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Top Ten Investment Mistakes Made By Americans Abroad

Views • 1st Dec, 21

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1. Buying Foreign Mutual Funds

Foreign mutual funds are attractive to an American living abroad. The IRS calls these "PFICs": Passive Foreign Investment Companies, and they are subject to strict tax treatment and filing procedures. PFICs are subject to special, highly punitive tax treatment by the U.S. tax code. Not only will the tax rate applied to these investments be much higher than the tax rate applied to a similar or identical U.S. registered investments, but the cost of required accounting/record-keeping for reporting PFIC investments on IRS Form 8621 can easily run into the thousands of dollars per investment each year.

To protect your investment returns, we strongly recommend avoiding these foreign investments at all costs.

2. Paying unnecessary high fees for investments that could be purchased in the U.S. 

The U.S. is renowned for having the lowest investing fees in the world. Just because you don't live there, doesn't mean you can't enjoy these low costs. Investment expenses (brokerage fees, trade commission, advisory fees, mutual fund fees, etc.) are substantially lower in the United States than they are anywhere else in the world for the same or very similar investments.

3. Doing Nothing

Many American expats find themselves so overwhelmed by the complex rules and many horror stories they have heard about investing while living abroad that they are cowered into taking no action at all and along with the lack of financial providers and financial advisory companies willing to assist Americans living abroad many Americans decide the best course of action is to do nothing.

4. Buy non-U.S. tax compliant insurance

While living abroad, Americans need to be careful which type of product they purchase as most non-U.S. registered insurance products that hold cash value almost never qualify as insurance under U.S. tax rules. Also, the underlying investments may hold PFICs which brings the additional costs and reporting requirements mentioned above.

5. Overinvest in your country of current residence.

The laws of diversification are universal, and the penalties of failing to obey those laws are equally universal. Take profits in the local market along the way and re-deploy them into other (i.e., stable, boring) markets just in case your bullish long-term thesis turns out to be too bullish!

6. Not understanding U.S. retirement account contribution rules with foreign earned income

Just because you earn foreign income, does not mean you cannot contribute to an IRA or Roth IRA. Work with an investment advisor and your accountant to avoid double taxation, and make sure you're maxing out your tax-advantaged accounts.

7. Do not report correctly with the IRS

The requirements under FATCA and the many reporting requirements for all foreign assets can be a minefield for American investors living abroad. There are numerous tax filings and compliance to these reporting requirements and require comprehensive management to ensure they are done in a timely and correct manner.  Late or incorrect filing can result in penalties which adds to the investor reluctance to invest outside of the US.

8. Sticking with your old U.S. tax preparer even after moving abroad.

Many competent U.S. tax preparers will mistakenly believe that they can continue to prepare your tax returns even after you move abroad.  But beware:  quite often, even a very good domestic tax preparer may be out of their depth when preparing expat returns. Too often, the tax preparer with little or no expertise in expat tax preparation will fail to do even the most basic research on special reporting requirements, relevant income tax treaties, the application of foreign tax credits, etc. 

9. Failure to properly report foreign financial assets on U.S. tax return. 

Following IRS reporting requirements is an important concern for Americans living and investing abroad. Virtually all foreign financial assets that are not being held in a domestic (U.S.) financial institution are subject to numerous reporting requirements. These reporting requirements include, but are not limited to, timely filling of a FinCEN Report 114 (FBAR), IRS Form 8938 (Statement of Specified Foreign Financial Assets), and IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund).

10.  Rely on your legacy U.S. estate plan.

Your U.S. estate plan may not travel well. Laws regarding wills, trusts, and who can lawfully inherit your wealth upon death may be different in your new country of residence, and, as a result, you may find that your legacy estate planning strategy either (1) is no longer legal valid, or (2) even worse, triggers taxes that render the strategy completely counter-productive. 

If you would like to discuss any of these points in more detail then please use the below button to book an appointment where we can introduce ourselves in more detail and explain how we can help US expats abroad.


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