# ISAs, PFICs and things that go bump in the night



## dayzedconfuzed

I hope that I am posting in the right place and that I am not asking for repeat information/help.

I have only just recently found out that as a US citizen living in the UK I was/am meant to be filing tax returns to the US. I am in my 30s and grew up in the UK from the age of 2 having being born in the US (to US father and British mother), went to the US to go to Uni, worked there for 2 years after uni, paid the correct taxes whilst living there. Came back to the UK in 1999 and have filed and paid my taxes to HMRC since (I have only held UK citizenship since 2010 but have had ILR since early 1970s). My earned income (combined PAYE, self-employment and interest and CG from shares and savings) is well below the $92K and in my previous years Iwas also well below the threshold (when I say well below - less than half).

However, I have several investments in ISAs that I have made over the years (these were made by my stockbroker). I have probably been doing this for 6 years or so - obviously this isn't a huge amount but some of the investments were in stocks that I think might have been and still are possibly considered as PFICs by the US.

I appreciate that there maybe an issue with specific shares and that a clear answer may not be possible, but if the profits made in both CG and dividends etc are below a certain level (probably in the region of $7-8k) do I still need to try and work out which stocks will fall into the PFICs? If I do need to work out and/or disclose the specific shares is there an easy way to do this without having to go to an expensive tax accounts or lawyer etc?

Also wanted to check if I am correct in thinking that filing this past year (2011) + 4 previous years is going to be OK, given that my figures are pretty much the same year by year.

Thanks for any advice.


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## Bevdeforges

Basically, in your case you need to file "a few" back years, in order to show the IRS that you don't owe any back taxes. Current year (i.e. 2011) plus 3 or 4 back years should be adequate.
Be sure to claim your Foreign Earned Income Exclusion for all the back years (for your salary income), and declare the appropriate interest and dividend income from your investments. Any taxes paid to HMRC on this revenue can be claimed back on form 1116.

You should probably also declare your various investment accounts on the FBAR forms - these go to the Treasury Department rather than to the IRS. The FBAR forms are nothing but a listing of your foreign (to the US) bank and investment accounts, similar to declarations that many governments are starting to require of their taxpayers as part of the international effort to fight money laundering and tax evasion through "offshore" accounts.

Unless your foreign investments amount to more than $200,000, there isn't all that much to do about those. (The threshold for having to file the infamous FATCA forms is higher for overseas residents than for US residents.) If your holdings are above the threshold, I'd try declaring the brokerage account in total, including all income from investments in your tax filings, and let the IRS come back and ask about any specific asset holdings in the account.

What they're after here are abusive passive investments intended to evade taxation (and usually structured specifically to do so). I don't think they're looking to have you parse your stock holdings down to individual shares that might meet the technical definition of PFIC. (I think if you wade through the instructions - something like 12 pages worth - of the main form, there is something to that effect included.)
Cheers,
Bev


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## dayzedconfuzed

*just to clarify*



Bevdeforges said:


> Basically, in your case you need to file "a few" back years, in order to show the IRS that you don't owe any back taxes. Current year (i.e. 2011) plus 3 or 4 back years should be adequate.
> Be sure to claim your Foreign Earned Income Exclusion for all the back years (for your salary income), and declare the appropriate interest and dividend income from your investments. Any taxes paid to HMRC on this revenue can be claimed back on form 1116.
> 
> You should probably also declare your various investment accounts on the FBAR forms - these go to the Treasury Department rather than to the IRS. The FBAR forms are nothing but a listing of your foreign (to the US) bank and investment accounts, similar to declarations that many governments are starting to require of their taxpayers as part of the international effort to fight money laundering and tax evasion through "offshore" accounts.
> 
> Unless your foreign investments amount to more than $200,000, there isn't all that much to do about those. (The threshold for having to file the infamous FATCA forms is higher for overseas residents than for US residents.) If your holdings are above the threshold, I'd try declaring the brokerage account in total, including all income from investments in your tax filings, and let the IRS come back and ask about any specific asset holdings in the account.
> 
> What they're after here are abusive passive investments intended to evade taxation (and usually structured specifically to do so). I don't think they're looking to have you parse your stock holdings down to individual shares that might meet the technical definition of PFIC. (I think if you wade through the instructions - something like 12 pages worth - of the main form, there is something to that effect included.)
> Cheers,
> Bev


Thanks for getting back so quickly Bev.

I think I am heading in the right direction now. I am still somewhat concerned about the ISAs though. Even if I don't worry about the individual stocks being PFICs or not.

Should I be concerned by the fact that I am effectively not paying the full tax on the shares - CG and interest inside the ISA portfolio (I think it is only 10% inside the ISA)?

Not sure if you were suggesting I steer clear of pointing out a particular portfolio is in such a bracket or can I have share ISAs profits fit into my "exclusion", if so is there a limit on said "exclusion" - I think it is around $9000 for 2011 - is this correct. 

What happens if I go over the aforementioned exclusion on past years ((probably different for past years - I haven't checked this yet) ?

I also had a quick question about National Insurance Contributions (Class 2) for Self-Employed - it is my understanding that the US requires a "certificate of coverage" as per their article/webpage - entitled "Self-Employment Tax for Businesses Abraod". I have requested a certificate from HMRC as urgent, it is meant to get to me in a week or so, if I don't get it before I send everything to the IRS can I explain in the covering letter I am still awaiting it and if they want a copy I can send it to them at their request?

Thanks again.


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## Bevdeforges

dayzedconfuzed said:


> Thanks for getting back so quickly Bev.
> 
> I think I am heading in the right direction now. I am still somewhat concerned about the ISAs though. Even if I don't worry about the individual stocks being PFICs or not.
> 
> Should I be concerned by the fact that I am effectively not paying the full tax on the shares - CG and interest inside the ISA portfolio (I think it is only 10% inside the ISA)?


Unfortunately, I know very little about ISAs other than what I can swami up on the Internet from a quick google search. Basically, the IRS requires that you declare the full income received on your US tax forms.



> Not sure if you were suggesting I steer clear of pointing out a particular portfolio is in such a bracket or can I have share ISAs profits fit into my "exclusion", if so is there a limit on said "exclusion" - I think it is around $9000 for 2011 - is this correct.


There is no exclusion as such for US taxes. You don't need to file at all in the US if your total worldwide income before any deductions or credits or the FEIE falls under certain limits, which vary according to your filing status. This doesn't seem to be your case at all.

What you do is to declare everything (basically on the front side of form 1040, with attachments of other forms as necessary) to arrive at the figure known as AGI (adjusted gross income). This figure is then carried to the verso of form 1040 where you can apply your personal exemption(currently $3700 for a single person) and the standard deduction (which is in lieu of itemizing all the various deductible items that plague the US resident taxpayer) of $5800 (again, for a single or married filing separately). That should bring you down to either 0 in "taxable income" or to a figure that is low enough to make the tax due pretty negligible. But, you have to file the forms to "show" the IRS that you don't owe anything.



> What happens if I go over the aforementioned exclusion on past years ((probably different for past years - I haven't checked this yet) ?


As I said, there is no exclusion - you have to file and go through the motions, even if only to prove you owe nothing. It's only if your worldwide income (including salary and all investments, tax free or not) is less than the threshold level. For a single filer, under age 65, the threshold is something over $9,000, but be careful - if you file as married, filing separately (because you're married to someone not subject to US taxation), the threshold drops to a mere $3500 or so.



> I also had a quick question about National Insurance Contributions (Class 2) for Self-Employed - it is my understanding that the US requires a "certificate of coverage" as per their article/webpage - entitled "Self-Employment Tax for Businesses Abraod". I have requested a certificate from HMRC as urgent, it is meant to get to me in a week or so, if I don't get it before I send everything to the IRS can I explain in the covering letter I am still awaiting it and if they want a copy I can send it to them at their request?


Depends a bit on how you're set up as "self-employed" - I don't know precisely how these things work in the UK, but if your business pays its own income taxes in the UK, you can claim to simply be salaried and not bother with the certificate. If you pay the business' taxes through your own personal income tax form, then you'll need the certificate. Hold off sending in your forms until you have the certificate. (You can file for an extension of the time to file if you think you'll need it.)
Cheers,
Bev


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## dayzedconfuzed

Thanks again Bev for quick response.

Just wanted to confirm that the $3700 personal exemption and the standard deduction of $5800 can be added for total of $9500 for 2011?

...and in reference to the threshold of just over $9000 for a single person filing that you mention --- are you referring to the same combined figure of $9500 I mention above? --- hope I am not being too thick.  

I think I probably meant "exemption" when I wrote "exclusion".


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## Bevdeforges

dayzedconfuzed said:


> Thanks again Bev for quick response.
> 
> Just wanted to confirm that the $3700 personal exemption and the standard deduction of $5800 can be added for total of $9500 for 2011?
> 
> ...and in reference to the threshold of just over $9000 for a single person filing that you mention --- are you referring to the same combined figure of $9500 I mention above? --- hope I am not being too thick.
> 
> I think I probably meant "exemption" when I wrote "exclusion".


No, you're combining things here.

The $9000 (probably $9500 by now) for a single person filing is the threshold level at which you have to file at all and takes into account your entire worldwide income, before you take any exemptions, exclusions or deductions of any sort.

The $3700 personal exemption and the standard deduction of $5800 are subtracted in sequence from the resulting AGI, assuming you have to file.

Simple example: Say you have $25,000 in salary income and $9,000 in interest and dividends. Your total worldwide income is $35,000 and yes, you have to file.

You declare the full $35,000 on the appropriate lines of the front side of your 1040 form. Using the 2555, you exclude the full $25,000 in earned income and carry that over to the front page of the 1040. That leaves you with $8,000 in AGI.

From that $8,000 AGI, you then (on the back side of the 1040) subtract your personal exemption of $3700, leaving you $4300. You then get to apply the standard deduction (unless, of course, you choose to itemize your deductions - but why bother?), which brings the taxable income down to below 0, so you just enter $0 on the taxable income line, $0 on the taxes due line, sign the forms and file them. (You also need to file the FBAR forms, listing your accounts and their high balances for the year.)

But in this case, you actually do need to file - because your gross income is considered to be $35,000 and you're well over the threshold.

Stupid, I know, but that's how the system currently works - and there is little chance for the moment of any changes.
Cheers,
Bev


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## dayzedconfuzed

Bevdeforges said:


> No, you're combining things here.
> 
> Simple example: Say you have $25,000 in salary income and $9,000 in interest and dividends. Your total worldwide income is $35,000 and yes, you have to file.
> 
> You declare the full $35,000 on the appropriate lines of the front side of your 1040 form. Using the 2555, you exclude the full $25,000 in earned income and carry that over to the front page of the 1040. That leaves you with $8,000 in AGI


Hi Bev 

Thanks for the clarification. Is the above example meant to be $34,000 for the full which leaves $9000? Thanks again.Apologies for continued thickness.


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## Jayem4416

Hi dayzedconfuzed, I know this is an old thread and you may not see this, but I was wondering what the outcome was with your stocks and shares ISA and the PFICs question? Were you able to just report your dividend interest in form 1040 (Schedule B?) and the account/s on the FBAR and leave it at that without worrying about if there were/were not PFICs? Thank you


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## Bevdeforges

The OP you're addressing hasn't been around in several years now. I see you have posted a query in this forum, so I think I'll close off this thread and let's see what kind of responses you get to your new thread.


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