I first held the funds (see edited post above)?

thanks

Glasgow Girl

Unfortunately the tax due on your funds includes the years before your arrived here. It is very unfair but it is what it is. If you do not have all the original paperwork then do the best you can in establishing your basis in the investment and be prepared to support that number if questioned. Don't forget any dividends that may have been reinvested. Most mutual funds will have data that goes back at least 10 years, so you can somewhat reconstruct what dividends were paid and at what rate. FT.com is one resource. You can probably go back to your mutual fund companies and ask for a statement going back to the beginning or at least a good number of years.

I feel for you, I have been there.

On a more positive note, if you have not already looked into paying Voluntary UK NICS, you should do so as soon as you can. You will not get a better investment anywhere, especially of you can pay Class 2 rates, which you will be able to do if you were employed before leaving the UK and are employed here.

adamas

That's sounds awful! So if someone has held the funds even for a single day while being a US LPR, then has to give to the IRS a lifetime of savings?!?

Aren't the taxes that I have already paid in Europe on this capital gains at least deducted from those due in the USA?

Isn't there a split treatment for the tax year one immigrates?

Had I knew this months ago, I would have seriously thought about not coming here...

Glasgow Girl

If you have already paid capital gains taxes then you must have sold these investments and reinvested at a later date perhaps? If so, then the amount you reinvested is your new base and so you will only pay capital gains on the profit you made from that point forward. Or perhaps you mean taxes you paid on prior year dividends. If that is the case then the dividend income from previous years is not the subject of US tax as you were not a resident when you received the income. The GAINS made in previous years are subject to US tax because you realized them through the sale AFTER you became a resident. I mentioned the dividends above because if they were reinvested then that that increases the cost of your investment and you need to include those in calculating you total cost so that your gains are reduced and hence your tax bill is also reduced. You are paying gains on the profit only not the total value of your investment.

With regard to split treatment for year one immigrants, now you get into serious detail. I think you pay tax on the gains incurred in the years before you became a resident at your ordinary income rate for the tax year in which they are sold, whereas the taxes paid on the gains realized since you were a resident are as described above. So, depending upon your marginal tax rate for this year you could get some savings if you sell now. The longer you hold the investments the more you move the gains into the punitive method. This link may help you. it describes the process in quite a lot of detail and has a great example that seems to be almost identical to your situation .

https://www.thetaxadviser.com/issues...-story-07.html.

The taxation of these investments is totally unfair to immigrants. That is why anyone in the process of moving over here should liquidate everything they can BEFORE they arrive. And, if you have arrived and face this mess, liquidate them as soon as you can, pay the taxes and move on with you life. Procrastinating makes the situation significantly worse.

Googling PFIC taxation will turn up a lot of information if you have the stamina to read through it all. It is very complex and unfair, but as a process is quite rational and understandable once you get your head around the terminology and detail. You could save some time and money with an accountant if you have a basic understanding of the process and options right at the start. You pretty much have everything I know on the issue now. It sounds like you need to find a good accountant to work through the details. Good Luck, I know I gave you unwelcome information but I hope it helps you navigate the way ahead.

adamas

Thanks again for your help. Before relocating I looked briefly at the tax implications, but only found out about FBAR and Form 8938, but not about PFIC, since it's so obscure and contorted that is not even mentioned everywhere. Besides, as you can imagine, undergoing the Green Card process and planning the relocation takes up a lot of time and energy, so I probably overlooked this aspect as it is so diabolic that I could never have fathomed it. Am I really the only immigrant caught up in this situation? What about you?

In my previous post I meant that I have been receiving monthly distributions from some of this mutual funds directly into a bank account, and the capital gains taxes were withheld automatically on these (Italian capital gains taxes, amounting to 26%). So, if I understood correctly, I wouldn't have to pay US taxes on these distributions, right?

Other investments didn't have distributions, but I will realize the gain once I sell them. However, some of these are currently at loss compared to when I started. Can the capital losses be used to compensate the capital gains? Or aren't the losses recognized at all?

I am looking on the Internet for CPAs dealing with expats. I am completely ignorant myself about finance and taxes, so I'd rather pay for professional advice than messing up with the myriads of forms myself. As if the taxes were not punitive enough, I will also end up paying an hefty bill to the CPA...

Glasgow Girl

You are not alone, there are thousand of people in your situation and not all of them realize it yet. I was too, hence my knowledge most of which I found out after the fact. I took professional advice the first year and have been able to do my taxes myself ever since. I remember my emotions at the time which is why I am happy to help out others if I can, with the caveat that I am not a professional just someone trying to help out others.

With regard to your monthly distributions, you will have to pay tax on whatever your received this year but you will also get credit for the 26% you have already paid, so depending upon your marginal tax rate here there may be nothing to pay, or worst case just the difference between your marginal tax rate and the 26%. If you sell all your investments this year, you should be able to get the gains taxed at your marginal tax rate which could be less than what you would have paid in the UK/Italy. If you have to pay tax there as well you can get a credit for the tax paid there and just pay the difference to the US. Keeping the investments long term will almost certainly result in far higher taxes and WILL complicate your life considerably. On the upside, you should get some benefit with the exchange rates, specifically the drop value of the GBP to USD will mean that your purchase price was almost certainly at a much higher rate of exchange than your selling rate. This will help to reduce your gain when it is declared in US$. Yet another reason to sell them now.

On the losses, I believe they are simply not recognized at all.

Google FBAR accountant, you should get some hits that will help you find someone.

durham_lad

Floridablues

There is a CPA here in Orlando area that is often highly recommended on a British property owners forums. I've never used them but often see their name put forward to new members. I think they have offices here and in the UK. If you still need help then I'll find out contact details but not sure if I can/should post names on here or if I should send to e-mail.

adamas

Ah, so, if I understand correctly, the capital gains/losses are calculated converting the initial and final capital in dollars rather than in the original currency and only then converting the net difference in dollars? That would definitely help limiting the potential taxes. Most of my funds are in euros, which was stronger vs. dollar years ago.

In absolute terms, the value of most of my funds is currently at loss, so that's not the ideal time to sell everything. But better than carrying this burden with the IRS for years to come...
It feels like expats, being USCs abroad or foreign nationals here, are treated like presumptive criminals and money launderers. I want to keep some assets in my home country for retirement, which I want to spend there, or if I have ever go back earlier. What are the types of investment which do not fall under the PFIC category?

Cook_County

Foreign tax credit claimable on Form 8621 is limited to the foreign tax paid on the excess distributions; not on the entire distribution.

Glasgow Girl

Bonds and individual stocks are not considered PFICs, so that is an option. Fidelity in the USA (and I am sure other brokers) will allow you to buy and sell stocks worldwide in local currencies, you have to call them and get it set up and have a certain balance with them. I think there are a handful of brokers in the UK that will let you maintain an account even if you are USA bsaed (maybe A J Bell is one of them? I cant remember for sure). So if you like to keep a balanced portfolio maybe your go 100% mutual funds with your dollar based assets, and keep some money in Euro or GBP bonds and/or individual stocks.

Also, property ownership is not a PFIC, so you could buy and rent out a house. If you plan to return eventually that is another great way to hedge your bets. While renting remotely is not Plan A for anyone, I rented out my UK home for a good number of years, used a property management company and never had any issues. I was even able to sell remotely without ever having to go over there to do anything. All the paperwork was sent by courier at a very reasonable cost.

If your investments are at a loss, it is probably an ideal time to sell at least in your circumstances. If you reinvest immediately through a US broker you will be no worse off from an investment point of view and a lot better off tax wise.

Anyway, welcome to the USA, once you get past this mess you will be glad you are here.