There are endless opportunities for US citizens to invest internationally. In extreme cases, you may own investment property or have accounts in a foreign country. Alternatively, you may be considering living overseas as a resident alien – and will accumulate assets in the new country you reside in. However, for many, it’s a simpler issue of having holdings in an investment account that are focused on companies outside of the USA.
While you may have assets in other countries – either part of an ongoing financial plan or not – it’s important to make sure they fit into your current situation and make sure these assets are treated correctly.
What Qualifies as a Foreign Asset?
First, let’s make sure we’re on the same page when it comes to defining a “foreign asset”. According to the IRS, a foreign asset can be a bank or financial account in another country, any income earned internationally, or any property purchased (or sold) overseas. An individual qualifies as owning a foreign asset both if they live in the United States or are a resident alien who lives and works abroad.
What Are Your Obligations?
The majority of US citizens or resident aliens living abroad are required to report their worldwide income using the Schedule B on their US taxes. The accounts reported and income received will help to determine whether you have any foreign accounts in your name, including both securities and bank accounts. You have a specific set of tax obligations if you own foreign assets and it’s important to remember that special reporting is required for foreign accounts and assets.
Additionally, it’s expected that you complete all of your reporting in US dollars – which is important to remember as you start to organize your financial documents for tax season.
You may also have FBAR and FATCA filing requirements if you have offshore assets. Essentially, if you’re a taxpayer with an interest in, or authority of foreign financial accounts that are valued over $10,000, this rule probably applies to you. You’re reporting your foreign bank accounts and proof that you’ve stayed compliant with tax laws on those foreign accounts with the government so they can rule out any criminal activity.
Property Ownership Abroad
Financial investments are one thing, but most every-day Americans don’t own foreign real estate. But when one enters retirement, it can something that becomes a goal. Some are looking to skip the traditional winter-home in the southern states and are instead looking at beautiful properties around the world.
The tax obligations for vacation homes owned in the United States are fairly cut and dry, but what about if you own a second home abroad? The good news is that many of the tax benefits you receive as an international property owner are actually the same as if you’d purchased property stateside.
If you live in your international home, you can usually deduct mortgage interest and property taxes. If you’re using the property for rental income while you’re not there, you can often deduct mortgage interest, property taxes, and several other expenses such as insurance costs or long-distance travel expenses that relate to maintaining your rental property.
If you choose to sell your international getaway, you will likely owe capital gains tax on any profit you make from the home sale and will need to report it in the year of the sale. However, there are several tax credits available to international homeowners to ensure you’re not subject to double taxation.
Foreign Tax Credits and Your Financial Plan
Having a diverse investment portfolio is something on which many financial plans are heavily reliant. For you, this may mean incorporating foreign investments into your strategy. One thing to consider is how dividends, interest and capital gains will be treated at tax time. This is where foreign tax credits come into play.
Every country has their own unique tax laws. Some have no capital gains tax at all, while others take 20% or more. Luckily, the IRS uses a tax credit system to ensure that you won’t get “double taxed” on many of your international investments.
For every foreign tax you’ve paid on your holdings, the federal government gives you a credit or allows you to take a deduction on your domestic tax return. Typically, it works in your interest to take the credit over the deduction. The deduction is simplified, but a credit is a dollar-for-dollar reduction in your taxes. This can be incredibly beneficial for tax payers who are concerned about how much they’ll owe come filing season.
When it comes to earning income abroad, this is treated in a similar way. If you are working and earning income in another country, you will need to file a tax return in that country as well as the United States (for specific rules, consult with an international accountant). Many countries have tax treaties with the United States where if they collect tax on that income, the USA does not collect tax again from that individual. It has some complications when it comes to filing taxes in both countries, so be sure to use a competent accountant when attempting this.
Understand All of Your Costs
Before committing to foreign assets in your financial portfolio, make sure you have a grasp on all the costs involved. If you’re looking at international investments, understand what kind of exchange rate you’re dealing with, what sort of disclosures their regulators and companies are legally required to provide, and how that plays into the amount of risk you’re taking on.
If you’re considering international property investment, do some soul-searching to uncover the purpose behind your property purchase. Are you planning on living abroad? If so, you may want to decide whether you want to go the route of resident alien or expatriate.
Are you planning on visiting regularly but keeping a “home base” in the United States? That’s a valid option, but travel costs can add up and these need to fit into your retirement budget. One way to combat these costs is to rent the property out a portion of the time, but then you’ll have a new set of costs to consider like maintenance, payment processing, a cleaning service local to the area, etc.
If you’re passionate about incorporating foreign assets into your long term financial plan, it absolutely can be done. However, to ensure that you’re considering all the challenges and benefits it’s wise to discuss your ideas with a Certified Financial Planner™ professional. They will help you identify the motivations behind your desire to invest internationally and come up with options that will help enhance your portfolio rather than unnecessarily complicate it.