How to invest as an ‘accidental American’

If you’re classed as a US person, investing is far more complex than it is for other expats.

For US citizens and so-called ‘accidental Americans’, choosing the right investment can make a substantial difference to your tax bill.

Unfortunately, identifying which investments could result in hefty taxes isn’t easy. It’s made even harder by the fact that many investment advisers shy away from working with Americans because of the onerous tax and reporting obligations.

BMP Wealth has launched a US expat proposition that can help to ensure your investments are compliant and suitable for your needs. If you’d like to find out more, please get in touch.

In the meantime, read on to discover how to invest as an accidental American.

You could be American without realising it

An accidental American is someone who doesn’t think of themselves as American but is seen as such by the US tax authorities. If this is you, then you’ll be subject to US tax and reporting rules regardless of where you live.

Most countries only tax individuals who live within their borders or own property there. However, the US often classes someone as a US person even if they’ve never set foot in the country.

If you have a parent or grandparent who is an American citizen, there’s a chance you’ll be viewed as a US person, no matter where you were born.

You could also be viewed as a US person if you’re married to or in a long-term relationship with a US citizen, or have a business partner or co-owner who is an American citizen or resident.

Beware punitive tax charges on PFICs

Investing in line with your objectives and goals should be the starting point of any investment decision. For Americans living overseas, it isn’t always this straightforward.

Most investments that are otherwise compliant and appropriate for expats could result in Americans suffering a huge tax bill. These are called Passive Foreign Investment Companies, or PFICs for short.

A PFIC is any investment outside the US where the decisions are made on your behalf, and details of all clients and transactions haven’t been submitted to the IRS since the company’s first year of trading. A PFIC could include managed funds, pension plans and insurance policies.

US citizens and accidental Americans should avoid investing in a PFIC. You could suffer unnecessarily high tax rates or even be prosecuted if the PFIC isn’t properly declared.

The PFIC regime has wide scope, making it easy for a US person to unwittingly become a PFIC shareholder. Before making an investment, it’s crucial to seek independent financial advice.

The QEF regime can help

One way of investing money in non-US jurisdictions, without losing all your gains to higher rates of tax, is to seek out investments that have Qualified Election Fund (QEF) status.

A QEF meets all the criteria of a PFIC – generates passive returns, based outside the US and invests on behalf of its clients – but it elects to disclose all information about clients and transactions to US tax authorities from year one of trading.

A QEF can be declared on your tax return and will be taxed in a similar way to a US mutual fund held by a US-resident investor.

BMP Wealth’s managers can help you to understand in advance which investments will be heavily taxed and which won’t, thereby ensuring your money is growing as it should be.

There are lots of other investing and banking complexities to look out for if you’re a US expat. One of these is reporting the annual gain on overseas pension schemes.

So-called ‘non-qualifying’ pension plans need to report gains annually to be US tax compliant. However, in most jurisdictions, pension plans are only taxable on dispersal, so this information is not available. This could lead to years of non-reporting, resulting in higher marginal tax rates and penalties.

When you’re making any investment, it’s crucial to ensure the institution or custodian supplies comprehensive and compliant tax reporting.

Seek professional advice

Getting independent, expert financial advice is extremely important if you’re a US person living overseas. That’s why BMP Wealth has launched a specialised proposition for US expats.

Our new service ensures your portfolio is fully compliant with US tax and reporting rules. We ensure investment institutions can supply the highest-quality tax reports in a compliant manner. This not only saves you time and accountancy bills, but could mean a significant difference in your tax liability.

As an expat, we know there’s a chance you’ll move on to another location or back home to the US. As a result, we make sure there’s a high level of portability in your portfolio, so you don’t have to liquidate your investments if you move.

We’ll help you understand the true cost of your investment and take advantage of cost-efficient underlying investment structures. We’ll look for investments that generate strong net returns, while ensuring your investments don’t adopt more risk or volatility than is required to achieve your goals.

Get in touch

At BMP Wealth, we can help to ensure your investments are compliant and set up in the best way to achieve your goals. If you’re a US citizen, a Green Card holder or an accidental American, please email or call +852 3975 2878 to find out more.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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