Expat US Tax Blogs

What legislative changes might be influencing tax refunds?

Several legislative changes could be influencing the decline in tax refund sizes:

Adjustment of Tax Brackets and Rates: The Tax Cuts and Jobs Act (TCJA) of 2017 adjusted tax brackets and rates, which continues to influence tax filings.
Increase in the Standard Deduction: The TCJA nearly doubled the standard deduction, meaning fewer taxpayers itemize deductions, which affects the size of their tax refunds.
Cap on State and Local Tax (SALT) Deductions: The $10,000 cap on deductions for state and local taxes came into effect with the TCJA.
Changes to Child Tax Credit and Earned Income Tax Credit: During the pandemic, credits like the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) were temporarily expanded. As these expansions phase out or revert to pre-pandemic levels, the size of refunds may decrease.
COVID-19 Related Legislation: Various COVID-19 relief measures, including stimulus payments and adjustments to unemployment benefits taxation, temporarily affected tax refunds. As these measures expire, taxpayers may notice differences in their refunds.

How are reduced refunds affecting household budgeting and financial planning?

Reduced refunds are significantly impacting household budgeting and financial planning. Households may need to revise their financial strategies, which could involve adjusting monthly budgets to accommodate lower-than-expected funds, delaying large purchases, or revising savings goals.

What do experts say about future tax seasons?

Experts from economics and tax planning fields predict that tax policies may continue to evolve in response to the economic impacts of the pandemic. This could involve more changes in tax laws to stimulate economic growth or address deficits. Additionally, increasing globalization may cause international economic trends to have a greater impact on domestic tax policies.

Should I hire a tax professional to help me with my refunds?

Yes, hiring a tax professional can be very beneficial. A skilled tax advisor can help identify deductions and credits that expats might not be aware of, which can significantly reduce taxable income and potentially increase the size of your refund.

Additionally, if there are errors in previous years’ tax returns or unfiled taxes, a tax professional can help address these issues, assist in filing amended returns, and negotiate with the IRS to resolve any potential disputes or penalties.

Always get professional advice from a US international tax specialist.

June 7 2024

How to claim US tax refunds from selling DVC in the UK?

Published on June 07, 2024
by Aya Takriti, EA

Aya Takriti, an IRS Enrolled Agent with 10 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in the Middle East.

Yes, you can claim it back from the IRS. British sellers of Disney Vacation Club (DVC) memberships are subject to IRS tax under FIRPTA regulations when they sell property in the US.

You can potentially get this tax back or reduce the amount owed by applying for a withholding certificate using IRS Form 8288-B before the sale or by filing a US tax return to claim a refund for overpayment.

What is Disney Vacation Club (DVC) and why is it popular among British investors?

Disney Vacation Club (DVC) is a timeshare program operated by Disney, offering ownership interests in resorts and properties. It promises magical vacations year after year, making it attractive to British investors.

The appeal lies in owning a part of the Disney experience and the potential for rental income and property value appreciation. When British nationals sell their DVC property, they encounter US tax regulations, specifically FIRPTA.

What is FIRPTA?

FIRPTA is a US tax law that taxes foreign persons selling US real property interests. Its goal is to ensure foreign investors pay US taxes on gains from selling US real estate, similar to US citizens and residents.

For foreign sellers, including British nationals, FIRPTA means that any gain from the sale of US real property is subject to US income tax. Typically, the buyer withholds 15% of the property’s sale price and pays it to the IRS as tax for the seller.

This withholding acts as an advance on the seller’s potential tax liability from the sale. However, the actual tax due may differ, requiring the seller to file a US tax return to reconcile the difference.

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Why does the IRS withhold 15% tax from non-US sellers on real estate transactions?

The IRS withholds a 15% tax from non-US sellers to ensure that taxes owed on the sale of US property by foreign individuals are collected. This withholding secures tax payment, given the challenge of collecting taxes from individuals who may not have other US tax obligations and may not reside in the US.

The withheld amount is provisional. Sellers can file a US tax return the following year to report the sale, calculate the actual tax due, and apply for a refund if the withheld amount exceeds their tax liability.

How do I reclaim withheld tax as a non-US citizen?

To reclaim tax withheld from the sale of US property as a non-US citizen, you must file IRS Form 8288-B and your Property Sale Contract with the IRS. You will also need an Individual Taxpayer Identification Number (ITIN) to complete Form 8288-B.

Steps to reclaim withheld tax:

Obtain an ITIN: Apply using Form W-7 if you do not have one.
Complete Form 8288-B: Fill out this form to apply for a withholding certificate.
Submit Property Sale Contract: Include the contract with your Form 8288-B submission.
File a US Tax Return: After the sale, file a US tax return to reconcile the actual tax liability and claim any refund if the withheld amount exceeds the tax due.

Why do British sellers need an ITIN when selling US property?

British sellers need an Individual Taxpayer Identification Number (ITIN) to comply with IRS requirements for reporting and paying taxes on US property sales. An ITIN is essential for non-US citizens who need to file a US tax return but are not eligible for a Social Security Number (SSN).

How do you apply for an ITIN?

To apply for an ITIN, you need to complete Form W-7 (Application for IRS Individual Taxpayer Identification Number). This form should be submitted along with your tax return (Form 1040-NR) and proof of identity documents.

Complete the ITIN application form.

What is Form 8288-B and how does it help?

Form 8288-B (Application for Withholding Certificate for Dispositions by Foreign Persons of US Real Property Interests) allows sellers to request a reduced withholding rate based on the estimated tax liability of the sale, instead of the standard 15% rate. This can reduce the amount of tax withheld at the time of sale.

Can the IRS refund the tax to a UK bank account?

No, the IRS cannot send funds directly to UK bank accounts. If you don’t have a US bank account, the IRS will mail a cheque to your UK address. However, many UK banks no longer process US government cheques. It’s advisable to contact your bank to confirm your options.

If you can’t find a UK bank to process your cheque, consider opening an account with Wise. Within your Wise account, you can open a US dollar savings account with a US Routing Number and US Account Number.

Open a Wise account here: Wise

Why should British sellers consider professional tax advice when selling DVC memberships?

FIRPTA regulations are complex and may have various exceptions and conditions. A tax professional can help you understand these rules and optimize your tax position.

Tax advisors can identify strategies to minimize FIRPTA withholding and potentially increase net proceeds from the sale. They can assist in preparing and filing Form 8288-B, advise on the timing of the application, and ensure all necessary documentation is accurate.

Additionally, incorrect reporting or failure to comply with FIRPTA requirements can result in penalties. A tax advisor can help ensure compliance and avoid costly mistakes.

May 31 2024

FinCEN Form 114

Published on May 31, 2024
by Grace Lorraine Angeles

Grace Lorraine, an IRS Enrolled Agent and CPA with 13 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working abroad.

FinCEN Form 114 aka FBAR, what does it do?

FinCEN Form 114, also known as the FBAR (Foreign Bank Account Report), is a form that US citizens and green card holders must file if they own foreign financial accounts exceeding $10,000 at any point during the calendar year.

This includes joint accounts, business accounts, and accounts over which you have signing authority.

When are you required to file FinCEN 114?

If you are a US citizen or green card holder and the total value of your foreign financial accounts exceeds $10,000 at any time during the calendar year, you must file FinCEN Form 114. The form is available on the official Financial Crimes Enforcement Network website.

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What is the difference between FinCEN 114 and FBAR?

There is no difference; FinCEN 114 is the official name of the form used to file an FBAR, which stands for Foreign Bank and Financial Accounts Report.

What types of accounts need to be reported on the FBAR?

Accounts that need to be reported include bank accounts, securities accounts, and other financial accounts outside the US if the total value exceeds $10,000 during the calendar year.

Consulting a tax professional experienced in expatriate tax matters is advisable to ensure you meet your reporting requirements.

When is the FBAR due?

The FBAR is due annually by April 15, with an automatic extension to October 15 if needed. No request for an extension is required.

How do you file FinCEN Form 114?

To file FinCEN Form 114, use the BSA E-Filing System online here.

What happens if you don’t file the FBAR?

Failing to file the FBAR when required can result in significant penalties. Non-willful violations can incur a penalty of up to $10,000 (subject to inflation) per violation, while willful violations can lead to a penalty of $100,000 (subject to inflation) or 50% of the account balances, whichever is greater.

Negligent violations by financial institutions and non-financial trades or businesses can also result in penalties.

Is there a way to catch up on unfiled FBARs if you weren’t aware of the requirement?

Yes, the IRS provides options such as the Delinquent FBAR Submission Procedures and the IRS Streamlined Procedure. These programs allow taxpayers to file late FBARs without penalty if they report all taxable income associated with those accounts.

Do you need to report accounts on the FBAR if you only have signing authority and no financial interest in the account?

Yes, individuals with signing authority over but no financial interest in foreign financial accounts are still required to report these accounts on the FBAR to ensure compliance with the Bank Secrecy Act.

Are there exceptions to the FBAR filing requirement?

Yes, there are exceptions. Certain accounts are exempt from reporting, such as those owned by a governmental entity or an international financial institution.

Participants in certain retirement plans might not have to report their interests in the plan. Beneficiaries of trusts who don’t control the trust’s assets may also be exempt under specific conditions.

Consulting a tax professional is advisable to understand if your situation qualifies for an exemption. By ensuring you understand and comply with the FBAR requirements, you can avoid significant penalties and ensure your foreign financial accounts are properly reported.

May 22 2024

Substituted 3520-A

Published on May 22, 2024
by Aya Takriti, EA

What is a Substituted Form 3520-A?

A Substituted Form 3520-A provides an alternative filing option for US taxpayers with foreign trusts, aligning the filing deadline with the individual tax return due date. This adjustment means the substituted form can be filed by April 15, automatically extended to June 15 for US expatriates, with a further extension available to October 15 upon request.

This change simplifies the compliance process by synchronizing deadlines and helps avoid the substantial penalties associated with late submissions of the standard Form 3520-A.

What does Form 3520-A entail?

Form 3520-A is required for US persons who are treated as owners of any part of a foreign trust. The form provides the IRS with details about the trust, its US beneficiaries, and the trust’s financial activities.

It’s an essential compliance document for managing foreign trusts, including pension plans from countries like the UK, ensuring that all relevant activities are transparently reported to US tax authorities.

How should US owners of foreign trusts, like UK pensions, manage their Form 3520-A filing obligations?

The form is due by March 15 annually, but an extension until September 15 can be requested using Form 7004. Consider filing a Substituted Form 3520-A alongside your Form 1040 to ease the process.

This adjustment allows for a unified April 15 deadline, extendable to October 15, simplifying management and ensuring compliance. Given the complexity and potential penalties for errors, consulting a tax professional specialized in foreign trusts is advisable.

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How do I obtain an EIN for my UK pension?

Securing an Employer Identification Number (EIN) for your UK pension involves several steps:

Prepare: Gather your annual pension statement, which provides essential details about your pension.
Call the IRS: Contact their international phone line at +1 267 941 1099 between 6 AM and 11 PM EST.
Provide Trust Information: You must name your trust uniquely; for instance, using your pension provider’s name and initials.
Verification: Answer verification questions about your trust during the call.
Registration: Follow the IRS representative’s instructions to register and receive your EIN immediately during the call.
Duration: Expect the call to take around 30 minutes.

Can I complete Form 3520-A on my own?

While it’s possible to fill out Form 3520-A independently, it involves details that must adhere to IRS regulations for foreign trusts. Here’s how to approach it if you decide to DIY:

Download the Form: Access the latest version of Form 3520-A from the IRS website to ensure compliance with current tax laws.
Collect Necessary Details: You’ll need comprehensive information about the trust, such as its name, address, and tax identification number, along with the trust’s financial statements including income and distributions.
Complete the Trustee’s Section: Ensure the sections regarding the trust’s financial activities are accurately filled out, whether by you or the trustee.
Fill Out Your Information: As the US owner, input your personal details and your relationship with the trust correctly on the form.
Attach Supporting Documents: Include all required statements that detail the trust’s financial activities, distributions, and beneficiaries.
Review and Sign: Double-check your entries for any errors, and sign, and date the form.
Submission: Follow the IRS instructions for submission deadlines and addresses.

Is it possible to extend the deadline for filing Form 3520-A?

Yes, an extension is possible. You can apply for a six-month extension by filing Form 7004 by the 15th day of the 3rd month after the end of the trust’s tax year, using the trust’s EIN.

What are the consequences of errors on Form 3520-A?

Mistakes on Form 3520-A can lead to:

Penalties: Errors may trigger penalties from the IRS, potentially significant depending on the mistake.
Audits: Inaccuracies can also prompt IRS audits, leading to more extensive scrutiny of your tax affairs.
Corrective Measures: If you spot an error post-submission, promptly file an amended form with a detailed explanation of the error and its rectification.

Should I consult a professional for help with Form 3520-A?

Definitely. Due to the complexities involved with foreign trusts, it’s advisable to seek guidance from a tax professional who specializes in international tax law. They can ensure your filings are accurate, compliant, and strategically sound to mitigate any potential liabilities. Their expertise is crucial in navigating the intricate requirements of IRS forms and international tax obligations effectively.

May 20 2024

Why does the tax treaty between the US and Canada exist?

Published on May 20, 2024
by Aya Takriti

Aya Takriti, an IRS Enrolled Agent with 10 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in the Middle East. Aya speaks fluent Arabic and English and the odd word of German and Spanish if you catch her on a good day.

Why was the tax treaty between the US and Canada established?

The US-Canada tax treaty was created to prevent double taxation for individuals and businesses that operate in both countries. This agreement ensures that income earned in one country by residents of the other is not taxed by both jurisdictions, lessening the tax burden for cross-border workers and enterprises.

You can explore the detailed provisions of this treaty on the official IRS website: Canada Tax Treaty Documents.

How can I claim benefits under the US/Canada income tax treaty?

Understand Applicable Provisions: Start by understanding which treaty provisions apply to your specific situation, including rules related to dual residency, earned income, pensions, and investments.
Filing the Correct Forms: To claim treaty benefits on your US tax return, file IRS Form 8833, Treaty-Based Return Position Disclosure, alongside your regular tax filing to detail the treaty benefits you are applying.
Maintain Documentation: Keep thorough records and necessary documents from Canada, such as proof of tax residency or income statements.
Seek Professional Advice: The complexities of the US-Canada Tax Treaty mean it is wise to consult with a tax professional who specializes in international tax laws to ensure accurate application of the treaty to your taxes.

Do US dual citizens living in Canada have to pay taxes to both countries?

As a dual citizen, your global income is taxable by the US, but the tax treaty allows you to mitigate double taxation. Both the US and Canada offer credits for taxes paid to the other country, which can be applied to reduce your tax obligations.

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What are the mechanisms to prevent double taxation under the treaty?

The treaty provides several mechanisms to alleviate double taxation:

Foreign Tax Credits (FTC): This allows taxes paid in one country to be credited against the tax liability in the other country, effectively reducing double taxation on the same income.
Foreign-Earned Income Exclusion (FEIE): For 2023, US citizens and resident aliens can exclude up to $120,000 of foreign-earned income from their US taxable income, helping reduce the US tax burden for those earning income in Canada.
Foreign Housing Exclusion (FHE): US expats can exclude or deduct certain foreign housing expenses from their taxable income, with the amount varying based on location and actual expenses.

What if there is a dispute over tax residency?

In cases where tax residency isn’t clear, “tie-breaker” rules outlined in the treaty are used to determine a taxpayer’s residency status for tax purposes. These rules help resolve scenarios where a person might otherwise be considered a resident of both countries, ensuring that taxation is fair and adheres to the established treaty framework.

How does the treaty address tax residency conflicts?

The US-Canada tax treaty provides a series of “tie-breaker” rules to determine tax residency when an individual qualifies as a resident in both countries:

Permanent Home: Priority is given to where the individual has a permanent home.
Center of Vital Interests: If a permanent home exists in both countries, the tie is broken based on where the person’s economic and personal ties are stronger.
Habitual Abode: If it’s still unclear, the decision is based on where the individual spends more time.
Nationality: If the above criteria do not resolve the issue, the person’s nationality is considered.
Mutual Agreement Procedure: As a final step, tax authorities from both countries will collaborate to decide the residency status.

Why am I subject to US taxes while living in Canada?

The US employs a citizen-based taxation system, meaning that all US citizens and permanent residents must report and potentially pay taxes on their global income, regardless of where they live.

Does the treaty provide specific benefits for retirement savings?

Yes, the treaty offers several advantages for retirement planning:

Tax-Deferred Growth: Investments within vehicles like Canadian RRSPs grow tax-deferred for US taxpayers until distributions begin.
Deductions for Contributions: Contributions to recognized retirement plans can be deductible in the taxpayer’s resident country. This includes deductions for RRSP contributions on Canadian returns for US citizens residing in Canada.

What is the ‘Savings Clause’ in the US-Canada tax treaty?

The ‘Savings Clause’ is a provision that allows each country to tax its own citizens and residents as if the treaty did not exist, with some exceptions:

General Rule: This clause primarily ensures that US citizens living in Canada remain subject to US tax on their global income, according to US laws.
Exceptions: The treaty allows certain exceptions where specific income types, like pensions and social security benefits, can still enjoy treaty benefits despite this clause.

May 15 2024

2024 FBAR Penalties

Published on May 15, 2024
by Grace Lorraine Angeles

What’s changed in FBAR penalties for 2024?

Significant updates have been made to the FBAR (Foreign Bank and Financial Accounts Report) penalties from 2023 to 2024, reflecting recent judicial decisions and policy adjustments.

Key updates include:

Standardization of Penalties: The IRS now generally imposes a standard penalty of $10,000 per violation for non-willful failures to file an FBAR. This amount is subject to inflation adjustments and aims to unify the penalty assessments across different cases.
Per-Report Basis Penalty: Following a judicial ruling, the penalty for non-willful FBAR violations now applies per report, rather than per account. This change limits the maximum penalty to $10,000 per report, significantly reducing the financial burden for those with multiple foreign accounts.
Removal of Mitigation Guidelines: In 2024, the IRS removed previously established mitigation guidelines that examiners used to adjust penalties. Now, IRS examiners have broader discretion to determine penalties, potentially leading to varied penalty outcomes in non-willful cases.

What is the FBAR?

The Foreign Bank and Financial Accounts Report (FBAR) is mandatory for US persons, including expatriates, who have financial interests in or signature authority over foreign financial accounts. The filing requirement kicks in if the aggregate value of these accounts exceeds $10,000 at any point during the calendar year.

Take a look at our FBAR article to learn more about the topic.
(https://www.expatustax.com/fbar-instructions/)

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What impact did the Supreme Court’s Bittner decision have on FBAR penalties?

The Supreme Court’s ruling in the Bittner case marked a pivotal shift in the penalty assessment for non-willful FBAR violations:

Shift to Per-Report Penalty: The decision moved away from imposing penalties on a per-account basis to a per-report basis. This adjustment means that the total penalties for non-willful violations are capped at $10,000 per annual report, regardless of the number of accounts left unreported.
Financial Relief: This ruling offers significant financial relief to individuals who may have multiple unreported foreign accounts, as it caps the potential fines to a maximum of $10,000 per year, rather than multiplying penalties by the number of unreported accounts.

What’s new in the 2024 FBAR penalty guidelines?

In 2024, the IRS simplified the penalty structure for non-willful FBAR violations. They now recommend a standardized penalty of US$10,000 per violation, adjusted for inflation, in an effort to make enforcement more consistent across cases.

How Do the 2023 and 2024 FBAR Penalties Compare?

2023: Penalties were applied per account, which could accumulate depending on the number of unreported accounts.
2024: The penalty is streamlined to a flat rate of up to US$10,000 per report, adjusted for inflation, regardless of the number of accounts involved.

What changes were made to penalty mitigation guidelines in 2024?

The IRS has removed the detailed mitigation guidelines from the Internal Revenue Manual (IRM) that previously helped IRS examiners reduce penalties for FBAR violations based on certain criteria, such as taxpayer cooperation and compliance history.

Before 2024, structured mitigation guidelines provided a framework for reducing penalties.

However, 2024 and beyond, penalties are now subject to the discretion of IRS examiners without structured guidelines, potentially leading to less predictability in their application.

How can taxpayers ensure compliance with FBAR requirements?

Monitor Foreign Accounts: Keep detailed records of all foreign accounts throughout the year to ensure all are accounted for when preparing to file FBAR.
Understand the Reporting Thresholds: Be aware that you must file an FBAR if the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the calendar year.
File Electronically: Submit your FBAR electronically using FinCEN’s BSA E-Filing System. The standard deadline is April 15, but an automatic extension allows filings until October 15 without additional paperwork.
Seek Professional Advice: Consulting with a tax professional experienced in international taxation can help navigate the complexities of FBAR compliance, especially if you have extensive foreign holdings or if the rules seem complex.

May 6 2024

Am I Taxed on Foreign Dividends?

Published on May 06, 2024
by Grace Lorraine Angeles

Do US expats get their foreign dividends taxed?

Yes, it does. As a US person, which includes citizens, dual nationals, Green Card holders, resident aliens, and domestic legal entities, your worldwide income is subject to US taxation. This global income includes dividends from companies based outside of the United States.

How are foreign dividends different from domestic ones?

Foreign dividends are payments you receive from companies based outside the United States. They are considered part of your global income and are taxed by the US, irrespective of the tax policies of the country where the dividend originates.

Are foreign dividends taxable in the United States?

Yes. All income earned through foreign dividends must be reported to the IRS and is potentially taxable in the US.

However, the US tax system offers mechanisms like the Foreign Tax Credit (FTC) to prevent double taxation—where you would pay taxes on the same income both in the source country and the US. This credit allows you to reduce your US tax liability by the amount of tax already paid to the foreign country.

Can tax treaties reduce taxes on foreign dividends for US expats?

Yes, the US has established tax treaties with numerous countries that can potentially reduce or even eliminate the withholding tax on dividends for US residents. These treaties aim to lower the tax rates imposed by the foreign country, making it easier for US expats to manage their international dividend income without facing excessive taxation.

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Are there any tax breaks for foreign dividend income?

While the Foreign Earned Income Exclusion (FEIE) does not apply to passive income such as dividends, US taxpayers have other options. Beyond claiming the Foreign Tax Credit, which offsets taxes paid abroad, you can opt to deduct foreign income taxes on your US tax return using Schedule A as an itemized deduction.

Choosing between a deduction and a credit typically depends on which one provides a greater tax benefit, which is often influenced by your overall income and tax situation. It’s recommended to consult a tax professional to clarify which option is more advantageous for your specific circumstances.

Must I report foreign dividends on my US tax return?

Absolutely. If you are a US citizen or resident alien, you must include all foreign dividends as part of your global income when filing your taxes with the Internal Revenue Service (IRS). This holds true regardless of whether these dividends are reinvested or paid out.

Correct reporting involves potentially filling out Form 1040 or 1040-SR and Schedule B, depending on the dividend amount and source.

What are the risks of not reporting foreign dividends?

Not reporting foreign dividends can lead to severe repercussions, including:

Interest and Penalties: These may accrue on the due taxes from the original deadline.
Increased IRS Scrutiny: Omitting foreign dividends can trigger an audit, leading to a detailed review of your tax returns and associated financial records.
Legal Consequences: In severe cases, particularly if non-reporting is seen as fraudulent, you might face criminal charges, resulting in fines or even imprisonment.

How can I stay compliant with US tax laws on foreign dividends?

Understand Your Tax Obligations: Stay informed about IRS rules for reporting foreign income. Regularly visit the IRS website and review official publications for current guidelines.
Maintain Accurate Records: Keep detailed accounts of all foreign investments and income, including dividends, regardless of whether they were taxed in the source country or repatriated.
Maximize Credits and Deductions: Utilize the Foreign Tax Credit and familiarize yourself with how tax treaties between the US and the dividend-source country might benefit you.
Seek Professional Advice: Consulting with a tax professional who specializes in expatriate taxation is advisable. They can provide tailored advice, ensure accurate tax return preparation, and help with international tax regulations.

April 30 2024

Workplace Pensions

Published on April 30, 2024
by Rose-ann De Villa, EA, CPA

Rose-ann De Villa, an IRS Enrolled Agent and CPA with 12 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in the UK.

Rose-ann has also talked about starting a business in the UK as a U.S. expat

Rose-ann has been mentioned in the Daily Express UK news wherein she talked about Stimulus payments and Child Tax Credit refunds for U.S. expats in the UK.

As a US citizen in the UK, should I choose a contract-based or trust-based pension?

If you have a choice, it’s almost always best to choose a contract-based pension. That’s not to say trust-based pensions are bad, but they are more restrictive for US citizens and Green Card holders.

Why is a UK contract-based pension better for a US citizen?

A contract-based pension allows you to pay more money into your pension than your employer does without causing US tax issues. Taxpayers in the UK can contribute tens of thousands of pounds every year to their pensions tax-free. It’s a fantastic way to save for retirement.

In the UK, individuals can contribute a significant amount annually to their pensions tax-free. However, with a trust-based pension, US citizens must ensure their contributions do not exceed those of their employer.

If they do, they face a Foreign Trust Filing requirement with the IRS, which can be costly and come with severe penalties for non-compliance. This issue does not happen with contract-based pensions.

How do I know if my UK pension is contract-based or trust-based?

Contract-based pensions are individual agreements between you and the pension provider, often an insurance company.

Trust-based pensions, on the other hand, are set up by employers and are governed by a trust. This means they are managed by trustees who are legally obligated to act in the members’ best interests.

Here’s a simplified table to help you understand the key differences between contract-based and trust-based UK pensions:

Aspect	Contract-based Pensions	Trust-based Pensions
Regulatory Body	Financial Conduct Authority (FCA)	The Pension Regulator
Management	Managed by a pension provider’s investment team	Managed by a board of trustees who make decisions about the pension
Responsibility	The provider handles investment choices and member communications	Trustees oversee all aspects, including investment and administration
Governance	Subject to specific investment rules set by the FCA	Governed by trustees with a duty to act in the best interests of scheme members
Type of Scheme	Includes personal pensions like group personal pensions and SIPPs	Includes occupational schemes, often part of larger master trusts

In short, the primary distinction lies in who oversees your pension. Contract-based pensions offer individual control but require you to navigate your investment choices, often without direct assistance. Trust-based pensions are overseen by trustees who share the responsibility for the scheme’s performance and adherence to regulations, potentially offering a layer of protection and guidance absent in contract-based schemes.

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Can I choose where my pension money goes?

It depends on the contact-based pension you have. Some account types allow you to control your investments to a degree. The type of pension plan you opt for influences how much say you have over where your pension money is invested.

In a contract-based pension, you may have a say in where your money is invested to a degree and how conservative or aggressive you want to be. These plans often come with a range of investment options, from stocks and bonds to mutual funds. Most pension account holders leave the investment decisions to their pension provider or turn their pension account into a SIPP so they can take complete control.

Trust-based pensions don’t typically offer the same direct control over individual investment choices. Instead, trustees are tasked with making investment decisions on behalf of all members. However, you may have input into the broader investment strategies or choice of trustees, who are obligated to act in your best interest.

What costs more? Contract or trust-based pensions?

It depends. When it comes to costs, both types of pensions carry fees, but how they’re structured and the transparency of those fees can vary significantly between contract-based and trust-based plans.

Contract-based pensions often have clearer fee structures, with charges for management, administration, and investment options. These can include annual management charges (AMCs) and additional fees for specific funds. The costs are directly linked to the choices you make, providing some level of control over the fees you pay.

Trust-based pensions might offer better value for money, especially for larger schemes benefiting from economies of scale. The fees in trust-based pensions can be lower per individual, as costs are spread out across all members. However, the fee structure might not be as transparent, with administrative and investment costs often bundled together.

What should I think about when picking a pension?

Choosing the best pension option for your workforce involves considering several key factors:

Investment Options: Assess the variety and performance of investment options offered by the pension. A diverse range of options can cater to different risk appetites among your employees.
Cost and Fees: Understand the fee structure of each pension type. Lower fees can significantly impact the pension pot’s growth over time.
Flexibility and Portability: Consider how easy it is for employees to manage their pensions, including the ability to transfer their pension if they change jobs.
Tax Implications: Analyze how each pension scheme affects your and your employees’ tax situations. Opt for structures that offer the most tax-efficient benefits for both parties.
Employer Obligations: Evaluate your responsibilities, including contributions, administrative tasks, and legal obligations under each pension scheme.
Employee Engagement: Choose a pension scheme that is easy for your employees to understand and engage with, enhancing their retirement planning experience.
Professional Advice: It’s highly advised to get the expertise of a tax professional, as they can provide valuable insights into how your pension choice fits your financial future, ensuring you make the most of your retirement savings.

April 25 2024

How do I include my UK pension on my US tax return?

Published on April 25, 2024
by Grace Lorraine Angeles

Your UK pension must be reported as foreign income on your US tax return, which means you’ll use Form 1040 to report the income. If you want to claim a Foreign Tax Credit for the taxes you’ve paid in the UK, you might also need to fill out Form 1116.

Is my UK State Pension considered taxable by the US?

No, the UK State Pension is not required to be included on your US tax return.

However, other pensions like those provided by employers, private pensions, and Self-Invested Personal Pensions (SIPPs) need to be reported on your US tax return and included in your FBAR filings as foreign financial accounts.

What impact does the US-UK Tax Treaty have on how my UK pension is taxed?

The US-UK Tax Treaty helps prevent double taxation of your UK pension and offers a “reciprocal pension exemption,” meaning it acknowledges the tax-exempt status of certain pension distributions in one country by the other.

However, it’s important to note that the 25% tax-free lump sum withdrawal that’s allowed from UK personal pensions is taxed by the IRS, which is something many US citizens and Green Card holders may not realize.

How can the US-UK tax treaty benefit American expats with UK pensions?

The treaty primarily aims to protect US expats from double taxation on their income, including pensions, by clarifying which country has the rights to tax different types of income.

In terms of pensions, this usually means the country where you reside gets to tax the pension, but you might be able to claim tax relief or credits in the other country to avoid being taxed twice.

Understanding the specifics of this treaty can be key to optimizing the benefits of your cross-border income and pensions. It’s wise to review the treaty carefully and talk to a tax professional for personalized advice.

I want to know more about US taxes abroad

Must I file US Foreign Trust Returns for my UK pension?

Whether you need to file Forms 3520 and 3520-A for your UK pension depends on the type of pension you have.

Trust-based pensions, especially where the account holder’s contributions exceed those of their employer, generally require reporting through these forms because of the pension’s structure and the nature of the contributions.

NEST is an example of a trust-based pension scheme in the UK that would necessitate such reporting.

However, if your pension is contract-based, like those offered by Aviva, you’re not required to file Foreign Trust returns with the IRS, regardless of the contribution amounts.

The distinction between employer and employee contributions, and whether your pension is trust-based or contract-based, is crucial in determining your filing obligations.

For accurate handling of your pension reporting and to make sure you’re meeting all legal requirements while potentially reducing your tax liabilities, consulting with a tax expert familiar with both US and UK tax laws is strongly recommended.

What sets contract-based pensions apart from trust-based pensions?

Contract-based pensions are personal agreements made directly with pension providers, where you have the autonomy to make investment choices.

In contrast, trust-based pensions are managed by trustees who are responsible for investment decisions on behalf of all the plan members.

The key distinction revolves around the control over investment decisions and how the pension is managed, which also affects their tax reporting in the US. For detailed information, speaking with a tax professional is recommended.

When is the deadline to file my US Foreign Trust Return?

You need to submit Forms 3520 and 3520-A by April 15th, although you can request an extension until October 15th.

Can you explain the different types of UK pensions?

UK pensions fall into three primary categories:

State Pension: This is a government-issued payment you qualify for upon reaching the State Pension age, with the amount based on your National Insurance contributions.
Workplace Pensions: Set up by employers, these include defined benefit schemes, which promise a set income upon retirement based on salary and service length, and defined contribution schemes, where both you and your employer contribute to a pension that’s invested, with the retirement income depending on how much was contributed and how investments perform.
Personal and Stakeholder Pensions: Private pensions you arrange, including Self-Invested Personal Pensions (SIPPs) that offer a broad range of investment options, stakeholder pensions with low entry contributions and fixed charges, and personal pensions typically provided by insurance companies.

How does the UK tax pensions?

State Pension: It’s taxable as income, but National Insurance contributions are not required.

Workplace and Personal Pensions: Contributions are made pre-tax up to certain limits. For defined benefit schemes, the retirement income is taxable. Defined contribution pensions can be accessed from age 55 (which will increase to 57 from 2028), with 25% available as a tax-free lump sum and the rest being taxable as income upon withdrawal. However, it’s important to note that the IRS taxes the 25% tax-free lump sum from UK pensions.

What IRS forms do I need for reporting UK and other foreign pensions?

When dealing with UK and foreign pensions, you might encounter several IRS forms:

Form 8938: Necessary if your foreign financial assets, including pensions, exceed specific thresholds. Attach it to your Form 1040, due April 15, with extension options available.
Form 3520: Applies to interactions with foreign trusts or receiving substantial gifts from foreign entities, relevant to some pension arrangements. It’s due alongside your income tax return by April 15, with an extension to October 15.
Form 3520-A: Offers details about the foreign trust, its beneficiaries in the US, and any Americans considered owners of the trust under grantor trust rules. The deadline is March 15, with an extension to September 15 if requested by March 15. Late filings can result in penalties.
Form 1116: For claiming a Foreign Tax Credit to mitigate double taxation on income, including pensions. File with your Form 1040 by April 15, with extensions possible.
FinCEN Form 114 (FBAR): Report balances of employer-pensions, personal pensions, and SIPPs on your FBAR. The filing deadline is April 15, with an automatic extension to October 15.

Navigating the US-UK tax treaty can potentially offer advantages, like favorable tax treatment for pension distributions. Consulting with a tax expert familiar with these nuances is crucial for ensuring compliance and optimizing your tax responsibilities.

Is it possible to exclude UK pension income from US taxes using the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion (FEIE) is not applicable to pension income. Since UK pensions are considered “unearned income,” they do not qualify for exclusion under the FEIE, which is typically reserved for wages, salaries, or professional fees.

Can medical expenses paid from my UK State Pension be deducted?

You do not report your UK State Pension income on your US tax return, so there’s no need to consider deductions for medical expenses paid from it.

April 12 2024

Can I get a Registered Retirement Savings Plan as a US expat?

Published on April 12, 2024
by Deborshi Choudhury, EA

Deborshi Choudhury, an IRS Enrolled Agent with 16 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in the UAE and Canada.

Can US expats invest in RRSPs while living abroad?

Yes, US expats residing in Canada have the opportunity to invest in Registered Retirement Savings Plans (RRSPs). This allows them to enjoy tax-deferred growth within Canada and may also benefit from the Canada-US tax treaty.

What exactly is an RRSP?

An RRSP is an investment vehicle in Canada designed primarily for saving toward retirement. It offers tax-deferred growth, meaning both Canadians and US expats in Canada can save for their retirement more effectively. Contributions to an RRSP may lower your taxable income, offering immediate tax benefits, while the earnings in the account grow without incurring taxes until they are withdrawn.

How does an RRSP benefit me?

Investing in an RRSP can lower your taxable income today, potentially putting you in a lower tax bracket and offering an immediate tax advantage. Plus, the tax-deferred growth on your investments within the RRSP means you can build up your retirement savings efficiently. When you retire and start withdrawing these funds, they are taxed as income at your current rate, which is usually lower than during your working years.

For detailed guidance, especially for US expats, consulting with tax professionals on Expat Tax Online could provide more specific insights and advice suited to your circumstances.

Is it possible for a US citizen to invest in an RRSP from abroad?

Absolutely, US citizens can continue to contribute to or open new RRSP accounts while living outside Canada, as long as they earn income that is taxable in Canada.

However, it’s crucial to understand the tax implications in both countries. Seeking advice from tax experts who specialize in cross-border taxation is advisable, as tax treaties between Canada and the US will significantly influence how your investments and income are taxed.

I want to know more about US taxes abroad

What investment choices do I have within an RRSP?

RRSPs allow for a variety of investment options, including:

Mutual Funds
Stocks
Bonds
Exchange Traded Funds (ETFs)
Guaranteed Investment Certificates (GICs)

When can I start contributing to an RRSP?

You’re eligible to contribute to an RRSP as soon as you have an income and file a tax return in Canada, continuing until the end of the year in which you turn 71.

What are the key advantages of putting money into an RRSP?

Investing in an RRSP presents multiple benefits:

Tax-deferred growth lets your investments grow tax-free until you withdraw them.
Tax deductions since contributions reduce your taxable income.
Helps in building a retirement fund.
Income splitting could provide tax advantages by sharing retirement income with your spouse.
For estate planning, RRSPs can be transferred to a spouse tax-free upon death.

Engaging with a financial advisor who has expertise in RRSP investments is highly recommended. They can offer insights and personalized advice, ensuring you make the most of your investment.

When is it possible to take money out of an RRSP?

You can start taking money out of your RRSP at any time, provided your plan isn’t locked. However, you must withdraw all funds by the end of the year you turn 71, with taxes applied to each withdrawal.

How do you get started with an RRSP?

To begin with an RRSP, you’ll need to pick a provider, understand the available investment choices, and make regular contributions. Getting advice from a financial advisor is a great move to ensure you’re setting up your RRSP correctly and making the most of your retirement savings.

Can you move your RRSP to someone else?

RRSPs cannot be transferred to another person directly, except to a spouse under certain circumstances like a divorce or legal separation.

Form T2220 is required for transferring funds from an RRSP, RRIF, PRPP, or SPP to another similar plan due to the end of a marriage or common-law partnership.

Typically, the RRSP stays in the original holder’s name until it’s turned into a retirement income or withdrawn.

How can I receive income from my RRSP?

To start receiving income from your RRSP, you can convert it into a Registered Retirement Income Fund (RRIF) or buy an annuity. This change should happen by the end of the year when you turn 71. Your choice between a RRIF or an annuity will dictate the way you receive income and its taxation.

What happens with an RRSP after the holder passes away?

If the RRSP holder passes away, the account’s value is treated as income on their final tax return unless the RRSP is passed directly to a surviving spouse or common-law partner. This transfer allows the spouse or partner to avoid immediate taxes under specific conditions.

This transfer needs to be finalized by December 31 of the year following the holder’s death, with certain rules applying to the surviving spouse or partner. For a full understanding of these conditions and related tax implications, it’s wise to consult with a financial advisor.