# US Expat Taxes: PFICs & Form 8621



## Snooz13

I have passed more than a few hours trying to figure out Form 8621 for PFICs. I think I know what 8621 says, but there are some black holes. I have some very specific, detailed questions on what is not explicit in the 8621 or the instructions for it. I am hoping someone out there has grappled with a 8621 and might be able to answer these questions or otherwise provide assistance.

1.	The first question relates to the calculations in lines 15a to 15e. I can explain the question with an example:— you own a fund which distributes $100 per month; you buy it in November of Year 1 and sell it in November of Year 3. Following the calculations set out in lines 15a to 15c, it looks like you would have an excess distribution in Year 2, even though the fund has no accumulated income.

It may be that §1291(b)(3)(C) of the Internal Revenue Code was intended to deal with this issue; it says that distributions received during a year in which the PFIC is held for less than the entire year — in the example, Year 1 — “shall be annualized”. Does anyone know how this works?

2.	The second question relates to the calculation of the tax on an excess distribution received by way of a sale — lines 16a to 16f. As I read the 8621, the additional tax on the excess distribution allocated to the years prior to the sale — in the example above, Years 1 & 2 — are levied on a taxpayer regardless of the taxpayer’s Taxable Income for those prior years or even the current year. This seems to me to follow as a consequence of transferring the amounts on lines 16e & 16f of the 8621 to line 44 of the current year 1040, after Taxable Income has been determined. This seems beyond draconian. Am I missing something?

3.	It seems from the wording of line 15f — a loss is not transferred to line 21 of the 1040 — that any loss shown on line 15f disappears into thin air – and there is no way to net out losses against gains, either in the current year or for prior years. Is this accurate?

4.	Does anyone know if the IRS will/can accept a retroactive (ie late) election to mark-to-market a PFIC under §1296?


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## maz57

Yes, you ARE missing something. The PFIC rules are the means by which the IRS discourages anyone who lives outside of the US from owning a mutual fund sold by a local institution in the country of their residence. No one knows how to fill out those forms; they were created for that very purpose.

The IRS reporting and taxation of foreign mutual funds (aka PFICs) is so punitive that for Canadians the only possible way to own them is within an RRSP. My advice (if you want to be IRS compliant) is to sell them; do the best you can with the forms and cross your fingers that no one at the IRS can figure them out either. If you wind up paying some tax they'll probably be happy.


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## Bevdeforges

FWIW, someone over on the France forum got a phone number for an IRS hotline said to deal specifically with overseas taxpayers. The number is 267.941.1000. 

But as maz57 said, we've had reports of folks who have asked the IRS about the FATCA forms and been told that no one in the IRS offices understands them either. Still, making a good faith effort to follow whatever the IRS hotline tells you should be an adequate defense if they come back on you later.
Cheers,
Bev


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## Snooz13

*PFICs & Form 8621*

Thanks Maz57 & Bevdeforges,

You confirmed my fear — I have searched everywhere for information/assistance without finding anything. I am inclined to try an email to the IRS but not holding much hope of a substantive reply. 

The Canadian government and the US Treasury are currently negotiating a FATCA agreement and hopefully one of the items being negotiated is the stupidity and rank discrimination of labelling Canadian mutual funds as PFICs. And maybe they will tackle the treatment of Canadian Tax Free Savings Accounts at the same time!


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## maz57

> The Canadian government and the US Treasury are currently negotiating a FATCA agreement and hopefully one of the items being negotiated is the stupidity and rank discrimination of labelling Canadian mutual funds as PFICs. And maybe they will tackle the treatment of Canadian Tax Free Savings Accounts at the same time!


I wouldn't hang my hopes on that peg.


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## Bchinian

*Losses on 1291 funds -> Sch D share-by-share*

The answer to Q3 is that capital losses go on Schedule D. (Make sure that you fill out a different part V for each lot of shares.) Note that frequently one will report both a loss and a gain on the same return.

Note that the tax on dispositions of 1291 funds solely originates in 1291(a)(2) [emphasis added]

"If the taxpayer disposes of stock in a passive foreign investment company, then the rules of paragraph (1) shall apply to any GAIN recognized on such disposition in the same manner as if such gain were an excess distribution."

In particular, there is nothing in sections 1291-1298 or in the associated treasury regulations which says a LOSS from the sale of a specific share of a section 1291 PFIC is treated any differently than the sale of a share of a nonPFIC.

The websites of many accounting firms contradict each other on this issue. The confusion seems to originate because of confusion between (at least) THREE DIFFERENT TYPES of gain/loss associated with a PFIC, which are:

1) The taxpayer's gain/loss from actual sales of shares of the PFICs.
2) The PFIC's gain from from actual sale of shares by the PFIC in its own account, which 
may be reported on the so-called "PFIC annual information statement", a form 1099-equivalent
3) The taxpayer's gain/loss from "deemed sales" used in connection with elections to purge the
section 1291-taint.

Note that so-called "deemed sales" are not sales at all:
1) No sales actually change hands
2) No payment is received
3) (Most importantly) The basis does not change in the case of a loss
It would not make sense for the IRS to allow one to declare a loss for a "DEEMED SALE", because you could make an actual sale the next day to harvest the loss for tax purposes all over again. 

I think that some accountants are confusing "seemed sales" with "actual sales".

The moral of the story is not to trust accountants to fill out 8621 correctly. (I have found them to be extremely unreliable on other international tax issues as well.)

If you're tired of slogging through the calculation yourself, then you might try to get hold of the form 8621 calculator from 8621.com. (Unfortunately, I haven't used that program, but it looks capable of handling the mechanics of reporting a 8621 fund. Of course, the tax planning issue of whether to elect M2M, make deemed sale elections, convert to a QEF, ect, requires some understanding.)


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## diharv

The previous post , too long and tedious to quote would be enough to make me want to raise my arms and say [email protected]#k it ! File FinCEN 114 and 1040 properly , sell all mutual funds or move into an RSP and forget all the stupid PFIC gibberish. What does it say on the actual form about the estimated burden to fill out the form , something like 30 hours or so ?


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## BBCWatcher

diharv said:


> ...sell all mutual funds or move into an RSP and forget all the stupid PFIC gibberish.


I think you meant RRSP, a specific type of Canadian tax-advantaged account that enjoys U.S. tax deferral per the U.S.-Canada tax treaty.

Tax filing is always about the past, so selling something now doesn't change what happened before the sale date. If you've already got PFIC complications then, unless those complications only started in the same tax year when you would sell, you probably cannot avoid them. If you cannot avoid them, you then consider whether to sell on its own merits, per normal.

File this one under "think before you do something." Yes, it's good advice to avoid tax complexity unless there's some substantial benefit.(*) PFIC-related complexities are avoidable. Though I've made a couple other mistakes (in my view), I have deliberately chosen to avoid PFIC-related complexities, and I've been happy with that decision.

(*) There can be a substantial benefit. The "mark to market" approach to PFICs can, oddly enough, be U.S. tax favorable in certain circumstances as I understand it, particularly when you have relatively modest passive income and either relatively modest total income or well shielded (or well foreign tax credited) foreign income. And I've just described a lot of people, actually. So if you can hack the paperwork -- or, better yet, your favorite tax preparation software can, even the free stuff -- then you may wish to proceed with caution.


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## GregoryN

*PFIC + Mark To Market*

I will need to fill in form 8621 for my PFIC Mutual Funds held in a UK ISA: I am proceeding with a Streamlined Tax Compliance registration.
There are 3 ways to progress with 8621, and as the *QEF Election* is a non-starter I am left with either the 'Excess Distribution' or the 'Mark to Market' Election, and I hope someone can help me to differentiate between these last 2, as I could not find sufficient information on the internet.

'*Excess Distribution*' is evidently the default method and I read that it is to be avoided as all increases in fund value are treated as Ordinary Income and flow into form 1040 line 21.
'*MTM*', if I elect to proceed with this in my first year, requires me to see if funds have realized a loss or gain by the end of the tax year - if a gain has been made, then that is also treated as Ordinary Income! So what is the difference? MTM is supposed to be more beneficial.

Any assistance would be appreciated.
Thanks.


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## JustLurking

GregoryN said:


> Any assistance would be appreciated.


This article probably tells you all you need to know.


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## GregoryN

*8621 Mark-to-Market = double taxation?*

If I file my overseas Mutual Funds under form 8621 using Mark-to-Market, that means all unrealized gains are taxed as ordinary income on an annual basis, no?

Then what happens when I want to take some money out of the fund and spend it on personal expenses - I will get taxed on it yet again, as it is income.

If I have a USA based Mutual Fund and I cash some shares in I get taxed on the Capital Gains (being the same as the 'unrealized gains' under MTM) but then I do not get taxed again on my income.

Do I understand correctly?


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## JustLurking

GregoryN said:


> If I file my overseas Mutual Funds under form 8621 using Mark-to-Market, that means all unrealized gains are taxed as ordinary income on an annual basis, no?


That's my understanding, yes.



GregoryN said:


> Then what happens when I want to take some money out of the fund and spend it on personal expenses - I will get taxed on it yet again, as it is income.


Not necessarily.

The US won't try to tax it again. You might have to report the sale as a capital gain to the US (not sure), but if you do you should be able to claim a basis that is up-rated for all the MTM events, so your basis should come out to the same as your sale price, making your gain zero.

For the UK, you might have a capital gain there, because here you can't up-rate your basis for the US MTM tax paid. But... you should be able to take a UK tax credit against your US MTM tax paid, so that you don't wind up paying tax twice.



GregoryN said:


> If I have a USA based Mutual Fund and I cash some shares in I get taxed on the Capital Gains (being the same as the 'unrealized gains' under MTM) but then I do not get taxed again on my income?


Though I'm not entirely clear what you mean by "taxed again on my income"... from the US side, and broadly, yes.

The thing to be wary of here is that the UK has punitive tax rules for 'offshore' mutual funds too. The rule is _nothing like as horrid_ as the US version -- capital gains treated as income in the year of sale -- but it's still a disincentive, and creates a catch-22 for folk caught in both the US and UK tax nets. The solution here is to use only US mutual funds with 'UK reporting status'. There is a list here.

[ I seem to recall at one time you mentioned you are in China, so not sure how much of this UK tax information is useful. I know nothing about how China might view all of this. ]


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## GregoryN

Thanks alot, especially for the 'middle but' and the warning about the UK view of US mutuals.

Yes, I am in China but let us not introduce distractions (lol) I have got enough on my plate. If I were wealthy I could accept all this international taxation business, but I am not and I wish there were some realistic lower limits.


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## JustLurking

GregoryN said:


> Yes, I am in China but let us not introduce distractions (lol) I have got enough on my plate.


Indeed. A couple of caveats then, on what I wrote above.

Firstly, if you are genuinely not a UK resident, and have not been for some number of years, then you may not have to worry about either UK capital gains tax or so-called 'reporting' fund status. I can't recall the exact details on timing etc, but in general once you're non-UK resident for some period then you are outside the UK tax net.

Secondly, I seem to recall you saying that these funds were held in an ISA. In which case, again you can ignore the 'reporting' fund status stuff, because the ISA wrapper insulates you from any UK tax nastiness there. Of course, you still have to deal with the appalling treatment meted out by the US in the form of PFIC, but that's a separate issue.


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## BBCWatcher

Another thing to point out is that mark-to-market treatment works quite well for lower and middle income tax filers -- and all filers in comparatively high income tax jurisdictions. That's because you're spreading the (unrealized) gains over a longer period into lower tax brackets, often zero tax brackets for overseas filers.

For example, let's suppose you live overseas and have $70,000 in foreign earned income, $3,000 in unrealized gains for that year, and $100 in bank interest -- and that's your total income. In this scenario you wouldn't owe any U.S. income tax. Your $70K qualifies for the Foreign Earned Income Exclusion, and your $3,100 slides well under your personal exemption and standard deduction. You can keep this up "forever," and the cost basis is reset every year, so the foreign account is then U.S. tax free. U.S. residents with similar U.S. accounts aren't so lucky.

Your mileage may vary, of course, but PFICs can often be _financially_ quite lovely as long as they're relatively modest in size -- typically middle class (or even upper middle class) in nature. You just have to make sure to report them correctly in tax and financial filings.


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## GregoryN

The scenario you describe is quite good if you fall within it. However if one is effectively retired with no earned income, and a modest amount of unearned income, yet relatively decent PFIC savings, it works the other way. On non-ISA UK savings I will be taxed as normal on earnings and withdrawals, but then the US reaches in and taxes on incremental growth. One might think it wasnt Wall Street that had the influence over Washington, but rather Accountants.

Here in China if one is a member of the Communist Party one is obliged (under penalty no doubt) to declare all bank accounts, savings, bonds etc, however at no time does the Chinese Communist Party go as far as the US Government in requiring Cost Bases/HighestBalance /Dates/8621/FATCA etc and other such details.


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## ExpatTaxLady

PFICs that have a MTM election in place will be either ordinary income, ordinary loss, and/or capital loss when sold- depending on prior unreversed inclusions. You should have been tracking these per share or per block of shares for as long as you have had the election in place. Your cost basis resets every year if there has been an unrealized gain in the investment or unreversed inclusions have been used to create an allowable loss. You are not double taxed on the federal level, there are cases on the state level in which double taxation occurs, but it doesn't sound like you are domiciled in the US. No capital gains treatment is ever allowed; losses are ordinary or capital depending on unreversed inclusions. <snip>


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