FBAR, PFIC and Other Four-Letter Tax Words U.S. Expats Should Know

Life as an expat in Hong Kong has all sorts of “get out of jail free” benefits – especially when it comes to family obligations.  But there is one family member American expats can’t avoid: Uncle Sam.  If you’re new to filing taxes abroad, here is a list of some four-letter terms and associated tips you should know.

FEIE:  The U.S. is one of two countries in the world[1] that taxes its citizens (or other “connected persons”) on their worldwide income, regardless of where they reside.  News to you? Rather than hurl expletives, get familiar with this four-letter word: FEIE, which stands for Foreign Earned Income Exclusion.  For the 2018 tax year, you can exclude up to USD103,900 of earned income from U.S. tax, subject to certain restrictions.  The FEIE for the 2019 tax year is USD105,900.  In addition, U.S. expats residing in Hong Kong can exclude certain housing costs (notably rent) up to a maximum of USD114,300 (again, subject to certain restrictions).

In order to qualify for the FEIE, you must have been out of the U.S. for a total of 330 days over a 12-month period or deemed a “bona fide resident” of a foreign country.  Don’t fret if you don’t satisfy either requirement, as partial exclusions may be possible.

Additional exclusions: If the FEIE and housing-related deductions don’t fully offset your U.S. taxable income, you may be able to use the income taxes you pay in Hong Kong as an itemized deduction or a foreign tax credit when filing your U.S. taxes.  Make sure to explore what option would be best for you with your tax advisor.

FBAR: FBAR refers to Reports of Foreign Bank and Financial Accounts. An FBAR must be filed if the total amount of your financial interests in or signature authority over financial accounts maintained outside the U.S.  exceed USD10,000 at any point during the tax year and regardless of whether any of the accounts produce any income.  Failure to report in any applicable year can incur some pretty hefty penalties or even jail.  Still not convinced?  Google it.

The filing deadline for FBAR is April 15 (although it can be extended in certain cases) and can be done electronically here: https://bsaefiling.fincen.treas.gov/main.html

Shameless Plug #1: At MASECO Asia, our clients’ assets are domiciled in the U.S., and are therefore not subject to FBAR filing.  This can help reduce the reporting burden during tax time.

PFIC:  I leave you with one more four-letter tax word: Passive-Foreign-Investment-Company (PFIC).  PFICs encompass pooled investments (e.g., mutual funds, ETFs, hedge funds, insurance products) domiciled outside the U.S.  Why care?  Well, Uncle Sam really cares. In his effort to disincentivize investing offshore, PFICs are subject to some rather punitive tax rates.

Take for example a mutual fund that invests in European stocks but is domiciled in the U.S.  Long-term capital gains from this product are taxed at 0%, 15%, or 20%, depending on your tax bracket and filing status.  Now suppose that same European stock mutual fund is instead domiciled in Hong Kong.  Those same capital gains would be taxed at the highest current federal tax rate of 37%.  The PFIC story gets even uglier when considering the taxation of distributions and compounded interest charges on deferred gains.  The good news is that there are several different accounting treatment options (and hence taxation outcomes) for PFICs.

Shameless Plug #2:  MASECO Asia investment portfolios are PFIC-free, lending to a more tax-efficient wealth solution versus for U.S. expats versus other providers.

Need more advice?  Although we are not expert tax advisors, we are expert tax advisor referrers!  Please don’t hesitate to contact us for direction.

[1] Fun fact: the other country is Eritrea, located in East Africa.

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