# ISAs for US citizens? Accountant reccomendations?



## udon918 (Jul 2, 2009)

Dear all, I am new to this forum. Please forgive me if this is a common question, but I was unable to find any other reference to my questions among the archives.

I have been living here in the UK for 2 years now, and have some money in a couple of cash mini-ISAs. ISAs are like Roth IRAs and give tax-free interest earnings within the UK, but I do not know their status in the US (The US requires that we report all income from all sources world-wide) and whether these UK tax free earnings are taxable in the US.

The bigger part of my question, however, is that I am about to buy a flat in London. My financial advisor is setting up a stock ISA (that in vests in a unit trust, similar to a mutual fund) for the repayment portion of a mortgage, with the actual mortgage being an interest-only loan. I am reading now from an American Expat magazine that US does not respect the tax-free status of these ISA accounts, and that unit trusts are a "US tax unfriendly asset" so I am becoming worried about the potential tax liabilities of such an investment.

I cannot post the URL for this particular article I just read, but if you dig up the 2009 Summer edition of American in Britain magazine under "Taxing Issues" you should be able to find the article.

Also, if anyone can recommend a good (and inexpensive) accountant who has experience in US-UK tax issues, I would welcome any and all suggestions.

Thanks!


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## Bevdeforges (Nov 16, 2007)

OK, well the article you read is correct (though I wasn't able to find it online). Foreign tax-advantaged investments are not subject to US exemptions from taxation. Add to that the fact that, once your total overseas bank/investment account balance tops $10,000, you're supposed to file an annual declaration of your non-US accounts with the Treasury Dept.

It's only foreign earned income (i.e. salary and a few other categories) that is subject to the overseas earned income exclusion. All other forms of gains, interest and earnings are supposed to be declared and have US taxes paid on them. (Actually, you have to declare your earned income, too, in order to take the exclusion each year.)

If you're concerned about the cost of an accountant, you may want to try contacting an enrolled agent in the UK. This is a specialized type of tax advisor, registered with the IRS and subject to Treasury Dept. standards of conduct. There are a few enrolled agents in the UK, and I suspect they may have some experience with UK-US tax issues. The website for the National Association of Enrolled Agents is here: NAEA : Home page where there is more information about the profession.
Cheers,
Bev


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## udon918 (Jul 2, 2009)

(dub)(dub)(dub)altassets(dot)com/private-equity-knowledge-bank/country-focus/article/nz3254(dot)html

I tried to recreate the link if you just substitute the (obvious) you should get to it. In the meantime, I will check out the NAEA site that you included in your last post.

Cheers!


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## jlms (May 15, 2008)

udon918 said:


> Dear all, I am new to this forum. Please forgive me if this is a common question, but I was unable to find any other reference to my questions among the archives.
> 
> I have been living here in the UK for 2 years now, and have some money in a couple of cash mini-ISAs. ISAs are like Roth IRAs and give tax-free interest earnings within the UK, but I do not know their status in the US (The US requires that we report all income from all sources world-wide) and whether these UK tax free earnings are taxable in the US.
> 
> ...



Why use shares for the repayment of the capital? Specially if there is no tax advantage as somebody has explained already.

Here in the UK there were a lot of people left in negative equity due to poorly performing shares.

In the UK you have the offset mortgage in which the bank calculates the difference between your mortgage debt and your savings and then you pay interest on the difference only.

Lets say, your mortgage is £200000 and you have savings of £50000, then you pay interest for £150000 only and receive no interest payments at all.

Interest is higher of course, but the vital part here is that the interest you are saving (the one you would pay for those £50000 of mortgage offset by your savings) are not earnings (you never see that money) and thus, at least in the UK, there is nothing to declare (you will need to check the situation in the US, but I find unlikely that it can be claimed you are earning anything).


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## Punktlich2 (Apr 30, 2009)

udon918 said:


> Dear all, I am new to this forum. Please forgive me if this is a common question, but I was unable to find any other reference to my questions among the archives.
> 
> I have been living here in the UK for 2 years now, and have some money in a couple of cash mini-ISAs. ISAs are like Roth IRAs and give tax-free interest earnings within the UK, but I do not know their status in the US (The US requires that we report all income from all sources world-wide) and whether these UK tax free earnings are taxable in the US.
> 
> ...


It is generally unwise for a US citizen to invest in an ISA or a unit trust unless s/he has earnings so low as to be below the US income tax threshold. This is because an ISA or any tax-free, tax-sparing or tax-postponed investment EXCEPT a retirement pension or similar product qualifying as a pension under article 18 of the US-UK tax treaty will be taxed currently by the IRS.

Furthermore, a unit trust does not qualify as a mutual fund under US tax laws (nor does a US mutual fund qualify as such under UK tax laws) and therefore the tax treatment is anomalous and horrendous.

Most UK financial advisors are incompetent to advise US citizens. If you don't believe me, read this case:
Grimm v. Newman
There may be a few accountants who don't charge too much and who can advise on US-UK cross-border issues and prepare tax returns. I know that many former City types whose returns were done at their employers' expense by the Big 4 are now unemployed or on much lower pay and looking for cheaper expertise. I would not, however, offer any names on a public forum, not even my own. I suggest you try for a personal referral.


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## PeterR (Jul 3, 2009)

Bevdeforges said:


> Add to that the fact that, once your total overseas bank/investment account balance tops $10,000, you're supposed to file an annual declaration of your non-US accounts with the Treasury Dept.


It's not even as simple as that. Suppose you have two UK accounts. During the year you transfer $5000 from one to the other. Because the maximum amount at any time in the one account + the maximum amount at any time in the other account 
exceeds $10,000, you must file form TD F 90-22.1 (a.k.a. FBAR) and fill in the relevant line on Schedule B of Form 1040.


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## Bevdeforges (Nov 16, 2007)

PeterR said:


> It's not even as simple as that. Suppose you have two UK accounts. During the year you transfer $5000 from one to the other. Because the maximum amount at any time in the one account + the maximum amount at any time in the other account
> exceeds $10,000, you must file form TD F 90-22.1 (a.k.a. FBAR) and fill in the relevant line on Schedule B of Form 1040.


If the total balance in all your overseas accounts exceeds $10,000 at any time during the year, you have to file the Treasury form. In my case, I wind up having to file all my overseas personal accounts because I have signature authority over our company account - which regularly exceeds $10,000. 

It's a PITA but just one of those little "inconveniences" of US citizenship. Once you get used to it, the paperwork takes about 20 minutes a year.
Cheers,
Bev


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## PeterR (Jul 3, 2009)

Bevdeforges said:


> If the total balance in all your overseas accounts exceeds $10,000 at any time during the year, you have to file the Treasury form.


As I understand it it's not the total balance at any one time, but the total of the maximum balances at different times during the year of all the different accounts over which the US citizen has signature.


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## Punktlich2 (Apr 30, 2009)

PeterR said:


> As I understand it it's not the total balance at any one time, but the total of the maximum balances at different times during the year of all the different accounts over which the US citizen has signature.


"Q. Who must file an FBAR?

"A. Any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year"

FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) - Filing Requirements

There is no intention on the part of Treasury to yield the ludicrous result that if you have $9,000 in an account and move that money to another account you are required to file because you are deemed to have $18,000 in accounts "at any time during the calendar year".

That said there is admittedly substantial ambiguity in the law and regulations and I recall that white-shoe law firms have often advised their wealthy clients to err on the side of reporting: foreign mortgages, indirect assets (at the time, "funds at Lloyd's", and so on would be reported with a disclaimer that the report was as a protective measure.


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## PeterR (Jul 3, 2009)

Thanks, Punktlich, for pointing that out. I guess some people have jumped to the conclusion that because the maximum value in each individual account is the one used for reporting once you've decided you need to file TD F 90-22.1, it is also the value used in aggregating. But I've been looking at the instructions and Googling for 15 minutes or so and I must admit I can't find that in any official publication.

Workbook on the Report of Foreign Bank and Financial Accounts (FBAR)
says:


> Who Must File the FBAR?
> 
> A United States person must file an FBAR report if that person has financial interest in, signature authority or other authority over any financial account (s) in a foreign country and the aggregate value of these account(s) exceeds $10,000 at any time during the calendar year.
> 
> The account value is the largest amount of currency and/or monetary instruments that appear on any quarterly or more frequently issued account statement for the applicable year. If a periodic account statement is not issued, the maximum account value is the largest amount of currency and/or monetary instruments in the account at any time during the year. If the account value exceeds $10,000 on any account statement at any time during the calendar year an FBAR must be filed.


and it would be easy to jump to the concluson that the aggregate value of accounts was based on the account values.

Kind regards

Peter


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## PeterR (Jul 3, 2009)

I sent an email to the FBAR helpline [email protected] outlining the above discussion and asking them to point me to IRS documents that would clarify this. They didn't do so but replied
"Your explanation is the correct way."

My email said


> I have been having a discussion on an online expatriate forum
> http://www.expatforum.com/expats/br...s-us-citizens-accountant-reccomendations.html
> as to how the aggregate value of accounts is to be calculated in order to determine whether the $10,000 threshold for FBAR has been reached.
> 
> ...


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## Punktlich2 (Apr 30, 2009)

PeterR said:


> I sent an email to the FBAR helpline [email protected] outlining the above discussion and asking them to point me to IRS documents that would clarify this. They didn't do so but replied
> "Your explanation is the correct way."
> 
> My email said


I told you what Treasury's intent was in proposing the legislation and drafting the implementing rules.

I also said that notwithstanding the intent, there is ambiguity. You should not expect a government bureaucrat to go out on a limb and provide more information than has been authorized.

I added that the advisors to the wealthy, expensively paid, tell their clients to file protective reports. This is what you should do if you have the slightest doubt. And if you don't wish to reveal your bank account numbers unnecessarily, file Form TD F 90-22.1 with a statement that at no time during the year did the total value of your accounts exceed $10,000 but that there were several accounts and, taken at different times, the sum of the value of those accounts on different days "might" have exceeded $10,000.

For what it is worth, a higher standard is expected of American taxpayers living in the USA than of "accidental" American citizens abroad, most of whom don't pay tax anyway.

Inflation has made $10,000 into chump change. The escrow value of taxes, unpaid but earned salary, and a host of other foreign assets of expat Americans can easily exceed $10,000. Sometimes accurate reporting is impossible. Unless you are engaged in moneylaundering you are unlikely to be targeted. 

And read this Supreme Court case, U.S. v. Bajakajian, 524 U.S. 321 (1972) United States v. Bajakajian, 524 U.S. 321 (1998)

I wonder what percentage of the population of Stanstead (Rock Island), Quebec, whose main street is the border with Derby Line, VT and many of whom happen to be American citizens by accident of birth in the nearest hospital in Newport VT, file FBARs. And think of those who happen to own incorporated small businesses in Quebec and don't file Form 5471 and so are, in principle, imposed with an automatic $10,000 penalty.


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