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Global Investing for U.S. Expats Living Abroad
Author: Joel Baretto, CFP®
November 14, 2023
There is a growing trend among American citizens to relocate overseas for various reasons such as career advancement, retirement or family ties. While the prospect of living in a different country can be thrilling, it also presents a unique set of challenges. Apart from adjusting to a new culture, individuals must also navigate through unfamiliar financial, tax and legal systems. Seeking guidance from professionals is crucial in managing personal finances and adhering to legal requirements, while optimizing tax efficiency in a foreign land, just as it is back home.
U.S. Expat Financial Planning and Investing Issues
It is essential to exercise caution and diligence in managing personal finances and investments of American citizens living abroad, and specialized investment advice tailored to U.S. expats should be sought. Although certain cross-border investments and transactions may seem routine for U.S. citizens, they could result in unexpected punitive tax liabilities and penalties in the United States and/or a foreign jurisdiction. A range of factors, including evolving U.S. tax regulations and limitations on expat brokerage accounts, have made investing for American expats increasingly challenging. However, a competent American expat financial advisor can offer effective alternate solutions for financial planning and investment management for U.S. citizens living abroad.
U.S. Citizenship Based Taxation and FATCA (Foreign Account Tax Compliance Act)
It is crucial to bear in mind that U.S. citizens and green card holders remain subject to taxation by the United States regardless of their residency abroad. Even if an individual lives and pays taxes in a foreign country, the U.S. tax system is based on citizenship, not residency. The implementation of FATCA and increased media coverage has helped raise awareness among U.S. citizens living abroad about their tax responsibilities. Fortunately, the U.S. tax code offers various strategies to mitigate the impact of double taxation. Managing investment accounts to minimize the risk of double taxation is a crucial aspect of successful financial planning for American expats.
How to Manage Your Investments as a U.S. Expat
Utilizing U.S.-based investment products is the most cost-effective and tax-efficient approach for American expats to invest while living abroad. The U.S. financial markets provide access to an extensive range of low-cost and diversified investment options that surpass those of other international financial markets. These investment products also comply with U.S. tax regulations, making them the most suitable investment options for American taxpayers residing overseas.
Many U.S. taxable investors make the costly mistake of investing in foreign mutual funds or other pooled foreign investment products. The IRS classifies these products as passive foreign investment companies (PFICs), which must be reported on a complex U.S. tax form (Form 8621) and are subject to punitive taxation. To avoid the PFIC problem, American expats should exclusively use U.S.-registered investments, such as mutual funds or exchange-traded funds (ETFs), to invest efficiently and minimize their tax obligations.
Regrettably, several leading U.S. financial institutions limit the account options available to Americans living outside of the United States due to the perceived compliance risks associated with FATCA. However, certain companies specializing in retail clients may still be able to offer brokerage services to American expats. It is crucial for American expats to collaborate with a suitable custodian through a qualified cross border financial advisor to avoid potential issues in the future.
Investing Advice and Financial Planning
American expats must deal with a number of fundamental investment issues, such as comprehending citizenship-based taxation, being familiar with FATCA, and managing the limitations on U.S. brokerage accounts and products. Living abroad as a U.S. citizen, however, presents a variety of opportunities and risks for financial planning. The following are some typical financial planning concerns that U.S. taxpayers living abroad may run into:
- Ownership of Foreign Mutual Funds (PFICs) – When it comes to owning foreign mutual funds (PFICs), it’s essential to note that this is a frequent and expensive mistake made by American expats. Opting for U.S.-domiciled funds through an expat-friendly U.S. brokerage company is the recommended approach to accumulate and preserve wealth.
- Foreign Pension Plans – are a popular investment option for many American expats. However, it’s worth noting that a few select countries may have bilateral tax treaties with the United States that make U.S. tax reporting more manageable, allowing the taxpayer to deduct contributions and defer taxes. On the other hand, most countries do not recognize pension plans in a tax treaty, which necessitates special attention for U.S. tax reporting.
- US. Retirement Account Contributions – The contributions made by American expats to their IRA, Roth IRA or 401(k) retirement accounts may not always result in benefits. This is particularly true for those living in countries with higher tax rates than the United States, as they may not be eligible for a deduction on their local tax return. In such cases, contributing to an IRA could result in double taxation. However, for those living in low-tax or no-tax countries, contributing to an IRA can make sense as it can help reduce the overall taxes owed. Therefore, it is advisable for American expats to determine the tax-efficiency of IRA or Roth IRA contributions when living abroad. This can help them make informed decisions about their retirement savings.
- Foreign Currency – For expatriates who earn a salary in a foreign currency but intend to retire in the United States, comprehending currency issues is crucial. Matching future life expenses such as retirement, college education, and home purchase with current assets denominated in the appropriate currency is paramount. American expats planning to retire abroad should seek to save substantially on investments associated with their local country of residency.
- International Estate Planning – U.S. citizens are constantly subject to the U.S. estate tax, although the increased U.S. estate tax exemptions have mitigated this issue for many Americans domiciled in the United States. Nonetheless, various countries worldwide have diverse systems of taxing estates and inheritances, as well as distributing wealth after death. It is crucial for long-term American expats to understand the domicile and residency requirements of the local jurisdiction. It is always advisable to review your estate plan when relocating across borders to prevent unintended outcomes.
- US. Tax Obligations – American expats are obligated to file an annual U.S. tax return, regardless of whether or not they owe taxes. It is advisable to seek the services of an accountant who specializes in American expat taxes. An accountant who does not typically work with Americans residing overseas may overlook specific deductions and tax credits, leading to an overpayment of U.S. taxes.
- Local Country Tax Obligations – Apart from being up-to-date on U.S. taxes with the IRS, American expats must also be mindful of their tax obligations in their home country. Each country has its own distinct tax regulations, deadlines, and obligations. It is crucial for expats to comprehend how their investments will be taxed by their country of residency.
- Foreign Spouses and Gifting to Non-Americans – When American expats marry a non-U.S. citizen spouse who is not subject to U.S. tax, it is crucial to pay close attention to the titling of financial accounts, investment structuring between spouses, and estate planning. In some cases, transferring assets into the name of a non-resident alien (NRA) spouse may offer U.S. tax benefits. However, it is crucial to be cautious about the amount of gifts, as the unlimited marital deduction does not apply to NRA spouses.
Building Wealth as a U.S. Expat
Managing multiple financial and tax systems is a challenging task. It demands a profound understanding not only of each jurisdiction’s laws but also of how they interact with one another. Many financial advisors may be knowledgeable in only one jurisdiction and neglect complexities that arise in the other. Consulting with a cross-border financial planning expert can often dispel myths and provide insight into the situation. With meticulous planning and sound advice, American expats can efficiently invest their savings and create long-term wealth while residing abroad.
Disclaimer:
- The information provided is for educational purposes only and does not constitute personal financial, tax or investment advice and should not be relied on as such. It does not take into consideration any investor’s particular investment objectives, strategies, time horizon, and tax or legal status. Abacus Wealth International (AWI) does not provide tax or legal advice. Please consult a tax or legal professional for corresponding tax and legal advice.
- All material and content have been obtained from sources believed to be reliable. AWI does not guarantee the accuracy of the information provided and shall not be held liable for decisions based on the foregoing information.
- All examples of graphs, financial products and historical returns contained in the foregoing material are for illustration and educational purposes only and shall not be deemed as financial advice or recommendation. Past performance is not indicative of any future investment returns.