money matters for overseas retirees

[nun]

That's a fine approach, with the caveat that your US-registered mutual fund will be paying non-resident withholding taxes on your UK dividends, and depending on whether you can get proper credit for them on your UK taxes, you may end up paying double taxes. This concern keeps me from from buying US mutual funds that hold Japanese companies, for example.

I thought I'd just claim the foreign tax paid by the International funds as a deduction or a foreign tax credit on my US tax form.

 

[bpp]

I thought I'd just claim the foreign tax paid by the International funds as a deduction or a foreign tax credit on my US tax form.

I'm thinking about your UK taxes, once you are living in the UK.

 

[bpp]

I wrote:

I'm thinking about your UK taxes, once you are living in the UK.

Just to clarify:

Let's suppose you are living back in the UK, and taxable on your worldwide income. (If this assumption is untrue, then never mind.) You have some UK stocks held within a US-registered MF/ETF. The MF/ETF will pay 15% (to pluck a number from the air) of dividends to the UK before distributing the dividends to your US account. The IRS will want, let's say, 15% (again plucked from the air) of those dividends, but you get the Foreign Tax Credit for the UK taxes already paid, so you end up owing the IRS nothing. Now it is time to file your UK income taxes, and you have to report that same dividend income again. Let's suppose they want 15% of your dividends. Is there a mechanism to tell them, "hey, my mutual fund already paid 15% on those dividends to the UK, so I don't owe you anything more"? In other words, you would need not a Foreign Tax Credit with the UK, but a Domestic Tax Credit...

Anyway, you'd have to talk to the UK Inland Revenue to find out what happens here. I don't know, but just thought it might be worth flagging as a possible concern.

 

[nun]

I wrote:

Just to clarify:

Let's suppose you are living back in the UK, and taxable on your worldwide income. (If this assumption is untrue, then never mind.) You have some UK stocks held within a US-registered MF/ETF. The MF/ETF will pay 15% (to pluck a number from the air) of dividends to the UK before distributing the dividends to your US account. The IRS will want, let's say, 15% (again plucked from the air) of those dividends, but you get the Foreign Tax Credit for the UK taxes already paid, so you end up owing the IRS nothing. Now it is time to file your UK income taxes, and you have to report that same dividend income again. Let's suppose they want 15% of your dividends. Is there a mechanism to tell them, "hey, my mutual fund already paid 15% on those dividends to the UK, so I don't owe you anything more"? In other words, you would need not a Foreign Tax Credit with the UK, but a Domestic Tax Credit...

Anyway, you'd have to talk to the UK Inland Revenue to find out what happens here. I don't know, but just thought it might be worth flagging as a possible concern.

This is why being a dual citizen gets so damn complicated, the way I'd be taxed would depend on my residency status in the UK. For the US I get taxed on my worldwide income just because I'm a US citizen, it doesn't matter where I live or my residency status. However as a UK citizen my residency status is cructial to how I'm taxed. Right now I don't reside in the UK and have no investments there so I have no UK tax liability. If I was to move there and become ordinarily resident I would NOT be taxed on my US finances unless they were remitted back to the UK, however, as my domicile would still be the US this might open me up to having to pay US state tax. If I become domiciled in the UK then I'm liable for tax on my worldwide income, but I'd get foreign tax credits for US taxes paid. In this stitation I'd end up paying tax at whichever is the greater tax rate in the US or UK.

 

[ladelfina]

I'd end up paying tax at whichever is the greater tax rate in the US or UK

nun, that's the way I understand it, too.
In a lower income bracket there's no beating the current US investment tax rates on cap gains and qualified dividends, but that aside, everything right now is in the US for simplicity's sake, except for a local bank account.

The tax liabilities w/r/t investments in Europe seem more onerous and complicated, though they are pointing towards some sort of "harmonization". I'll be investigating this soon just for my own information.

As for brokerage accounts, I can't recommend Charles Schwab highly enough.. in fact, I just came off of writing their customer service a letter of praise since I noticed they have recently waived wire transfer fees (well, 3 free ones/quarter which for me is the same thing) on accounts $500k and up. They also have an extremely low (under 1% over interbank rates) spread on forex.. and yes, I did check up on my latest transfer to see whether the fee waiver had translated to a higher spread but it appears not.

7/6/06:
€7000 =>$8937 interbank according to oanda.com on that date
=>$9026 interbank + 1%
=>$8977 out of my Schwab acc't.
(of course this does not take into account possible inter-day fluctuations)

We already own our house here outright so that is something of a hedge, also I have a high %age of foreign stocks and bond funds (tho' denominated in $).

bpp, do you plan to live in Japan indefinitely?

 

[ladelfina]

Just found this synthesis, on the current Italian taxation of investments:

Sono tassati al 12,50% interessi, dividendi, plusvalenze di Borsa e rendimenti di gestioni e fondi comuni. L´aliquota del 27% è applicata sugli interessi dei depositi e conti correnti bancari e postali, inclusi i certificati di deposito, oltre che in alcune ipotesi particolari (per esempio, obbligazioni private con scadenza inferiore a 18 mesi). Le plusvalenze realizzate da vendite di azioni che rappresentano una partecipazione "qualificata" (cioè superiore al 2% dei diritti di voto o al 5% della partecipazione al capitale se si tratta di titoli quotati in Borsa, o superiori al 20% dei diritti di voto o al 25% della partecipazione al capitale se si tratta di titoli non quotati) sono, invece, soggette a tassazione ordinaria per il 40% del loro ammontare.

Per quanto riguarda, in particolare, i fondi d´investimento, la tassazione del 12,50% si applica sul rendimento complessivo (principalmente dividendi e plusvalenze) ottenuto dalla gestione. Al momento del riscatto il risparmiatore non deve pagare nulla, perché le imposte sono prelevate direttamente dal patrimonio del fondo. Il valore giornaliero delle quote dei fondi italiani già è al netto dell´imposta. Nel caso di fondi esteri, invece, il guadagno è tassato al momento del disinvestimento (in misura del 12,5% a titolo definitivo in caso di fondi Ue armonizzati).

Interest, dividends, capital gains and mutual fund income is taxed at 12.5%. A 27% rate is applied to bank account interest, including CDs (except for in particular circumstances such as private obligations with terms of less than 18 months). Capital gains realized by the sale of shares that represent a 'qualified' participation (over 2% of voting rights or 5% of capital participation for exhange-listed  shares, or over 20% voting rights or 25% capital participation for shares not quoted) are, instead, subject to ordinary taxation of 40% of their total value.

As far as mutual funds are concerned, the 12.5% taxation is applied to the total income (dividends plus capital gains) obtained by the fund management. At the moment of redemption, the investor owes nothing, because the taxes are taken directly out of the fund's patrimony. The daily value of quoted Italian funds is already after-tax. In the case of foreign funds, the earnings are taxed at the moment of sale.. [and the last sentence I have no idea..].

Even Granny with €5000 in the bank and a €600/month pension pays 27% in taxes on her bank interest or CD. In fact, the bank helpfully deducts the sum for you, so you don't even need to write a check to the Agenzie delle Entrate. There is a level of income under which you don't pay taxes, but it only deals with earned income, not total income, apparently.

I think the EU is going to have gross problems with any kind of harmonization (barring the elimination of the member states' taxation authority) because their underlying business taxation policies, and perhaps more important, their business subsidy policies and histories, are so wildly different.

---
nun, I just found this site:
http://www.taxationweb.co.uk/guides/residence_and_domicile.php
as usual, the residency 'distinctions' make my eyes glaze over.
Best of luck!!

 

[bpp]

bpp, do you plan to live in Japan indefinitely?

No particular plans or desire to leave at this point. We have built our dream house, and are likely to be here until retirement at least (which probably won't be early by the standards of this board). Then again, who knows what the future will bring. Had you told me 15-20 years ago that I would be living here at all, I would have been very surprised. I don't think it was even on my list of places to visit some day at that point.

It sounds like mutual funds are treated much better than bank accounts in Italy. Do you think this is intentional, to encourage investment?

 

[ladelfina]

bpp. I just asked because at some point you may have to make your money moves in the opposite direction, away from Japan..

Intentional? Hard to say. The feeling here is very much "tax the rich", which is understandable as far as it goes. On the one hand, the high tax on bank interest seems an anomaly, especially for small to normal balances. On the other, really, very very few people in Italy have 'investment' accounts or pay any attention to the matter whatsoever, so it is unlikely to be an incentive. I know it is not advertised or promoted as such; I think the "low" rates were really under the radar. Coupled with the fact that the taxes are unseen (as is the VAT) and prices (and thus performance?) all around are generally quoted net of tax.

The barriers to small business ownership and the heavy taxation of entrepreneurial activity leads one to believe that promoting Italian businesses is really the farthest thing from anyone's mind, unless it is in the form of massive subsidies or rigged contracts to large, politically-well-connected firms.

The recently-elected center-left government has promised to equaiize all these investment taxes at 20%, including on government bond interest. And they got voted in by a hair's breadth, so...  a bit better for the small saver, a hit for everyone else and strangely, with their big deficit, a disincentive to buy Italian gov't bonds that were taxed at the 12.5% rate. No one ever said Italy was a rational place.

---
Just read a stat that 5% of families in Italy own shares of stocks, 5% own shares of mutual funds or insurance/stock/annuity products and 20% report owning goverment or other bonds. These percentages overlap one assumes.

Compare that to probably around 60% or so that own stocks or funds in the US.

Conversely, the percentage of Italians' net worth that is in RE is 68% (2005) up from something around 60% pre-Parmalat/Cirio (the Italian Enron/Worldcom).

Compare to 32% US net worth in RE in 2000 according to the census bureau.

 

[nun]

I think the levcel of invetsment sophistication in the UK, like in Italy, is less than in the US. Most people "invest" in savings accounts or a limited selection of mutual fund type investments offered by banks and building societies. This might not be a bad thing, sometimes I think there is too much choice and specailization available from firms like Vanguard and Fidelity. People in the UK were frightened off stock investmenst when so many pension funds went bankrupt at the the end of the 90s.

I'm settling in on the following strategy for US citizens abroad

1) Invest in US based funds, open an account with Vanguard, Fidelity etc before you leave the US.
2) Avoid foreign investments as there can be dangerous tax consequences
3) Keep a couple of years expenses in a local saving account, declare this to the IRS if its over $10k.
4) Get advice from an accountant experienced in US expatriate tax issues before leave the country.

If you are going to be away for a long time, 5 years or more,

5) buy local real estate.
6) Invest in US based mutual funds that hold stock in companys where you are living. This will insulate your investments from currency fluctuations.

 

[Rosalita]

BPP - where did you learn so much about the expat taxation laws, do you work in that area? Are you aware of any specific authorities that I could approach/scan websites to pick up some basic information before seeking out an international tax expert?

I also had a question regarding holding mutual funds that invest only in US companies - why would that complicate matters further with respect to taxation? Isn't the tax liability based only upon the payout of the fund, and not what is happening with the individual holdings of the fund? Or does this revert back to the payouts that the fund makes?

 

[bpp]

Hi ladelfina,

bpp. I just asked because at some point you may have to make your money moves in the opposite direction, away from Japan..

True, and I have modified my asset allocation as my view of the future has changed, too. Once we bought a house, the probability that we stay here forever went up, and so I bumped up the target allocation to Japan to reflect that. If it starts looking like we may move somewhere else some day, I will modify our allocations (and asset locations) accordingly. Life is like jello, can't nail it down, yes?

Out of curiosity, do you think you will be staying in Italy permanently?

Hi nun,

[...]
If you are going to be away for a long time, 5 years or more,
[...]
6) Invest in US based mutual funds that hold stock in companys where you are living. This will insulate your investments from currency fluctuations.

Good basic principles. I avoid 6) myself, preferring to buy individual stocks in the country where I live for the tax reasons I mentioned (and also to keep more money close to home, in case, for example, the US goes weird on me -- even if that may be a low-probability event), but 6) is certainly a lower-maintenance approach.

Hi Rosalita,

BPP - where did you learn so much about the expat taxation laws, do you work in that area? Are you aware of any specific authorities that I could approach/scan websites to pick up some basic information before seeking out an international tax expert?

I am not an expert, just a taxpayer who has had to study up on this stuff to fill out his own tax returns. I have mostly learned what little I know from slogging through the IRS documentation and tax laws, and occasionally asking the IRS questions directly. I frankly don't know who I would trust as an international tax expert -- I have seen glaring errors in the advice proffered by self-proclaimed experts, and even the IRS staff are not well-trained as far as I can tell. They seem to be still at the level of trying to get taxpayers abroad to realize that they have to file returns at all, and haven't really addressed a lot of the more practical issues of how to actually fill out the returns in their material or training yet.

It goes without saying not to trust what I say, either.

Since you know that you will be heading to Australia, I would suggest you look for a tax advisor who is specifically familiar with both US and Australian tax law. An American tax attorney who is living and practicing in Australia would probably be ideal. I think that would be much more useful than a generic international tax attorney, since there are a lot of situation-specific issues.

For general US tax questions, www.fairmark.com is probably a good place to start.

I also had a question regarding holding mutual funds that invest only in US companies - why would that complicate matters further with respect to taxation? Isn't the tax liability based only upon the payout of the fund, and not what is happening with the individual holdings of the fund? Or does this revert back to the payouts that the fund makes?

Maybe what I said was confusing. US funds that invest in US companies are fine. My concern (for my case) is with US funds that invest in Japanese companies, when I live in Japan and have to pay tax on my worldwide income to Japan. Reason being, my US fund will pay tax to Japan (based on what's happening with the individual holdings in the fund), and then Japan will ask me for tax again on top of that (based on the payouts of the fund to me), and I don't think I can get credit for the taxes already paid by my US fund to Japan, so I would end up paying double taxes to Japan on the investment.

In your case, that would be US funds that hold Australian companies, if you would have to pay tax on worldwide income to Australia after you move there. In nun's case, it sounds like he may have ways to avoid worldwide-taxation status in the UK, so it may not be an issue for him.

My general principle is to invest in US companies through US accounts, and Japanese companies through Japanese accounts. I think this minimizes tax complications in my case. (As for other countries, I buy mutual funds in the US, and individual stocks and bonds in Japan, for cost and tax reasons.) You may or may not find that the same principle works for you, depending on the details of Australian tax law and your status once you move there.

All this thinking about taxes is giving me a headache... Time for coffee!

 

[nun]

Reason being, my US fund will pay tax to Japan (based on what's happening with the individual holdings in the fund), and then Japan will ask me for tax again on top of that (based on the payouts of the fund to me), and I don't think I can get credit for the taxes already paid by my US fund to Japan, so I would end up paying double taxes to Japan on the investment.

Bpp, You can claim foreign tax paid by US mutual funds as a credit or an itemized deduction on your US taxes, so wouldn't that eliminate the dual taxation senario you describe. What I've found is that if there's a tax treaty in place
its pretty difficult to get taxed twice as that's exactly what the treaty is there to prevent.

ladelfina, if you are a Greencard holder or a dual citizen and have paid into US SS look into whether the US has a reciprocal SS agreement with your country of origin. If it does you might be able to use US SS payments to top up SS payments in your home country or you might even be eligible for payments from both countries. FYI for people living in the UK who receive US SS payments they are only taxable in the UK...that's an weird wrinkle, it might be true for Australia too.

To find a suitable tax advisors I'd look at the australian/US expat websites. Be careful of anyone who claims you can invest offshore and pay no tax, what you want is someone who makes sure you pay the correct amount of tax.

 

[bpp]

Bpp, You can claim foreign tax paid by US mutual funds as a credit or an itemized deduction on your US taxes, so wouldn't that eliminate the dual taxation senario you describe. What I've found is that if there's a tax treaty in place its pretty difficult to get taxed twice as that's exactly what the treaty is there to prevent.

I don't see how this would help... The issue is not my US taxes, it is my Japanese taxes. I am talking about paying Japan twice for the same investment, not paying the US and Japan each once for it. (I agree that in the latter case I should be able to take a credit against one or the other's taxes.) Does what I'm saying make sense?

ladelfina, if you are a Greencard holder or a dual citizen and have paid into US SS look into whether the US has a reciprocal SS agreement with your country of origin. If it does you might be able to use US SS payments to top up SS payments in your home country or you might even be eligible for payments from both countries.

I think the way that typically works is that the time spent making payments to either country would count towards both countries' minimum eligibility periods, but the actual payments themselves are only counted towards the SS of the country where you sent the payments. So you can get some prorated, reduced SS from both countries based on what you paid into each system, but can't choose to take full SS from just one country based in part on payments made to the other one. (A somewhat fine distinction, perhaps.)

Added: at least, that's the way the US-Japan treaty works. It may be different elsewhere.

 

[nun]

Bpp,
Wow this is getting way too archane. All I can talk about is the UK/US situation which is this. If a US citizen is domiciled in the UK then their worldwide income is taxable by both the UK and the US. However, the UK/US tax treaty allows you to take a credit for foreign tax paid. So if the capital gains tax is 15% in the US and 20% in the UK I'd pay 15% on my US capital gains to the IRS and 5% to HMRC. I'd pay 20% on UK investments (stocks NOT UK mutual funds as we've established they are a bad think for a US citizen to own) and as that rate is greater than the US 15% I'd have no tax liability in the US.

I think this is covered in Article 5 (Avoidance of Double Taxation) of the US/Japan Tax treaty, although don't quote me on any of this as it's obviuosly very complicated, which is why I'm going to pay someone to do my taxes when I go to the UK.

Redarding the SS thing (for the UK/US anyway) if you don't have enough payments in a country to qualify for a benefit then payments to the other country are used to help you to qualify, but as you say you get a reduced benefit reflecting the actual level of your payments to the country.

 

[bpp]

Hi nun,

I agree with what you say in your post, especially the arcane part.

I think we are talking past each other a bit, but unless someone else can come in and disentangle this, I think I can feel my brain coming to a halt.

Aren't taxes fun?

 

[ladelfina]

I think what bpp might be saying is that he doesn't see a way (on his Japanese taxes) to deduct the Japanese tax component already paid out on his behalf by a US mutual fund holding Japanese investments.

You're right that in the US we have the Foreign Tax Credit but maybe he can't find a Japanese analog.

nun, excellent point on SS. Being retired and thus not working here there's no issue for me personally to have to try and broker payments from two countries, but that could be the case for others. I believe when/if my paltry SS come in I can get it direct-deposited to an Italian bank.

bpp, tough question! I really don't know if I will want to "retire" here  (that is, grow old here). I'll let you know in 10 or 20 years... Health care coming back would be a big cost issue, but on other levels life in the US is easier for oldsters (and everyone else). I still feel somewhat 'on vacation'. My Italian DH has started to fit in better in our new town; he knows the ropes. I miss a sense of 'agency' and give up on things that I might be doing if I were in the US, as here they are "too difficult". Keeps $ in my pocket, though, that way.. Will depend, as well, on what our family situations are further down the road. Just living the Jello life, I guess! 

 

[Arif]

Are you dealing with a bank there for the mortgage? If not, how does an American bank deal with foreign property purchases? Or maybe it so much cheaper you are paying outright!

It is easier (like flying to Moon is easier than the Mars) to use a international bank here in Panama. Scotia Bank is the one we are using after going to what seems like every bank in town to get a mortgage. It's not easy and you will have to provide a lot of information especially if all your assets are in the US and not Panama.

 

[nun]

It is easier (like flying to Moon is easier than the Mars) to use a international bank here in Panama. Scotia Bank is the one we are using after going to what seems like every bank in town to get a mortgage. It's not easy and you will have to provide a lot of information especially if all your assets are in the US and not Panama.

The situation is similar in the UK, but mortgages are things that generally follow fairly strict rules re income
and assets and if those assets are held offshore I can see there being some problems. My strategy is to be able
to buy a house outright in the UK when I retire and avoid borrowing as much as I can. Then I can live of a greatly reduced income (no housing costs) and keep the tax bill down.

 

[Red-y]

I believe Vanguard told me that once I change my accounts to a Canadian mailing address, I won't be able to make any new purchases or trades, since Vanguard is not a registered investment entity in Canada. All I can do is sell things and distribute cash.

Wrong...I looked again into the possibility of managing Vanguard assets from outside the country after retirement, just to be sure. This may in fact be feasible without the mail-forwarding ruse.

I got the same answer (see below) from two different Vanguard reps, so hopefully it's accurate 

"As an existing Vanguard customer, you may continue to transact on your
Vanguard accounts while living in Canada. Please note, however, that a
United States citizen living in a foreign country must certify that he or
she is a US citizen and the beneficial owner of an IRA by sending Vanguard
a W-9. 

A US citizen living in a foreign country is subject to an automatic
10 percent tax withholding on any distributions from an IRA.  In order to
avoid this automatic withholding, the shareholder would need to provide
Vanguard with a W-9 and a legal United States address to which we would
send the distributions.

Consequently, you can manage your assets by mail, e-mail or by phone
through our 800 number or call collect." 

The Flagship rep I spoke to assured me that "continue to transact" means buy, sell, exchange, and contribute new funds.