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February 17, 2017 - Phil Hodgen

Children, Investment accounts, and PFICs. It’s a Mess.

Americans living abroad will frequently do a sensible thing, and invest in foreign mutual funds. That’s a good investment strategy.

But when that American is a kid? Foreign mutual funds make trouble. They may require the child to file a U.S. tax return, even if the child has trivial amounts of income:

  • Usually, a minor (who can be claimed as a dependent on someone’s tax return) doesn’t file a U.S. tax return until his or her investment income exceeds $1,050.
  • But if that minor owns foreign mutual funds, the requirement to file Form 8621 will likely kick in and force the filing of a tax return, if there is as little as a dollar of dividends from the mutual funds.
... continue reading
Friday Edition
February 3, 2017 - Phil Hodgen

The Foreign Earned Income Exclusion and Self-Employed Americans Abroad

This is for the self-employed Americans living abroad who want to enjoy some of that tax-free goodness that comes from the foreign earned income exclusion.

Perhaps you are a digital nomad — an American abroad earning a living online by building websites. You have not organized your business as a corporation. You are a sole proprietor.

You live at the intersection of Schedule C (PDF) and Form 2555 (PDF).

The Answer

Watch out for “gross” and “net” income. It is easy to assume (because it is logical) that the foreign earned income exclusion applies to net income. Not so.

As soon as a self-employed person grosses more than the exclusion amount for the year, there is an assurance of income tax and self-employment tax no matter what the net profit really is — unless you are in rounding error territory.... continue reading

Friday Edition
January 20, 2017 - Phil Hodgen

Immigrants and Estate Tax: Four Choices

The Estate Tax

The United States has a wealth tax that is imposed at the time of death, called the “estate tax”. In round numbers, the first $5,500,000 of a person’s wealth (measured at the time of death) is tax-free, but everything above that is taxable. The top tax bracket is 40%.

You might have accumulated significant wealth before becoming a U.S. resident. You might wonder why the U.S. government should be entitled to take 40% of that away from your spouse, children, and grandchildren when you die.

It is not polite to say this out loud, but the estate tax is largely optional.... continue reading

Friday Edition
January 6, 2017 - Phil Hodgen

Digital Nomads and Eliminating Social Security Tax

American Digital Nomads With U.S. Corporations

This article is for entrepreneurs who, for valid reasons, need to have a U.S. corporation to operate their businesses. Maybe the customers are in the United States. Maybe there is an office full of employees in the United States. Maybe banking and financial transactions are simpler when there is a U.S. corporation.1

The entrepreneur, however, decides to live abroad. Let’s use the phrase “digital nomad” (the current favorite appellation). This person is going to travel from place to place, working for the U.S. business, but staying below the radar in the various foreign countries.... continue reading

Americans Living Abroad Friday Edition
December 23, 2016 - Phil Hodgen

The Green Card Holder’s Gift Tax Loophole

Green card holders living abroad can have a weird hybrid (tax) life. They are U.S. residents for income tax, but can be U.S. nonresidents for gift tax purposes.1

This is a useful tax planning tool. We use it for people who wish to abandon green card status because they no longer wish to live in the United States. By making large gifts, they can avoid covered expatriate status for purpose of the exit tax. But any green card holder who is permanently settled abroad can use this to solve cross-border tax problems.

Definitely a U.S. Resident for Income Tax

A person holding a permanent resident visa (aka the green card) is a “resident alien” for income tax purposes.... continue reading

Americans Living Abroad Friday Edition