nun said:
I like the idea of investing outside of the US with individual stocks, I just don't know how to make sure they are not PFICs and do you have to prove to the US that your foreign stocks are not PFICs.
You do not have to prove on an ordinary IRS return that your foreign companies are not PFICs. I imagine the question would only come up in an audit. On a regular tax return, you just list their sales on Schedule D and dividends on Schedule B, same as any individual stock in the US. (Of course you have to keep track of the basis in US$, regardless of what currency was actually used to make the transactions, which is one extra complication.)
To avoid PFICs, I avoid stock-holding companies, and startups which may still be living on financing or gifts of stock from a parent company and are not yet making a living from regular operations and sales. You can also check to see if the investor relations department has issued a statement that they believe they are a PFIC in the eyes of the IRS. (I have only seen one company in Japan that has such a statement -- a real estate development company, by the way (Orix).) Beyond that, I would guess that if it doesn't leap out at you as being a likely PFIC, it won't to the IRS either. Only so much you can do, really.
I'm particularly worried about living in the UK and having most of my investments in the US in dollars, hence, I was going to buy mostly Vanguard international funds and maybe some iShares UK tracker funds through a brokerage account. It seems like a round about thing to do ie earn money in UK, take that and invest it with Vanguard in the US, but in a fund that tracks the UK market. But other than buying UK shares it seems like a reasonable approach to insulate me form US $ fluctuations as my US citizenship makes it onerous to buy UK mutual funds.
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.
Is it ok to have savings or money market accounts outside of the US?
Savings accounts are no problem. You just declare their interest on Schedule B. Money-market funds I am not entirely sure about. Technically, they are bond funds that happen to have a fixed share price, so I suppose an argument could be made that they are PFICs. However, in reality they behave like an ordinary savings account, so I think an argument could also be made to treat them as such. I only have one MMF, perforce, in my Japanese brokerage account (that is all they offer as their cash-holding vehicle). I report the dividends from it on Schedule B, but don't file an 8621 on it. Since the share price is fixed on it, there would never be a gain or loss to report on 8621 anyway; I seem to recall that if you take your proceeds in a foreign currency, and if you use the default reporting for PFICs (not mark-to-market or QEF), then you calculate the gain/loss in terms of that foreign currency, so exchange rate fluctuations won't mess you up here. (This may be just about the only place in the US tax code where you are supposed to calculate capital gain/loss relative to a foreign currency rather than relative to dollars.)
Bleah. Does the above make any sense?
Added: Of course if you have any kind of foreign financial account (bank, brokerage, whatever), you also need to file Form TD F 90-22.1 if the total over all foreign accounts exceeds $10,000.