For all US citizens living in Europe and for the many accidental Americans – more on this term below – it’s US tax reporting season. This is a good time for you to assess your finances and consider what you can be doing to achieve your objectives whilst remaining compliant with the restrictive US framework, and not forgoing investing.
First, for all our US clients, you will have received your 1099 forms this week. This is the document you need to lodge your FATCA compliant tax reporting with the IRS. Please contact us if you have not received your form.
What are we talking about?
For any Americans living in Europe for whom these acronyms and phrases don’t make sense, here is a brief summary. This can be important for you.
FATCA– this is the US Foreign Account Tax Compliance Act. This brings together several tax and reporting obligations on US citizens and US connected individuals, wherever they are living in the world. The US non-resident tax and reporting laws are complex, and they impose a number of conditions and restrictions that impact how you can manage your finances when living abroad.
If this is you, you may need to report your asset and income positions to the IRS each year. It does not mean you necessarily incur a tax bill, but that is something you can determine with your US tax adviser.
US Connected persons or Accidental Americans
The FACTCA regulations cover the reporting obligations and investment restrictions for US citizens and US connected individuals living around the world. They also define who is covered by the regulations and in these definitions, there is another aspect to be aware of and action to avoid.
Do not just presume that because you don’t consider yourself American you can avoid the requirements for reporting. The FACTA net can be broad.
Here are some examples that could classify you as an accidental American and there are many more:
- You were born in the US, and have a US passport but left as a child.
- You have a parent that is a US citizen.
- Your spouse is American (depending on how you and they file taxes).
- Do you have a green card that is still functional, even if you live outside the US?
In the above examples and other similar scenarios, you may find yourself as being defined as a US connected person, which means you will have to file your US tax returns. If you are unsure, speak with a US tax specialist.
Investing while living in Europe
We know that it can be difficult as a US citizen living in Europe when it comes to managing your money. Many institutions will refuse to take you on as a client. The US classifications impose a number of conditions and restrictions that impact how you can manage your finances when living abroad.
The US has also classified a number of otherwise compliant investments in the EU such that if they did accept you as a client, you may be subject to higher taxation in your US tax reporting. These are called PFICs (Passive Foreign Investment Companies). You need to avoid these.
We are often asked whether it is ok to maintain a US investment by providing the US based institution with an address of a family member back home. Our position on this is that it is NOT. If you are doing this, you are being reported as a US tax resident rather than as a tax non-resident. Not only is it inaccurate it may be considered tax fraud. If this is you, or if you are not sure if you have kept your details up to date, we recommend you check and update your current address and residential status.
Despite the complexity, you can invest compliantly in the EU as a US citizen or connected person without having to forego returns or lock your funds away with no access. You should treat an investment like any other part of your financial plan so that it is a component of your financial plan and aligned to achieving your objectives, not just investing because you have found an option.
Speak with us to find out how this might be relevant and applicable to you.