FATCA & Worldwide Taxation for US Citizens

The USA is one of very few countries in the world that tax their citizens and green card holders no matter what their residency is. US citizens and green card holders are US taxable while living in Ireland or any other country in the world even if you are paying taxes in Ireland.

The Foreign Account Tax Compliance Act (FATCA) legislation in the USA has sent shockwaves through US expat communities across the world creating huge complexity. There has been a lot of media attention due to the implementation of FATCA but it’s difficult to find specific information for US expats here in Ireland. Fortunately, the U.S. tax code provides clear methods to lessen the effects of being taxed in two different countries.

U.S. Expat Investing Advice and Financial Planning

Understanding US & Irish taxation, knowing about FATCA, 401k’s, Individual retirement accounts (Roth or Traditional), the various Irish pension structures (DB, DC, BOB’s, PRSA’s, ARF’s or Self-administered Pensions)  and navigating U.S. investment account restrictions are some of the basic issues Americans or Irish resident US passport holders must navigate.

Understanding PFICS

Ownership of Foreign Mutual Funds (Passive Foreign Investment Companies) is a common and costly mistake made by US expats. It’s important to use US cited mutual funds or ETF’s to invest and build wealth. This can be done using a US expat friendly brokerage or some Irish investment platforms depending on your individual circumstances. US passport holders should not invest in Irish, Luxembourg, UK or other EU domiciled collective funds through a European based insurance company as these will be taxed punitively. The UK does have a list of reporting funds which can also be utilised by US citizens resident in the UK.

The PFIC tax rules were developed to dissuade U.S. citizens from forming a foreign company or trust to shift income away from the IRS. PFICs require complicated U.S. tax reporting and more often than not bring higher U.S. tax rates. There are simple global investment solutions available to aid investors grow their savings and pension which Imperius Wealth can help formulate.

After tax and penalties, PFIC tax rates can reach near or above 50% and worse still annual tax deferral can be removed causing very high tax rate each year. The deduction of losses can also be limited which increases the negative impact.  This has be contested many times over the past few years but the IRS always wins. These simple planning mistakes can reduce investment returns by more than 50% and are easily avoidable. It’s imperative to take US specialist advice if building an investment portfolio in Ireland or the UK.

Foreign / Non- US Pensions

Pension planning outside the USA can be a puzzling area for most US expats. Should they abstain or contribute to pensions? What vehicles should they invest through if they wish to build retirement savings? What happens to existing Irish or UK defined benefit or defined contribution occupational pensions if moving to the USA? What do I do with my 401k or IRA when I move/retire in Ireland or somewhere in Europe?

The overlapping systems can make this a minefield between growing your pension according to the Irish or European pension system & utilising prescribed pension vehicles such as Occupational pensions, self-administered pensions, BOB’s, ARF’s and PRSA’s but then overlapping FATCA, PFIC and W8-BEN reporting requirements. Many pension trustees will not take responsibility in this area and this adds additional reporting admin to the pension owner.

U.S. Retirement Accounts /Bespoke Planning

Continuing to contribute to an IRA, Roth IRA, 403 b or 401k account may not be possible or of any benefit.  Where and what you should contribute to depends on what the level of tax is in the country where you have become resident.

As Ireland is considered a high tax country versus the USA it can make sense to contribute to an Irish pension to alleviate Irish tax at the higher rate of 40%. This obviously depends on your personal situation, but we can help analyse the pros/cons when speaking to one of our specialist Certified Financial Planner’s CFP® & UK Chartered Financial Planners.

For Irish moving to the USA to work with major multi-nationals, it’s very important to review your Irish pensions to ensure you are not creating a tax timebomb. Many are unaware their defined benefit or contribution pensions from the likes of AIB, Bank of Ireland, Willis Towers Watson, Aon or other financial institutions could be taxed annually at penal rates.

FATCA & Common Reporting Standards (CRS) ensure the ultimate beneficial owners are identified and reported to annually across 100+ countries.

It is also worth considering whether a low tax country such as Portugal or Malta might be worth analysis for some clients looking to retire in the sunshine while moving between Ireland, UK and/or the US throughout the year. Each client is different and requires bespoke planning and solutions.

Inter-generational Estate Planning

This is one of the more interesting areas of US tax as U.S. citizens will always remain subject to U.S. estate tax or death tax as some call it. It is not necessarily the US tax and exemptions which are complex rather the overlap of tax in the country of residency and where the beneficiaries live.

I personally have family resident in the USA but parents living in Ireland. Irish revenue will look to tax resident beneficiaries under Irish Capital Acquisitions Tax rules even if the beneficiary has a US passport. Irish living in the US will be taxed in Ireland if inheriting anything from parents in Ireland. This can be penal if inheriting well in excess of the €335,000 Class A category threshold.

This is a complex area and kick’s up more questions than can be tackled in one article.

Simply put, it is best to review your circumstances with our team rather than fall into any tax quagmire. We work with specific US tax accountants in the US and Ireland who can help identify the best route forward.

Tax of holding US Shares

With the vast amount of US public listed companies in Ireland this area can catch Irish estate executors off guard. The US generally tax an estate whereas Ireland generally taxes the beneficiary not the estate. This can cause anomalies and unnecessary tax.

Employees of companies such as the global recognised Google, Facebook, Gilead Sciences, Intel, Microsoft, Symantec, Regeneron, Boston Scientific, Mercer, Accenture, Pfizer, Abbott to newer technology firms such as Dropbox or Hubspot. In most cases when Irish estates have an exposure to US Federal Estate Tax, it is because an Irish resident has worked for a US Multinational company and received shares as part of their compensation package.  There are c. 160,000 people in Ireland working for the c. 700 US firms, many of which offer share options to employees.

Under the Double Tax Agreement (DTA) such shares are deemed to as located in the US, giving the US primary taxing rights.  Holdings over $60,000 in value are likely taxable in the US.

The stock registrar of a US company is unlikely to release the shares to the personal representative of the Estate without being provided with IRS Form 5173 (Estate Tax Closing Document).

Where a US citizen is married to a Non-US citizen, this can cause a tax issue as spousal relief is likely not recognised and therefore federal tax can be applicable. Federal Estate Tax in the US can be as high as 40% so it’s worth planning to avoid these costly mistakes.

Route 66 or N17?

Navigating the Irish, UK, EU & US tax systems is fraught with difficulty for financial advisers never mind expats dealing with day to day issues such as jobs, housing, kids, schooling, new social circles etc.

Imperius Wealth has many years’ experience working with US and Irish expats all over the world and with specific detailed knowledge of the Irish, UK, French, Italian, Spanish and Portuguese retirement systems.

Many tax advisers will only be experienced with one jurisdiction so Imperius Wealth has built up a network of specialist tax consultants in London, Dublin, Madrid, Paris, New York, Boston and Washington DC that can help the most complex of situations. We work with US and Irish multi-nationals who frequently have senior personnel moving between the US & Europe. HR Managers can utilise us to enhance their service to management teams moving across international borders. Companies often pay vast sums to accountancy companies for advice much of which we can provide at far less cost to companies or direct clients.

While Imperius Wealth Ltd is authorised and regulated by Central Bank of Ireland we have a partner financial planning firm which is FINRA/SEC authorised in the USA with offices on the East coast. This allows us to give professional advice on financial solutions on both sides of the Atlantic to give you additional options when needed.

We believe we are one of very few Irish or International financial advice firms who can offer this level of expertise. We look forward to helping more and more US connected people throughout Ireland and across Europe.

Please contact Mike Shannon with any questions you have in this area and we can send you further details as necessary.