Foreign owners of U.S. real estate and stocks may face estate tax issues

Individuals outside the United States own billions of dollars worth of U.S. real estate and stocks such as Apple, Amazon, Netflix and Tesla. What most of these investors don’t realize is that owning these assets exposes them to possible U.S. estate tax liability. In short, the estate of any non-U.S. person with U.S. situs assets (including both U.S. real property and stock of U.S. listed companies) will be subject to U.S. estate tax if the value of the assets exceeds $60,000 at the time of death.

If the stocks are held in a U.S. financial institution, they will typically require proof of estate tax compliance before releasing the shares to the heirs of the estate. And many non-U.S. brokerages are becoming aware of this situation and are also requiring proof of U.S. tax compliance. Advanced planning can often be used to mitigate this situation. Whether you want to plan for the future or need assistance with your current situation, we can help.

Green Card holders are subject to U.S. tax and reporting requirements

Winning the Green Card lottery can seem like a great stroke of luck until you find out about the income tax and financial reporting requirements that come with it. No matter where you live, Green Card holders are treated just like U.S. citizens when it comes to matters of taxation but proper planning can help to reduce the impact. Especially if you plan to move to the U.S., timely planning before activating your Green Card is absolutely critical and can result in tax savings of many thousands of dollars. Get in touch with us and let us help.

Foreign owners of U.S. LLC’s are no longer anonymous

As of tax year 2017, any non-U.S. person that wholly owns an LLC will likely be required to file Form 5472 to report their ownership and certain financial transactions with the LLC. This rule has been instituted, in part, to enhance U.S. compliance with international standards on information exchanges. Failure to comply with the filing rules can result in an IRS penalty of $10,000. If you have a U.S. LLC we can help to analyze your situation, inform you about potential issues and help with any required reporting. We can also assist you in setting up an LLC and taking care of the yearly paperwork.

Choose your optimal filing status and maximize your deductions

If you are married to a non-American and/or have a child with U.S. citizenship you may be able to choose between several filing statuses and claim them as dependents, optimizing your U.S. tax rate and increasing your deductions. Many tax preparers are completely unaware of special rules that apply to Americans abroad so make sure that your preparer is well informed or come have a chat with us.

Considering giving up your U.S. citizenship?

Ensure your tax and reporting obligations are met before expatriating. To complete your final expatriation tax return you must certify to the IRS that you have complied with all of your tax reporting obligations for the previous five years. If you have been filing tax returns that you, yourself, prepared or that were prepared by someone who did not have an expertise in international tax issues, we recommend a thorough review of your past filings to ensure that everything is in order. This should be done before you undertake the steps to expatriate. And if you have already expatriated, remember that an Expatriation Tax Return must be filed in order to finalize your U.S. tax situation.

Your children may also be U.S. citizens

It comes as a surprise to many Americans living abroad that their children are likely also U.S. citizens, even if those children have never been to the U.S. or acquired a U.S. passport or social security number. The rule is this: if your child was born after November 13, 1986 and you resided in the U.S. for at least 5 years, at least two of which were after the age of 14, then your child automatically acquires U.S. citizenship and is subject to the same tax and FBAR filing requirements as any other American. Most young children won't have enough income to require reporting but depending on their level of assets they may need to file an FBAR. Please find further information in our flyer «Child Born Abroad».

Think twice before making additional contributions to your 2nd or 3rd Pillar accounts

Additional contributions to your Swiss 2nd and 3rd Pillar pension accounts may lower your current Swiss tax burden and increase your retirement savings, however you cannot deduct these contributions from your U.S. taxable income. Being subject to U.S. taxes in Switzerland can present unique challenges as these pension accounts are considered “non-qualified” pension plans by the IRS. The unintended result of additional contributions may be that lower Swiss taxes increase your U.S. taxes because you will have less Swiss tax to claim as a foreign tax credit on the U.S. side. A possible alternative may be to invest in a U.S.-based IRA account. Careful retirement planning should take both your Swiss and U.S. situation into account.

Don’t purchase foreign investment funds (PFIC’s)

We commonly discover that our clients own non-U.S. investment funds – such as Swiss “Fonds” and other foreign-issued funds (ETF, SICAV and the like) – in their custodial, 3rd Pillar, or pension holding (Freizügigkeitskonto) account. For U.S tax purposes such funds are called PFICs (Passive Foreign Investment Company) and are taxed at a punitive tax rate while you hold them and when you sell them. Also, we are obliged to complete detailed reporting forms each year for every single PFIC you own. The after-tax cost of these foreign funds always makes them a bad investment. If you hold foreign corporate shares and other securities directly, rather than bundled into a foreign fund, you will avoid PFIC tax and may benefit from preferential U.S. tax rates on dividends and long-term capital gains. Also, be sure to instruct your financial advisor not to purchase PFICs on your behalf.

Be sure your FBAR is accurate and filed on time

The potential implications of an inaccurate or late-filed FBAR are much worse than for an income tax return. The IRS reserves the right to impose a penalty of $10,000 for simply filing the FBAR late. We often find that clients forget to list 3rd pillar accounts and other accounts for which they have signatory authority. If this happens we strongly recommend filing an amended FBAR to correct such omissions.

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