# FBARs and Form 8938



## mwebber

I am glad to find this forum. I have lived abroad for almost ten years and have not filed US taxes or FBARs. I now want to get into compliance and spent a lot of time reading the IRS instructions. I now have good understanding how to file tax returns (i.e. Form 1040, schedule B and Form 2555), but am totally confused with FBARs and Form 8938 filing requirements. These are extremely difficult issues in my case and I am not sure how to proceed.

My situation:

Income: range USD 80,000-USD 110,000 per annum depending on a year. Acccording to IRS instructions and my calculations, I do not owe anything to the IRS in any of the prior years if I elect FEIE and use personal deduction (I am single) and personal exemptions. 

Interest generated from foreign bank accounts: not significant, ca. USD 1,000-1,500 per year. Again, this can be offset by the personal deduction and exemption.

Several checking and savings bank accounts in a non US banks with total balance currently standing around USD 250,000 (it was lower in prior years - I am saving to purchase a house). I understand I report these accounts on FBARs and on 8938 as these are bank accounts.

However, my employee (non - US company) also runs two pension plans for all employees.

Pension plan 1: something similar to the US 401(k) where my employer matches my contributions. I have been contributing to the plan, my company matched and the balance is currently is well above USD 10,000. I can withdraw funds if needed. 

Plan plan 2: a defined pension plan. When I retire or leave the company, I am entitled to receive a lump sum payment which will equal to X% of my annual salary for the year preceding the year when I retire/leave multipled by a number of years I have worked for the company. The amount of this lump sum is unknown (as I am nowhere near the retirement age and I do not know what the final salary will be), but can be estimated if I assume that I leave this year. This money is not available until I leave the company and I am not contributing anything to this plan.

I am not sure how I report those plans. These are not individual plans, but are employer-sponsored plans. My understanding is that until I start withdrawing funds from these plans, they are not considered income. Do I need to report them on either FBAR or 8938? If yes, in which sections? IRS instructions are very vague on this - perhaps someone had similar issues with foreign pension plans?

Thank you for your advice.


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## BBCWatcher

Plan #1 is FBAR/FATCA reportable. Plan #2 is not -- though (hopefully obviously) if Plan #2 is ultimately paid and deposited into your foreign account, the funds are reportable just like any other funds.


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## mwebber

BBCWatcher said:


> Plan #1 is FBAR/FATCA reportable. Plan #2 is not -- though (hopefully obviously) if Plan #2 is ultimately paid and deposited into your foreign account, the funds are reportable just like any other funds.


The contributions to plan 1 by employer are not taxable, correct? As I do not use the money and have never withdrew. 

In regards to plan 2, the idea is to deposit funds to my US account once I leave the company. Again, do I report this as income when I withdraw?


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## BBCWatcher

mwebber said:


> The contributions to plan 1 by employer are not taxable, correct?


Not correct. Unless there's a tax treaty that says otherwise, it's likely they are taxable when paid into the account.



> As I do not use the money and have never withdrew.


That's nice, but it probably doesn't matter. The usual case for such accounts (401k-like foreign accounts), unless a tax treaty says otherwise, is that income received and deposited into the account (employer matches) is taxable income as/when received. Then you'll probably need to make QEF elections on the gains each year unless you're very, very careful about how those funds are invested. Even if you're careful about how the funds are invested, interest and dividends will be considered income as you go (in each year), and only capital gains will be deferred until realized as you trade within the account.

In short, the fact some foreign government doesn't tax that account is completely irrelevant to the IRS unless a tax treaty says otherwise. It's either treated the same as any other non-tax advantaged account (as if held at a U.S. brokerage), or, if you've got PFIC issues as a result of the investments within the account, you'd make QEF elections (report unrealized gains every year, basically).

The matching contributions you receive would likely be treated as earned income from the U.S. point of view (see below).



> In regards to plan 2, the idea is to deposit funds to my US account once I leave the company. Again, do I report this as income when I withdraw?


Absolutely, in the year you receive it. It would very likely be considered earned income from your description, equivalent to a severance payment. If it's considered earned income then you may be able to shield it from some or all U.S. taxation via the Foreign Earned Income and Foreign Housing Exclusion depending on your circumstances when that payment is made to you.


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## mwebber

wow, BBC Watcher, thanks a lot... I really should think about getting into compliance and renouncing my U.S. citizenship. The IRS code is really ambigious and instructions are not clear. That is why so many people cannot become compliant. Basically, if you are living abroad, you will always be at risk of breaking some of the IRS million different laws.
What a country!!!


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## BBCWatcher

The IRS is actually well above average in writing clear, understandable instructions compared to other tax authorities around the world. That's been my experience, anyway.

The treatment of tax-advantaged accounts is reciprocal. Whatever country you're living in, _unless a tax treaty says otherwise_, will not provide any tax benefits to U.S. tax-advantaged accounts such as 401(k) accounts and IRAs. It's the same issue.


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## mwebber

BBCWatcher said:


> The IRS is actually well above average in writing clear, understandable instructions compared to other tax authorities around the world. That's been my experience, anyway.
> 
> The treatment of tax-advantaged accounts is reciprocal. Whatever country you're living in, _unless a tax treaty says otherwise_, will not provide any tax benefits to U.S. tax-advantaged accounts such as 401(k) accounts and IRAs. It's the same issue.


To me, the whole concept of paying US taxes on my worldwide income and/or providing all these reports to the US government is totally absurd. I have been living abroad for many years and do no have any plans to return to the US; yet, I am obliged to report every single penny to the US and pay taxes to the country where I do not live and do not benefit from their services. The whole concept is ridiculous and, unfortunately, US is just one of a few countries which penalises its citizens for living abroad.


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## BBCWatcher

Well, OK, but this particular issue is general. Tax-advantaged retirement accounts don't really cross borders very well. If you had a Belgian tax-advantaged account then moved to Thailand, for example, Thailand wouldn't particularly care what Belgium thinks about their account. If Thailand wants to tax it, Thailand would. It certainly wouldn't be a Thai tax-advantaged account.

And the U.S. doesn't actually tax that income until at least two things are true: (1) it's above thresholds (at least $10K unearned and above ~$100K earned), and (2) some other country doesn't tax it first at or above U.S. rates. For example, let's suppose you're receiving $80K/year in salary and $5K/year in employer match into that account. The account is generating $2K/year in interest, dividends, and gains, and you've got another $5K/year in unearned income. I just described someone who, if living outside the U.S., wouldn't owe even a dime in U.S. income tax. You've got to hit at least some non-trivial numbers (and not substantially foreign taxed) before the IRS starts to collect.

If _that's_ a problem, you can renounce U.S. citizenship (assuming you hold another citizenship). That's the deal, and it's a voluntary one. In the meantime, your membership in that particular club means you have unfettered access to the world's largest economy, and (to pick a random example) you can suddenly pop up in Minnesota, destitute, in need of full time nursing home care, and Medicaid would pay for your care. The option value of those rights and privileges is non-zero. Whether you find that deal to be a good deal for you or not is entirely up to you and within your power to reject should you choose, but it is a reasonable deal on offer.


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## Bevdeforges

BBCWatcher said:


> In the meantime, your membership in that particular club means you have unfettered access to the world's largest economy, and (to pick a random example) you can suddenly pop up in Minnesota, destitute, in need of full time nursing home care, and Medicaid would pay for your care. The option value of those rights and privileges is non-zero. Whether you find that deal to be a good deal for you or not is entirely up to you and within your power to reject should you choose, but it is a reasonable deal on offer.


Ooh, Minnesota must have a really nifty Medicaid program. I remember all the hoops we had to jump through to get my Dad onto Medicaid back in Massachusetts - and he was a resident in the state for over 50 years, a WWII vet and had never lived abroad (like I do). I don't think I could go back and claim benefits in The Old Country like that (not that I particularly want to anyhow).

In practice, too, I think you'll find that the IRS isn't really all that intense about tracking down every last cent of technical income from foreign sources that are already subject to the tax rules of your country of residence. We've just had someone in the France section call the Paris office of the IRS, and they confirmed that many of the "benefits" that would be considered income back in the US are not reportable on your US tax return if you're drawing them from the French government (for example). 

Believe it or not, the IRS is actually fairly reasonable about these things. They are looking for big time tax evaders, not for technical mistakes or missteps by those who are generally law abiding folks, juggling the requirements of two countries' tax systems.
Cheers,
Bev


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## mwebber

Thanks for your comments. I am just frustrated as these things are not very typical and make filing very complicated as I do not know what to file. The "tax experts" also do not have a very clear view on the situation with the retirement plans.

For now, I assume:

For my defined contribution plan (which is essentially similar to US 401k), I crecognise both my own and employer contributions to the plan as foreign earned income in a particular year (basically, it is line 7 on 1040 and on 2555?). This means that I pay tax on employer contributions now and will not have to pay anything on these in the future as I already recognised them as income? I report the current balance on both FBAR and Form 8938? No other forms?

For my defined benefit plan (which is a lump sum based on a formula and number of years in service) which is vested, but depends on the final year salary, I just report on FBAR? I pay taxes on this once I receive the payment upon leaving the company.

Is the approach correct or any other suggestions?


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## Nononymous

BBCWatcher said:


> Well, OK, but this particular issue is general. Tax-advantaged retirement accounts don't really cross borders very well. If you had a Belgian tax-advantaged account then moved to Thailand, for example, Thailand wouldn't particularly care what Belgium thinks about their account. If Thailand wants to tax it, Thailand would. It certainly wouldn't be a Thai tax-advantaged account.


The converse, of course, is that once our hypothetical Belgian moves to Thailand, Belgium won't give a toss about his Thai tax-advantaged account, and won't try to tax his retirement savings in Thailand, and I'm guessing won't want to see tax returns at all. In this sense being a Belgian is far superior to being an American. And this is the OP's situation.


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## Bevdeforges

mwebber said:


> Thanks for your comments. I am just frustrated as these things are not very typical and make filing very complicated as I do not know what to file. The "tax experts" also do not have a very clear view on the situation with the retirement plans.
> 
> For now, I assume:
> 
> For my defined contribution plan (which is essentially similar to US 401k), I crecognise both my own and employer contributions to the plan as foreign earned income in a particular year (basically, it is line 7 on 1040 and on 2555?). This means that I pay tax on employer contributions now and will not have to pay anything on these in the future as I already recognised them as income? I report the current balance on both FBAR and Form 8938? No other forms?
> 
> For my defined benefit plan (which is a lump sum based on a formula and number of years in service) which is vested, but depends on the final year salary, I just report on FBAR? I pay taxes on this once I receive the payment upon leaving the company.
> 
> Is the approach correct or any other suggestions?


If you choose to go that route, then yes, you include your employer's contribution as income in the year it is "received" (i.e. when the employer makes the contribution). That means it would be includible under the FEIE. 

I'm not sure if retirement plans are actually reportable on the FBAR - I thought it was only for bank accounts. But I suppose it would fall under the items you report on the 8938 if your totals exceed the filing threshold ($200,000 for singles, $400,000 MFJ). Then, technically speaking, you probably should also recognize the interest or other earnings on the account each year when you file. If you do that, then withdrawals from the account at retirement are nothing but transfers of capital, with no US tax consequences whatsoever. (Like you were taking money out of a savings account.)

If you don't declare and pay taxes on the earnings each year, then on withdrawal you probably should use the "annuity rules" for pensions (see publication 575 for more information). This would mean that you have to determine what portion of each withdrawal is previously unreported earnings and how much is your original contribution. (It does reduce the amount considered as "income" and thus the potential taxes.)

Or, you go for "selective compliance" based on the notion that you're not evading anything - you're making use of a tax-free (or tax-deferred) retirement plan that is recognized by the government of your country of residence. You could even try calling the IRS office in London and just asking what they recommend in this situation. Sometimes the answer you get might surprise you. 
Cheers,
Bev


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## BBCWatcher

As mentioned way upthread, my view is that Plan #2 is not FBAR/FATCA reportable.


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## Bevdeforges

BBCWatcher said:


> As mentioned way upthread, my view is that Plan #2 is not FBAR/FATCA reportable.


Sorry for not being clear, I was talking about Plan #1.
Cheers,
Bev


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## mwebber

Nononymous said:


> The converse, of course, is that once our hypothetical Belgian moves to Thailand, Belgium won't give a toss about his Thai tax-advantaged account, and won't try to tax his retirement savings in Thailand, and I'm guessing won't want to see tax returns at all. In this sense being a Belgian is far superior to being an American. And this is the OP's situation.


Yes. And this is why I am seriously considering giving up my citizenship. I do not think the American government has any right to tax anything which is earned abroad. I do not use services of the US government and I am not even represented in the Congress or in the House of Representatives. The whole US taxation system is totally unfair.


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## mwebber

Bevdeforges said:


> If you choose to go that route, then yes, you include your employer's contribution as income in the year it is "received" (i.e. when the employer makes the contribution). That means it would be includible under the FEIE.
> 
> I'm not sure if retirement plans are actually reportable on the FBAR - I thought it was only for bank accounts. But I suppose it would fall under the items you report on the 8938 if your totals exceed the filing threshold ($200,000 for singles, $400,000 MFJ). Then, technically speaking, you probably should also recognize the interest or other earnings on the account each year when you file. If you do that, then withdrawals from the account at retirement are nothing but transfers of capital, with no US tax consequences whatsoever. (Like you were taking money out of a savings account.)
> 
> If you don't declare and pay taxes on the earnings each year, then on withdrawal you probably should use the "annuity rules" for pensions (see publication 575 for more information). This would mean that you have to determine what portion of each withdrawal is previously unreported earnings and how much is your original contribution. (It does reduce the amount considered as "income" and thus the potential taxes.)
> 
> Or, you go for "selective compliance" based on the notion that you're not evading anything - you're making use of a tax-free (or tax-deferred) retirement plan that is recognized by the government of your country of residence. You could even try calling the IRS office in London and just asking what they recommend in this situation. Sometimes the answer you get might surprise you.
> Cheers,
> Bev


Bev, this part is very confusing to me. There are different opinions with no consensus. I spoke to tax adviser this morning whose opinion is both plans need to be reported on both FBARs and 8938. His argument is that for a defined contribution plan, the value is known as of 31 Dec 2013 and I can withdraw funds if needed. For a defined benefit plan, while I cannot withdraw and will only have access to the funds once I retire or leave the company, I am already vested and the amount of the lump sum can be estimated if I use last year's gross salary and assume I leave the company tomorrow (basically there is a known formula). 

As for the defined contribution plan, recognising interest and/or income on the 1040 is extremely difficult and will be inaccurate. First problem is that the plan is in GBP currency and the USD amount can change at the end of each year simply due to the fluctuations of the GBP/USD exchange rate. Second problem is that any gains/losses are temporary as I have never withdrew money and have no intention doing so in the foreseeable future. For instance, it can happen that there is a gain in the fund of USD 100 for 2013, but there is a loss of USD 200 in 2014. Why should I pay taxes on some "artificial" value in 2013 which I may never actually receive and was erased during 2014? Doesn't it make more sense to recognise everything upon withdrawal when you get the money? However, the tax code doesnt allow this.

The other issue is how do I prove, say in 10 years, that the employer contributions to the Plan have been reported as income? There are no specific lines on either 1040 or 2555. This is really a mess


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## BBCWatcher

mwebber said:


> I spoke to tax adviser this morning whose opinion is both plans need to be reported on both FBARs and 8938. His argument is that for a defined contribution plan, the value is known as of 31 Dec 2013 and I can withdraw funds if needed. For a defined benefit plan, *while I cannot withdraw and will only have access to the funds once I retire or leave the company*, I am already vested and the amount of the lump sum can be estimated if I use last year's gross salary and assume I leave the company tomorrow (basically there is a known formula).


I think his/her opinion is wrong for the reason I highlighted. However, there is no penalty in over-reporting. Consequently the most common advice is "report everything that even vaguely resembles a reportable account."



> As for the defined contribution plan, recognising interest and/or income on the 1040 is extremely difficult and will be inaccurate. First problem is that the plan is in GBP currency and the USD amount can change at the end of each year simply due to the fluctuations of the GBP/USD exchange rate.


Not a problem. The IRS tells you that you can pick a reasonable exchange rate. They also publish an exchange rate annually that you can use. If you're not happy with theirs, and you wish to pick something reasonable and defensible otherwise that better reflects the real gains in U.S. dollar terms, you certainly may. Keep a record of the exchange rate calculation if don't use the IRS's.

Note that exchange rate fluctuations alone could result in capital losses in certain circumstances, and (other than losing money) there's nothing wrong with those in terms of their impact on your U.S. tax owed, if any.



> Second problem is that any gains/losses are temporary as I have never withdrew money and have no intention doing so in the foreseeable future.


Sure they are. So is my ordinary brokerage account held in the U.S. where I follow a "buy and hold" strategy to the best of my ability. Nothing unusual or problematic. It's just math.



> For instance, it can happen that there is a gain in the fund of USD 100 for 2013, but there is a loss of USD 200 in 2014. Why should I pay taxes on some "artificial" value in 2013 which I may never actually receive and was erased during 2014?


Ask Congress, but maybe you don't. In those amounts, living overseas, you certainly wouldn't until about $110K in AGI. And also note that capital losses can be useful, though Congress has limited their power to some extent.



> Doesn't it make more sense to recognise everything upon withdrawal when you get the money? However, the tax code doesnt allow this.


It does not for interest and dividends paid in a foreign financial account unless a tax treaty says otherwise. It may not for implied capital gains. You pay as you go, if indeed anything is owed at all.

When I open a Certificate of Deposit (CD) at a bank in the U.S. it's treated exactly the same way. The interest paid on the CD (not much these days) is taxed in the calendar year/quarter when it's credited to the account regardless of the length of term of the CD. You pay as you go. That's by far the most common treatment of financial accounts. It's only the tax-advantaged ones that are tax-deferred or tax-exempt, and (just like Thailand in that earlier example), unless there's a treaty otherwise most countries do exactly the same thing. (Yes, there's CBT, but that's a separate issue here.)



> The other issue is how do I prove, say in 10 years, that the employer contributions to the Plan have been reported as income? There are no specific lines on either 1040 or 2555. This is really a mess


That's line 7: Wages, salaries, tips, etc. It's exactly as if your employer bought some shares in Ford Motor Company in your U.S. brokerage account as part of your total compensation for your work in Topeka, Kansas. The fact you're receiving that income in British pounds, euro, company cars, or bales of hay is irrelevant. If somebody pays you in the form of cans of tomatoes to babysit their children, that'd go on line 7, too (at fair market value).

Whether that income is actually _taxable_ is a completely separate question. If that line is less than $100,000 then _generally_ you can pay zero U.S. tax. If that line 7 is a low number then in some circumstances you can actually receive money from the IRS -- one of the perks of U.S. citizenship. That's called a refundable tax credit, and occasionally U.S. citizens, U.S. nationals, and U.S. permanent residents living overseas qualify for those. One example is the Earned Income Tax Credit. Nobody seems to mention that, but I am. There are very, very few countries that pay their expatriates only because they are citizens, nationals, and permanent residents who are lower income workers, boosted if they have U.S. status children to care for. The U.S. does.

What you might think are problems or complexities aren't, actually, in many cases (and probably all of these). They may be answers you don't like about how the U.S. tax code works, but does anybody ever like any country's tax code?


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## mwebber

Thanks BBC. I think I in fact need an adviser to do my taxes. I thought I could do them myself, but the retirement plan issues are just too complex. As I have decided to do the streamline process, I am really uncomfortable not disclosing everything. Yet, I do not want to overreport and pay extra taxes.


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## BBCWatcher

There are no taxes assessed on FBAR and FATCA reports.


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## mwebber

All

I am still not very clear how to deal with the defined contribution plan for IRS. Above you suggested that the dividends, interest and gains must be reported as income to the IRS. However, I do not understand why temporary "gains" in the defined contribution plan should be reported. These are unrealised gains and losses which change from year to year and are only "paper" income/losses which may never materialise.

For instance, if both my employer and I have contributed USD 5,000 into the employer administered plan in a particular year (I accept that I should include both mine and employer contributions as income as foreign pension plan is not the same as US retirement plans). For example, these funds are used to purchase 100 shares of a stock for USD 50 per share. If during the year the stock goes up to USD 70 per share, I have a "paper" gain of USD 2,000. However, if I do not sell the stock / withdraw funds, I do not benefit from the gain. Next year, the stock can go down from USD 70 per share to USD 35 per share and I would have a "paper" loss. 

I understand that interest income / dividends must be reported as income because they are realised. However, doesn't make sense to realise "gain" and report it as income once I actually sell the stock? 

For instance, if over the years all contributions (which I declare as income in each year) = X, and I withdraw upon leaving the company X + Y, where Y is a realised gain - don't I just declare Y as a realised gain in that particular year and pay tax on Y?


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## Bevdeforges

You're over-thinking this. Though, to be honest, everyone does. Tax law doesn't actually have to make sense.

You could try treating your defined contribution plan as a sort of annuity. In that case, you'd declare what you and your employer have contributed. Then, at retirement, your withdrawal (or cashing in of the plan) would be taxed based on the proportion of your contributions (i.e. what you had reported and paid tax on) to the amount withdrawn. So, if over the life of the plan you and your employer paid in $100,000 and your pay-out on retirement is $150,000, you pay tax on the difference - i.e. on $50,000. (If you withdraw your money over time, there's a calculation for handling that.)

It's not exactly the way most tax advisers will advise you, but unless you've got other "unusual" stuff on your returns, it's highly unlikely that the IRS will get particularly upset.
Cheers,
Bev


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## BBCWatcher

Bev, let's not go inventing things here.  Before deciding whether to break the IRS's rules it's important to understand them first.

OK, as posted upthread -- please, do read what's posted! -- _if the investment(s) is(are) considered PFICs by the IRS_ then you would take what are called QEF elections on the capital gains. QEF elections mean you would calculate and report capital gains (and losses) annually, as described. If you don't have a PFIC investment, you don't.

Please note when you take QEF elections your cost basis changes every year. For example, let's suppose you invest 10 pounds in a foreign mutual fund (clearly a PFIC investment), and the equity increases in value by 1 pound every year. Every year you would report 1 pound in your QEF election. At the end, when you sell that mutual fund, the cost basis would include all your QEF elections, so your final taxable capital gain will be only 1 pound in this example. In other words, QEF elections are pay-as-you-go capital gains for PFIC investments.

_Your_ contributions to the account are not income. If you are paid a salary and then, let's say, you allocate 5% of that salary to the account and your employer matches that contribution pound-for-pound, then your earned income is your salary plus the 5% employer match. You don't count that 5% you contributed again -- you don't double count.


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## Bevdeforges

The rules (actually, the IRS regs) aren't written to fit all situations, particularly those of non-US banking transactions and investment vehicles. You wind up picking and choosing which US oriented regs to apply and how.

But if all else fails, the staff at the overseas IRS offices actually are quite helpful.
Cheers,
Bev


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## maz57

BBCWatcher said:


> Bev, let's not go inventing things here.  Before deciding whether to break the IRS's rules it's important to understand them first.
> 
> OK, as posted upthread -- please, do read what's posted! -- _if the investment(s) is(are) considered PFICs by the IRS_ then you would take what are called QEF elections on the capital gains. QEF elections mean you would calculate and report capital gains (and losses) annually, as described. If you don't have a PFIC investment, you don't.
> 
> Please note when you take QEF elections your cost basis changes every year. For example, let's suppose you invest 10 pounds in a foreign mutual fund (clearly a PFIC investment), and the equity increases in value by 1 pound every year. Every year you would report 1 pound in your QEF election. At the end, when you sell that mutual fund, the cost basis would include all your QEF elections, so your final taxable capital gain will be only 1 pound in this example. In other words, QEF elections are pay-as-you-go capital gains for PFIC investments.
> 
> _Your_ contributions to the account are not income. If you are paid a salary and then, let's say, you allocate 5% of that salary to the account and your employer matches that contribution pound-for-pound, then your earned income is your salary plus the 5% employer match. You don't count that 5% you contributed again -- you don't double count.


The insane PFIC rules were the deal breaker that finally convinced me I had to get rid of US citizenship. Not being able to invest freely in my chosen home was a US "penalty" I wasn't willing to accept. It wasn't just the tax; it was the convoluted reporting that even the professionals scratch their heads over.


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