# U.S. Tax on Provident Fund



## motojet

I have been working in the UAE for a few years and contributed to my employers Provident Fund. When I do leave my employer will give me a check for the full hopefully large amount of my Provident Fund. I hate to think that I will be required to pay the top marginal tax rate on this to the I.R.S.. (Between my salary and the value of my Provident Fund I will be well above the Foreign Income Exclusion Limits).

Is there anyway around this? Paying 35% or whatever the top rate happens to be is pretty painful.


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## BBCWatcher

Did you contribute (as you wrote), or did your employer? Big difference!

Assuming your employer did, and jumping about 3 steps too far ahead of the facts (and making too many assumptions, probably), one possibility is that you should file amended tax returns for the years when your employer contributed to the fund in order to report those contributions as earned income, hopefully within annual FEIE limits. Which might be what you should have done anyway. Then you'd make QEFs on the gains on an annual basis since presumably that provident fund is completely PFIC contaminated, also via those amended returns. (And if those QEFs are above your personal exemption and standard deduction along with the rest of your unearned income, you'll have some back taxes potentially. But _probably_ not.)

Oh, and back FBARs if you didn't report the fund there.

But, as I said, I'm jumping at least 3 steps ahead. If you could clarify, that'd be great.


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## BBCWatcher

....I'm getting as rapidly educated as I can on typical UAE employment terms in order to know what questions to ask. Now I have another question: is this payment you will be receiving an "End of Service Gratuity" or a cash out of your Provident Fund? There's also a big difference between those two, so let's get that clarified.

If the latter, it appears that the usual arrangement is that both you and your employer contribute to the fund. Your contributions should have no U.S. tax consequences (except for the gains) unless you failed to report your contributions as part of your earned income in the tax years you made them. I'm warming to the idea of going back and filing amended returns to (also) include your employer's contributions as part of your earned income, which is probably what you should have done anyway. That assumes you still have some unused FEIE/FHE amounts in those prior tax years.

I'm also somewhat curious whether you are required to withdraw all the proceeds of your provident fund upon termination of your employment, or whether you can defer some or all of the withdrawals. Though I think that's probably a very secondary possibility.

Awaiting further information.


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## Bevdeforges

One other big question - on what basis will you be paying taxes in the US? If you're a citizen, it won't matter when or where you get the payment. If you get your payout before you take up residence in the US it won't be an issue.

If you're a US citizen, have you kept up on your IRS filings? If so, it might be easiest to simply amend your prior returns and then on payout, you'd only pay taxes on the gain over what you've already paid in and/or declared as employer contribution.
Cheers,
Bev


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## BBCWatcher

Yes, that's what I'm thinking too, Bev. Though it'll probably be QEFs due to PFIC issues. I'm assuming a UAE provident fund isn't invested 100% in government bonds, for example.

I suppose there's the theoretical possibility the original poster is a U.S. national or permanent resident (if not a citizen), and that's the same tax situation. Probably not, but you never know. Very good point about asking whether the original poster is a U.S. citizen (or national or permanent resident).


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## motojet

I'm a U.S. Citizen, resident of the the UAE. I have filed tax returns every year since I have been here and have reported my Provident Account with the FBAR. My first two years in Dubai I made less than the Foreign Income Exclusion Limit, the last three I have earned over the limit and had to pay taxes. I have contributed some of my salary into the Fund, my employer has
also contributed into my fund. My money is invested into a small number of mutual funds offered by the Provident Fund. When 
I leave the company I should receive a check or deposit into a bank of my choice approximately a month later.

Hope that clarifies.


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## BBCWatcher

It does, thanks. And is it correct to assume those funds were invested in stocks, bonds, mutual funds (called unit trusts in certain countries), REITs, and/or some other type of investment vehicle, so there are some capital gains as well?

Bravo on the FBARs, by the way. Too many people miss that.

OK, I'm assuming you reported your contributions into the fund as earned income on your U.S. tax return in the same years you earned that income. So we're only dealing with the employer contributions and the investment gains. If all that's correct, you'd have to check to see what the IRS says (if anything) about when those employer contributions are considered earned. There are two possibilities, really. One is that those contributions are deferred income, and the other is that those contributions should have been deemed earned (and reportable) in each of the years you worked.

Now, if the latter treatment is acceptable to the IRS, that's _probably_ good news, on balance. It means you'd go back and file amended returns. For those couple years when you were under the FEIE+FHE, the employer contributions would be tax free (or only taxed on the portion above the FEIE+FHE). For the other years you'd owe some tax, but since you're spreading out that income it could be income in a lower bracket.

Ah, but it's still not quite that simple. Because you didn't report that income and pay tax at that time, the tax you'd owe would be marked up with interest and/or penalties. So you'd have to toss that into the equation versus (if the IRS allows) just paying this tax year's tax rate on those employer contributions as deferred income.

OK, so that covers the employer contributions. What about the gains? Well, it's a safe bet a UAE provident fund didn't send those monies to Vanguard in the U.S. for investment there, with wonderful 1099s issued for your U.S. tax filings. That is, that fund would most likely be considered a PFIC. And those have special rules, because the IRS (and Congress, really) don't like such things since they've been horribly abused as tax shelters.

There's a solution for that: taking what are called QEFs. Essentially what you do is tally up the gains in each of the years you've held the fund, starting from year 1, and report those gains on your annual tax returns, step by step, year by year. (In your case that's via amended returns.) And then you pay whatever tax you owe. If you did not fully consume your personal exemption and standard deduction, then these capital gains shouldn't be taxable. If you did, they are -- and see above about interest and/or penalties.

Not fun, but there it is.

That's a reasonable summary of the situation as I see it, but perhaps Bev and others have some views. And of course the IRS has the only view that ultimately matters.

Hope that helps.


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