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Tax Planning for the New Decade

Out with the Old and In with the New!
By Janathan L. Allen
Published on January 7, 2020

We are entering a new decade and it’s time for US expats to think about taxes again. A former Chairman of the US Federal Reserve, Alan Greenspan, who predicted the 2001 downturn, called the turn-of-the-century market “irrationally exuberant”. I believe this is where we stand today. Most economic forecasters believe we are near the end of an economic growth cycle and you cannot presume the US and its investors are going to be able to sustain existing market growth. Hope is a bad strategy.

The pattern of US recessions going back to the 1960s is not an encouraging picture. When the downturn arrives it’s not likely to be a slow shift from a bull to a bear market. The approaching cycle is most likely going to represent a sudden and substantial change.

The central question in 2020 for many will be “how can I position my holdings to hedge against losses in an economic downturn and diversify my portfolio to reduce risk?”.

By now US expats are hopefully in a non-volatile tax neutral position. The question many US expats face is how to structure their portfolio to minimize risk and the potential for losses. For example, a portfolio which is based in the US dollar may wish to consider diversification. Consider strategies which blend holdings based in the Euro. The German economic strategy may hold promise for investments which hedge against a sudden and precipitous drop.

The IRS foreign earned income exclusion of $105,900 may lull some US expats into a false sense of security. The amount of your income when compared to the annual foreign earned income exclusion should not affect your obligation to file a US tax return. FBAR reporting is still an issue for all US persons with foreign accounts and holdings.

Many US expats, especially newer expats, may not understand the risks they undertake when investing in offshore mutual funds, investments and even life insurance. Many foreign mutual funds, investments and life insurance are subject to the complex IRS PFIC (Passive Foreign Investment Company) provisions which treat resulting earnings as ordinary income. PFIC gains are therefore not taxed at the typical (and much lower) long term capital gain rates.

Foreign trusts and other foreign government retirement vehicles such as superannuations create additional tax challenges. Offshore government programs may provide an apparent and substantial economic reward for investment, but resulting earnings are ultimately going to be taxed by the US at a much higher rate. The incentive of the higher returns are often lost based upon applicable US taxation.

One must balance the perceived value of returns against the tax implications these investments carry. This is why it is so important to review your investment portfolio and strategy with an experienced tax and financial expert.

Business owners and minority shareholders in foreign corporate interests face onerous US reporting requirements and substantial tax challenges. All foreign corporate income is susceptible to heavy US taxation if your entity and its transactions aren’t properly structured.

If a US expat wishes to start a new business in 2020 they should consider a foreign entity which is as close to a Limited Liability Company (LLC) as possible such as an Ireland Limited Liability Company. The goal is to avoid a decision by the IRS to classify your company as a foreign corporation. If possible, avoid entities which could trigger the IRS Controlled Foreign Corporation or CFC regime and work with your legal, tax and financial experts to minimize resulting US and international tax exposure.

Janathan is Tax Attorney/Partner, Allen Barron, Inc, & Janathan L. Allen, APC who specialize in complex international issues. www.allenbarron.com

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