More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
Saddle River Capital Management recently launched a service to help clients with assets in multiple countries comply with the various tax laws they’re subject to.
“The issue for many expatriates, whether they be Australians like me or foreigners living in the United States on an H-1B visa or visiting executives, is that often they don’t realize they need to comply and provide information for the U.S. tax return,” John Kimber, an advisor with Saddle River, told ThinkAdvisor.
Saddle River is not a tax advisor, but helps facilitate the process of filing taxes in multiple jurisdictions.
The firm begins by taking account of all of a client’s international assets “so we can do the asset allocation study, whether it be for property, securities, cash or bonds in more than one jurisdiction,” Kimber said. “Often if a client if dealing only with a U.S. advisor, many of those international assets get lost in the mix.”
He referred to one of his clients who is filing taxes in three or four different tax domiciles. “He worked in three or four countries during that year. Nobody wanted to coordinate this and he was in a situation where his home-base accountant in the United States could not do his foreign tax returns, and his foreign accountant could not do his U.S. tax returns,” Kimber said. “Worse than that, none of them seemed to be able to know what the ramifications were of dealing in more than one jurisdiction.”
That’s an extreme case, he acknowledged, but it’s not uncommon for people to be unaware of where they’re paying taxes.
“Generally speaking, if you’ve been in a country for more than six months, that’s where you’re going to file your tax return, but you got to avoid also paying taxes in your home country,” he said.
Even working between just two tax domiciles can be difficult. “The differences between countries can be quite distinct,” Kimber said. There are many tax concessions in the United States that aren’t available in the other countries. “For example, anybody coming from England and working in the United States would not be familiar with things like the 401(k). They would not be familiar with the tax deductibility of interest on a family home. They would not be conversant with 529 plans or Coverdell plans. They would not be familiar with estate taxes in the United States. There are a number of differences and unless they are made aware of these, they can make some terrible mistakes when they start work.”
Dick Wolfe, founder and managing partner at Saddle River, illustrated another difficulty for expat investors. “We had someone from England who was working in the United States for a couple of companies — he worked for Google then moved to another company,” Wolfe said. “I managed his 401(k) rollover and also his rollover to the other company because he went back to England. One of the problems was that we had everything held with Fidelity and they said they would not hold his account because he has a British address. So he had to either withdraw the money, taking the 10% penalty because he’s under 59 ½ years old plus the ordinary income taxes on the entire withdrawal, or we had to find someone who would hold his account.”
Saddle River found Interactive Brokers, an online brokerage firm, to hold accounts with any address, Wolfe said, as well as in any currency.
Just keeping track of all the moving parts presents its own problem. “It does require time and effort to be able to collect the documents, put them in one place and have both sides understand what has been done, what tax has been paid and what the liability is,” Kimber said.
Competent accountants who can do that for you are expensive, he added. “We can often save a client a lot of money in terms of tax filing by taking care of the documentation, by providing the accountants with the information that they require in a form that they can use and then, especially, being able to consolidate assets into one account.”
Kimber stressed that the goal of Saddle River’s service is not to hide assets from the Internal Revenue Service.
“We’re in no way, shape or form trying to create a situation where they’re not going to pay taxes,” he said. “One of the services we provide is to be able to show these people what they have to do to comply. This is not something anybody should be afraid of. There are perfectly adequate laws available to protect people’s assets and to be able to take advantage of tax concessions.”
Wolfe agreed, adding, “They just have to be aware of them, that’s all.”
Check out IRS Tweaks Offshore Account Rules to Prod Tax Cheats to Pay Up on ThinkAdvisor.