How to Find the Best Investments for U.S Expats

https://investmentsforexpats.com/how-to-find-the-best-investments-for-u-s-expats/

I want to help U.S expats find the best investment for them taking in the considerations that may impact them, such as taxes, FATCA, PFICs, FBAR, NIIT, and all the issues that aren’t necessarily considered which is finding a platform that meets these requirements and allows U.S expats to invest and understanding all the different tax requirements from state to state and general taxes. Never mind finding an offshore tax advisor who understands the situation you find yourself in.

If you have any questions, please contact me using the contact form. Please note, this is not personal financial advice and if you need personal financial advice, please speak to a qualified and competent advisor.

What Does “Tax-Efficient Portfolio” Mean?

When we talk about a “tax-efficient portfolio,” we are referring to an investment portfolio that maximizes the post-tax return on all investments. Tax efficiency is the amount of return on investment (ROI) that remains after taxes are paid on that return. To calculate tax efficiency, you can follow these steps:

1. Look at your investment portfolio, including retirement accounts, stocks, bonds, etc.
2. Determine the ROI for each investment
3. Subtract the taxes you will owe on that return
4. Divide that figure by the original investment to learn how tax-efficient your investment is

For example, if you invest $1,000 in a bond that will give you a $100 return at maturity with a 25% tax rate, you will only keep $75, resulting in a post-tax ROI of 7.5%. In contrast, if you buy 100 shares of XYZ Corporation for $10,000 and sell them for $11,000 with a 15% capital gains tax, you will keep $850, resulting in a post-tax ROI of 8.5%.

Expats must be especially careful when choosing their investments, as expat tax laws can be complicated and may lead to double taxation. There are three types of investments to consider when investing: taxable investments, tax-deferred investments, and tax-free investments. Taxable investments do not offer any tax advantages, but they tend to be more liquid and come with lower administrative costs. Tax-deferred investments allow you to save your return and pay any tax due later, but foreign plans do not qualify for deferred-tax status. Tax-free investments, such as US municipal bonds, are investments where the return is free from US taxation.

Investing for Americans living abroad can be challenging due to limited options for tax-efficient investments. Unlike those residing in the US, non-US retirement accounts for expats are fully taxable regardless of their treatment in their resident country. As a result, choosing the best investments for expats is not a one-size-fits-all approach, and it largely depends on their financial situation and tax requirements.

Building Tax Efficient Portfolios

However, there are strategies that expats can use to build a tax-efficient portfolio. Here are some tips:

1. Set clear investment goals that are specific and measurable, whether it’s saving for retirement, college funds for your children, or other financial objectives.
2. Determine your investment timeline based on your goals. This will help you structure your portfolio and determine the right mix of short-term and long-term investments.
3. Assess your risk appetite to determine how comfortable you are with taking risks. All investments come with some level of risk, so you need to balance your desire for returns against potential losses.
4. Understand the tax implications of each potential investment to rule out inefficient options. This will help you build a portfolio that is tax-efficient and cost-effective.
5. Consult a qualified financial advisor to help you make the right investment decisions. They can offer reliable advice on how to invest your money wisely based on your unique financial situation and investment goals.

In conclusion, building a tax-efficient portfolio as an expat requires careful planning and consideration of various factors. By setting clear investment goals, understanding your timeline and risk appetite, and working with a qualified financial advisor, you can create a portfolio that fits your priorities and maximizes your returns.

How Will My Expat Investment Be Taxed?

Knowing how your investment will be taxed by the IRS is an essential part of building a tax-efficient portfolio.

Most forms of investment are taxed as income or capital gains. They may also be taxed twice — in the US and your country of residence. Fortunately, the US has established tax treaties with many countries. These treaties are designed to ward off double taxation.

In addition to the numerous Us tax treaties, the IRS also provides several other potential tax credits and deductions for expats, such as:

• Foreign Earned Income Exclusion
• Foreign Tax Credit
• Foreign Housing Exclusion (or Deduction)

Using these tax benefits, most expats are able to erase their US tax debt entirely.

Aside from income and capital gains taxes, there are several other types of taxes expat investors may be required to file. These additional filing requirements almost always require additional tax preparation costs to meet the obligations. While not a tax, the additional preparation fees increase your total expenses relating to foreign investments.

Here are a few of the most common.

1. FATCA Reporting

As an expat, you have probably heard of the FATCA This law requires US taxpayers to report certain foreign financial accounts, and offshore assets. It also requires foreign financial institutions to disclose certain information about financial accounts held or substantially owned by US taxpayers.

If you own non-US financial assets valued above certain thresholds, you must file a FATCA report. The specific threshold for your finances will depend on your filing status and whether you qualify as a bona fide resident of another country.

1. FBAR

The FBAR is a report most Americans living abroad are required to file — especially when making foreign investments. If you have at least $10,000 deposited in one or more non-US financial accounts, you will need to report it by filing an FBAR.

1. PFIC

Depending on how you structure your investments, the IRS could classify your portfolio as a Passive Foreign Investment Company (PFIC). This happens most commonly when investing in non-US brokerage accounts, such as mutual funds.

In most cases, the income from these types of investments must be reported using IRS Form 8621. In fact, you would need to file a separate form for each account that is considered a PFIC.

Note: There are some special elections you can make to defer the tax. Consult an expat tax professional to learn more.

1. NIIT

The NIIT is a tax that applies when your net investment income exceeds certain thresholds. The rate for this tax is 3.8%. If your investment income meets the standards of the NIIT, you must report it by filing IRS Form 8960.

Conclusion

As always, there are many things to consider when being a U.S expat, however, here are some ideas and considerations. Especially when looking to build a portfolio, because that is a question I get most in my emails about portfolios and maintaining tax compliance.

For more help on a platform for U.S expats please contact us using the contact form. We are partnered with Morningstar Wealth and allow U.S expats to invest.

If you are after more information, here are some articles I have written which might be useful for you:

• https://investmentsforexpats.com/financial-hacks-for-u-s-expats/
• https://investmentsforexpats.com/investing-as-a-us-expat-is-it-getting-more-difficult/
• https://investmentsforexpats.com/estate-planning-for-u-s-expats/