# Should we realise some USA capital gains while overseas?



## boopieboop (Mar 15, 2016)

Hi all,

My partner is a US national now living in New Zealand still in the transitional tax resident stage meaning her USA investments are not yet subject to New Zealand capital gains tax. She has some USA-based equity investments with some hefty unrealised long term capital gains. She is also earning well under the US$103,900 exclusion amount so isn't paying USA taxes on her NZ earned income.

I'm just wondering what the best way to structure our finances is and whether we should realise some capital gains now.

My understanding is that the long term capital gains tax rate is 0% up until US$39,375. Exactly what income counts towards this number for an expat? NZ earned income? Retirement/kiwisaver employer contributions? Kiwisaver tax credit? NZ investment capital gains? NZ dividends? USA-based realised capital gains? She has income from all of these sources... I believe if we count all of them towards the US$39,375 she would go into the next bracket.

Thanks a bunch for any help!


----------



## 255 (Sep 8, 2018)

boopieboop -- No one answered, so I'll take a stab. I can address the U.S. references, but have no clue, if you are asking about NZ taxes. First off, the exclusion I think you are referencing is the "U.S. Foreign Earned Income Exclusion" (FEIE,) as such, it only covers earned income ("NZ earned income.") Additionally, any bonuses paid by your employer is also considered earned income ("Retirement/kiwisaver employer contributions.") Any capital gains, US or NZ, are capital gains and reportable, as such, on your U.S. tax return. As I'm sure you know, capital gains are not reportable until your positions are closed ("realized.") In the US, long-term capital gains rates are based on income and are 0, 15 or 20%. Short term capital gains are taxed at the taxpayers ordinary income rate. NZ dividends, as any US dividends, are reported as dividends. There is no difference in an American's tax reporting requirements for being an expat. You're taxed on world-wide income. The reporting requirements are exactly the same -- although, of course, you would be eligible to exclude some earned income through the FEIE or take a foriegn tax credit (I recommend calculating both and see which gives you the most bang for your buck.) As far as the "Kiwisaver tax credit," that appears to only affect your Kiwi taxes and would seamlessly reduce the amount of foreign taxes paid/amount you could credit on your US tax return. The capital gains rates are rather minimal in the US. I suppose, if you can close the position and eliminate any NZ taxes on the gain, it might make sense (but generally I don't recommend making any investment decisions based on tax implications.) I would also recommend reading the US-NZ Tax Treaty (I haven't,) it would be unusual to be taxed on the same income by both countries. You may be eligible for benefits, I haven't referred.

https://www.irs.gov/businesses/international-businesses/new-zealand-tax-treaty-documents

Cheers, 255


----------



## Moulard (Feb 3, 2017)

> Additionally, any bonuses paid by your employer is also considered earned income ("Retirement/kiwisaver employer contributions.")


Not so fast. 

While I will admit to knowing very little about Kiwisaver beyond the fact that it was partly modeled after Australian Superannuation what I can say, is that under US tax law, it is highly unlikely that employer contributions can be treated as earned income. 

s.911 specifically excludes exemption for non-qualified retirement plans. KiwiSaver, by virtue of being a New Zealand retirement plan is by definition non-qualifying.

So unless retirement plan contributions are specifically mentioned in the 2008 US-NZ protocol, it is extremely likely that employer contributions would be taxed as ordinary income under s.402(b). If Kiwisaver works like Super in that employee contributions can be taken out of pre-tax income then those contributions too would be taxed as ordinary income.


----------



## 255 (Sep 8, 2018)

Moulard -- It is true, I do not know anything about "Kiwisaver" other than what the OP listed in his post and as I stated, I have not read the US-NZ Tax Treaty. The OP referenced an employer contribution, therefore I agree with you, the contribution is considered ordinary income (unless otherwise defined in the US-NZ Tax Treaty.) Ordinary income and earned income are synonymous! I don't really understand your point. Cheers, 255


----------



## Bevdeforges (Nov 16, 2007)

The point is that to be considered as an "employer contribution" in this context, the contribution has to be made to a "qualified plan" - and the US does not recognize any retirement savings plan outside the US as "qualified" - even if it functions identically to the US qualified plans. 

This is precisely the sort of thing that it's better just to not report at all, out of ignorance (feigned or otherwise). The US has no means of verifying or even learning of your employment compensation and it is often just left off the tax forms. (And that advice parallels what the IRS people in one of the IRS overseas offices used to tell folks.)


----------



## underation (Oct 25, 2018)

Bevdeforges said:


> The point is that to be considered as an "employer contribution" in this context, the contribution has to be made to a "qualified plan" - and the US does not recognize any retirement savings plan outside the US as "qualified" - even if it functions identically to the US qualified plans.
> 
> This is precisely the sort of thing that it's better just to not report at all, out of ignorance (feigned or otherwise). The US has no means of verifying or even learning of your employment compensation and it is often just left off the tax forms. (And that advice parallels what the IRS people in one of the IRS overseas offices used to tell folks.)


If NZ doesn’t tax employer contributions on the way into the plan, presumably NZ will tax after retirement when the pensions are received? 

If so, then a USC who is filing US tax returns surely should simply exclude the contributions from Gross Income.

As it’s NZ income, and therefore NZ has the taxing rights, the priority is to comply with NZ tax law. Once the pension is in payment, the US citizen will have the opportunity to report the payments to the IRS and claim credit for the NZ tax they will have paid on the payments.

IMO. I, too, have not read the NZ treaty but I assume it contains the usual “Relief from Double Taxation” Article and is protected from the Saving Clause.

“Feigning ignorance” (i.e. perjuring oneself) is not necessary, as the US does not have the taxing rights unless the right to tax is specifically conceded by the treaty.


----------



## Bevdeforges (Nov 16, 2007)

underation said:


> “Feigning ignorance” (i.e. perjuring oneself) is not necessary, as the US does not have the taxing rights unless the right to tax is specifically conceded by the treaty.


That's your theory - however I believe the IRS sees things a bit differently. Having renounced, you're safely out of the clutches of the IRS as it is.


----------



## underation (Oct 25, 2018)

Bevdeforges said:


> That's your theory - however I believe the IRS sees things a bit differently.


Then that’s _your_ theory. And you seem to me to be mistaken. I’ve had a look now at the Treaty and the Protocol. Taxation rights on Kiwisaver employer contributions is not conceded to the US as far as I can see. 



> Having renounced, you're safely out of the clutches of the IRS as it is.


I’ve never been “in the clutches” of the IRS. The IRS doesn’t have taxing rights on non-US income received by residents of other countries. Therefore, no clutches. Pay your residence country what you owe to your residence country, pay the US what you owe to the US. You’ll be fine.


----------



## Moulard (Feb 3, 2017)

255 said:


> Ordinary income and earned income are synonymous! I don't really understand your point.


I was taking exception to two of your statements ...



> Additionally, any bonuses paid by your employer is also considered earned income ...


and...



> As far as the "Kiwisaver tax credit," that appears to only affect your Kiwi taxes and would seamlessly reduce the amount of foreign taxes paid/amount you could credit on your US tax return.


These two statements are patently incorrect.

You don't need to have read the NZ-US tax treaty. You don't even really need to understand anything about Kiwisavers. You only need read s.911 and s.402 of the US Internal Revenue Code. 

You are wrong on two points of US law..

Point One...

Not all earned income is treated as earned income in the eyes of the IRS. These sorts of retirement schemes are not treated as earned income under the IRC. Even if they are a direct percentage of wages, are part of an overall salary package, or are factored into an employment contract. As such they are not eligible for the foreign earned income exclusion by virtue of the fact that they are non-qualifying retirement schemes. For what its worth, no foreign scheme is qualifying. 

Point Two.

There is no tax credit available unless you are personally liable for the tax.

A quick google tells me that taxation the contributions to a Kiwisaver account (like Australian Super) are deducted from your pre-tax income. In the case of Kiwisaver, the contribution is taxed, but it is the employer that is liable for the tax not the employee. (In the case of Oz Super it is taxed as income to the super fund a small difference, but one that has no material impact on this point). Under US tax law, unless there is an actual personal tax liability, then no foreign tax credit is available. 

Upshot... the contribution is a percentage of your wages, you have had tax deducted from it and yet.

1) it is not treated as foreign earned income that can be excluded, and 
2) there are no foreign tax credits that can be claimed


----------



## underation (Oct 25, 2018)

Moulard said:


> Upshot... the contribution is a percentage of your wages, you have had tax deducted from it and yet.
> 
> 1) it is not treated as foreign earned income that can be excluded, and
> 2) there are no foreign tax credits that can be claimed


The question is: does the recipient get taxed by NZ on the eventual pension payments?

If so, that’s when the USC can report the income to the IRS, claiming credit for the NZ tax s/he has paid.

See the treaty article “Relief from Double Taxation.”


----------



## underation (Oct 25, 2018)

underation said:


> The question is: does the recipient get taxed by NZ on the eventual pension payments?


And the answer, it appears, is no.

Consequently, a US citizen who files US tax returns should report the employer’s contribution as US-taxable income, as that does not result in double taxation.


----------



## Moulard (Feb 3, 2017)

underation said:


> If NZ doesn’t tax employer contributions on the way into the plan, presumably NZ will tax after retirement when the pensions are received?
> 
> If so, then a USC who is filing US tax returns surely should simply exclude the contributions from Gross Income.


Employer contributions ARE taxed on the way in, but they are NOT taxed as income to the employee. 

And there is the rub. Employer contributions are taxed, but the employee is not liable for the tax. Under NZ law, I believe that employer contributions are treated as non-assessed income to the employee, but treated as assessed income of the fund. As such the tax liability is on the fund not the employee. 

Therefore in the eyes of the IRC, no tax credit is available to the employee for that portion of their wages that are contributed to the scheme.

Similarly, a highly remunerated individual may be forced under the IRC to pay tax on growth in the fund. 



> I, too, have not read the NZ treaty but I assume it contains the usual “Relief from Double Taxation” Article and is protected from the Saving Clause


Articles 18 and 22 (in the case of NZ) are not a double taxation panacea.

Article 18 protects pension payments after retirement. 

Article 22 provides relief it does not provide elimination of double taxation, and it allows the US to limit that relief - which it does.


----------



## underation (Oct 25, 2018)

Moulard said:


> Employer contributions ARE taxed on the way in, but they are NOT taxed as income to the employee.


Correct - and the eventual payments aren’t taxed either.



> ...no tax credit is available to the employee for that portion of their wages that are contributed to the scheme.


Correct. S/he hasn’t paid any NZ tax on the employer’s contribution. You can’t claim credit for tax you haven’t paid.



> Similarly, a highly remunerated individual may be forced under the IRC to pay tax on growth in the fund.


Well - might owe US tax, yes. It’s not coerced, since the law of the land (NZ law) presumably doesn’t require the expat to report his/her income to the US as US-taxable.



> Articles 18 and 22 (in the case of NZ) are not a double taxation panacea.


The expat isn’t being double-taxed. They’re being taxed on the employer contributions by the US rather than NZ.

If the expat never files US tax returns, the NZ income remains non-US-taxable. It’s up to the expat to decide whether to file the returns, complying with their citizenship obligation, or not file the returns. Some wouldn’t dream of filing, some wouldn’t dream of not filing. It’s a reasonable choice, either way, but it’s a complex situation and quite hard to figure out the pros and cons, for those who identify as American and want to live as dual citizens, owing loyalty (and potentially taxes) to both countries.


----------



## boopieboop (Mar 15, 2016)

Many thanks for these responses. One point of clarification. The ESCT is considered an employee income tax in NZ. As in, employer contributions are taxed at the employee's marginal income tax rate on the way in. The employer literally transfers the funds, just like PAYE (regular income tax), but it is considered to be paid by the employee via withholding.


----------



## underation (Oct 25, 2018)

boopieboop said:


> Many thanks for these responses. One point of clarification. The ESCT is considered an employee income tax in NZ. As in, employer contributions are taxed at the employee's marginal income tax rate on the way in. The employer literally transfers the funds, just like PAYE (regular income tax), but it is considered to be paid by the employee via withholding.


Have you tried claiming US tax credits for it?


----------



## Moulard (Feb 3, 2017)

Thanks Boopieboop. 

I had assumed the tax component was treated similar to Super given the two schemes are alike in so many other ways. Bad assumption on my part.

If the tax component appears on your personal tax summary from Inland Revenue (notice of assessment or its equivalent), then you can claim it. But the other point I made that it is not eligible for the Foreign Earned Income Exclusion remains correct.

Depending on your broader income profile you may be able to deduct in from your standard deduction to owe no US tax. But if you have other income that you need to report, then that may not be sufficient.

In which case you may find it beneficial to use foreign tax credits. I don't know NZ tax rates, but I will assume that the marginal rate is higher in NZ than the US.

You can also split your filing so that you use the FEIE to exclude your normal wages, and the FTC to offset the tax owed on contributions to your KiwiSaver. You would only be able to claim that portion of your income tax that was related to the non-excludable contribution.


----------



## boopieboop (Mar 15, 2016)

underation said:


> Have you tried claiming US tax credits for it?


Not as yet.


----------



## underation (Oct 25, 2018)

boopieboop said:


> Not as yet.


At any rate (it appears to me), since the tax paid on the employer’s contributions are taxed by NZ, and the tax is treated as being paid out of the employee’s wages, and it’s not a tax-deferred pension, and the eventual payments are exempt by treaty — there’s no untaxed income that could be taxed by the US, so it doesn’t really make any difference whether the employer’s contribution is reported, and US tax credits claimed, or excluded as exempt by treaty.


----------



## underation (Oct 25, 2018)

One further comment, about the problem referred to by Moulard concerning what retirement plans will or won’t be treated as “qualified” or “similar to “qualified”.



Moulard said:


> Not all earned income is treated as earned income in the eyes of the IRS. These sorts of retirement schemes are not treated as earned income under the IRC. Even if they are a direct percentage of wages, are part of an overall salary package, or are factored into an employment contract. As such they are not eligible for the foreign earned income exclusion by virtue of the fact that they are non-qualifying retirement schemes. For what its worth, no foreign scheme is qualifying.


This problem has been fixed in the (Consolidated) US-UK treaty provisions (I believe as a result of a taxpayer’s MAP appeal), by the two countries agreeing that a non-US-retirement plan which is similar to a “qualified” US plan (as determined by the Competent Authorities), will be treated as such. So clearly it’s not current US policy to obstinately behave like a jackass by dismissing other countries’ retirement plans as “not qualified” simply because they’re not American retirement plans.

From a cursory glance, it looks to me like it may have been fixed by the 2008 US-NZ Protocol also. But in any case, it’s clearly not necessary to _assume_ that the Kiwisaver has to be treated as “not a qualified retirement plan” when determining whether US tax is or is not due. Better (IMO) to assume that it _is_ a retirement plan / pension scheme, and treat it accordingly; and if the IRS disagrees, take it to the MAP.


----------



## underation (Oct 25, 2018)

It appears to me that the provisions set out in 18.4 of the 2006 US Model Tax Treaty can be taken to reflect current US policy on expats and non-US pension funds.

https://www.treasury.gov/press-center/press-releases/Documents/hp16801.pdf

The “not a qualified pension plan” meme seems likely (to me) to be a thing of the past.


----------

