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ACA Town Hall Evening Zurich
September 17, 2014
Jonathan Lachowitz
Financial Planner | Investment Advisor
This presentation is not meant as legal, tax or financial advice to any individual. You are strongly recommended to seek the advice of a professional who understands your specific circumstances before relying on any of the information in this presentation. There may be mistakes and regulations may change or not apply in some circumstances. The presentation may be circulated but should be appropriately cited if used in a professional setting.
IRS Circular 230 Disclosure: Any tax advice in this communication is not intended or written by the author to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.
Introduction
Jonathan Lachowitz
Board Member - ACA
Financial Planner & Investment Advisor
Certified Financial Planner™ - US & CH
Founder of White Lighthouse Investment Management in Lausanne & Lexington, MA
Agenda & Additional Material
Swiss Banks Request for information from US citizens
Top 10 Financial Challenges for Americans in Switzerland and How to Address Them
Retirement Planning for Americans in Switzerland – Should I Stay (in Switzerland) or Should I Go (Back to the US)?
What’s new for Taxes in 2014?
Backup Slides
Being a smart financial consumer
Tips for American expatriates
Money management – essentials
American taxes - Living in Switzerland
Money and children
Estate planning
Government & employer benefits
Common financial questions
Retirement – How much do I need?
Swiss Banks Request to US Taxpayers for Personal Tax Info
FATCA - The “why” the banks are asking
DOJ & Swiss Government Joint Statement: August 29, 2013
your choices in responding
A Brief History
The Foreign Account Tax Compliance Act (FATCA), introduced as part of the HIRE Act. and enacted into law by the 111th Congress on March 18, 2010, is designed to compel foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) to provide information to the US Internal Revenue Service (IRS) about US persons who hold accounts with or interests in FFIs and NFFEs.
FATCA was meant to combat offshore tax evasion and to recoup federal tax revenues.
Under US tax law, US persons are generally required to report and pay taxes on income from all sources regardless of where they live.
The IRS previously instituted a Qualified Intermediary (QI) program under Internal Revenue Code §1441 which required participating foreign institutions to maintain records of the US or foreign status of their account holders and to report income and withhold taxes. One report found that participation in the QI program was too low to have a substantive impact as an enforcement measure and was prone to abuse, as has been demonstrated by UBS and Credit Suisse as well as the relatively small number of Overseas Americans filing tax returns and FBARs.
FATCA in 1 Minute – For Individuals
From the 2011 tax return, the form 8938 needs to be completed with your US tax return. [For taxpayers living abroad: Joint return $400K in specified foreign assets or more than $600K during year; other than joint return: $200K in assets or more than $300K during the year.]
SwissBanks will be reporting to the IRS account information for US persons – US-Swiss IGA signed 13-2-2013: Starting for the year 2014, first reports probably sent in 2015.
Savings & investment accounts will be reported
2nd and 3rd Pillar accounts should not be reported
Your Swiss financial institution will ask you (if they have not already) for a W9 to confirm your US Social Security Number and for your permission to send info to the IRS
If you have not reported your accounts on FBAR & 8938 and/or have not reported the income on a US tax return, you should talk with a US tax/legal professional before the IRS receives your information
Some[local FFI] Swiss Financial Institutions will not be allowed to discriminate against US persons living in Switzerland
DOJ & Swiss Government Joint Statement: August 29, 2013
DOJ announces program to encourage Swiss banks to cooperate in DOJ investigation of offshore tax evasion
Swiss government encourages all Swiss banks to participate in the program
Available to banks not currently under criminal investigation:
Agree to pay substantial penalties
Make a complete disclosure of their cross-border activities
Provide detailed information on an account-by-account basis for accounts in which US taxpayers have a direct or indirect interest
Cooperate in treaty requests for account information
Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed
Agree to close accounts of account holders who fail to come into compliance with US reporting obligations
Banks meeting criteria exchange information & money for non-prosecution (category 2) or non-target letters
Link to full text of statement: http://www.justice.gov/opa/pr/2013/August/13-tax-975.html
Link to program: http://www.justice.gov/iso/opa/resources/7532013829164644664074.pdf
Banks will pay a penalty of between 0% and 50% of the US taxpayers maximum account value
Banks want your help in getting them to 0% that is why they are asking for information
Banks are generally asking for FBARs, an attestation from the client and tax advisor that the accounts and income have been properly reported to the IRS and Department of Treasury
Banks are also asking for clients to give up certain Swiss rights with respect to the handling of their private information
In some cases, banks are asking for copies of tax returns
In some cases, banks are blocking access to client funds
What to give your banks or former banks?
Do you want to keep your banking relationship?
| Do you want to keep your banking relationship? | |||
|---|---|---|---|
| YES | NO | ||
| Are you US tax compliant? |
YES | - Give info requested - Redact info not related to that bank - Consider not giving up Swiss Privacy rights |
- Give info requested if you want to be nice; redact info not related to that bank - No obligation especially if you have no money left there - Your name may end up on a "list" so keep good records |
| NO | - Get compliant and likely with a professional - Then see box above |
- Get compliant and likely with a professional - Your info may be handed over and this may get you in trouble |
|
Swiss Banks Request to US Taxpayers for Personal Tax Info
More information available
Full article: http://americansabroad.org/files/6013/8618/6297/swiss-banks-versus-us-citizens.pdf
Abridged version: http://genevalunch.com/2013/12/03/banks-ending-year-with-letters-to-us-clients-update/
If You Still Don’t Want to Report that Swiss Account & Sign Bank Forms
April 3, 2014 Letter from Swiss Federal Tax Administration – A. Dumas Head SEI
Banks required under Swiss IGA to report certain info on US persons to the IRS
Banks request signed consent to communicate info to IRS and US Tax ID number; consent renews automatically each year unless revoked
If info not received by date given, bank required to report as non-consenting US account in January 2015, without giving client name
IRS has the option to submit a group request to the Swiss Competent Authority
Article 26 of the Swiss US Convention (Tax Treaty) amended September 23, 2009 - not yet ratified in US Senate
Group request published in Swiss Federal Gazette and listed at http://www.estv.admin.ch. SEI will request info from the bank; individual may submit counter arguments – SEI will make a decision in 2-3 months.
Final decision published on website and in Federal Gazette; individuals can obtain decision on their file from Federal Tax Administration (FTA) – FTA decision can be appealed to Swiss Federal Administrative Court (FAC) within 30 days of Publication. If appeal is justified for individual, no info is sent. Otherwise FTA will submit a motion to dismiss the matter to the FAC.
FAC has the final decision then to grant administrative assistance or not to the IRS, their decision is final.
Top 10 Personal Financial Challenges for Americans in Switzerland and How to Address Them
1 - US Tax Compliance – Keep up with ever more complex rules
File your tax returns including worldwide income, pay your taxes on time and file your FBAR/FinCEN 114 and you will avoid 90% of “problems” that overseas Americans run into
Net page has some of the most common overseas tax forms
Employer and employee contributions to retirement accounts are taxable in the US (flaw in the treaty) – track your US tax basis
Owning non-US investment funds is for most US taxpayers a recipe for trouble (especially without a tax advisor and even in 3rd Pillar accounts)
Even the most “simple” situation can be challenging to report properly
2 -US Tax Planning – Using the rules in your favor
If you have earned income and it is not all excluded, you can make a tax deductible IRA contribution
Having a year with no income or low income for the US, consider a Roth conversion of a US retirement account
Watch how your investments are structured: ETFs often better than similar Mutual Funds due to less capital gains distributions
Consider gifting and/or titling of accounts especially if married to non-citizen spouse
3 -Saving for retirement
By far the most important thing is to save, regularly, this will have the biggest impact on your retirement.
Don’t “save” on Swiss taxes only to increase your US taxes.
TRACK YOUR US TAX BASIS in your 2nd and 3rd Pillars to help avoid double taxation in retirement.
Retirement savings in a non tax-deferred account has other tax and non-tax advantages; Capital gains treatment is better, diversification and personalization of strategy is possible
Whether in Switzerland or the US, you will probably live longer than you think (on average); and Switzerland still has a mandatory retirement age for most jobs. You may need to be saving more than you think.
Understanding of how US Social Security and Swiss AVS rules can work for or against you; especially with the deferral of benefits
4 - Estate Planning
Your US Will may not be executed the way you are expecting if you die in Switzerland
If you are not Swiss you can elect to have your home country law apply
A Swiss Notary or Attorney can help you get your paperwork in order
Switzerland has forced heirship rules, which means your children will inherit some of the estate upon the death of the first parent…Unless you choose the previous 2 items above
5 - Insurance – Especially for life insurance
Life Insurance is most valuable in the currency it would be needed
US taxpayers should try to avoid building cash values or investing in non-US compliant Life Insurance
Consider having a spouse own the policy for US estate planning purposes
Medical insurance is private in retirement in Switzerland; Medicare with supplemental insurance can be a reasonable alternative, but not available outside the US
Term insurance is generally fa. cheaper in the US but most US companies cannot sell insurance to Swiss residents
6 - Investment Management Services
Difficult (not impossible) to find comprehensive advice for US persons at a reasonable price if Swiss domicile of account is preferred
Strongly consider using a US investment account: Prices tend to be far more competitive; you can own most Swiss investments in a US-based account
Being SEC registered does not mean a firm has any particular competence in working with US persons. Do your homework and be clear about what type of advisor you are looking for. Many (in the US and Switzerland) are strictly sales people with a fancy title.
7 - Finding professional & trustworthy services – also at reasonable price
If your bank/banker has asked you to leave because you are a US person, use this as an opportunity to go through a good selection process. Far too many people research a new restaurant more than they do their advisors.
Get references and follow through.
The community of professional advisors who serve US persons (tax, legal, financial etc) is small. Sometimes going outside the country can help.
Most good advisors don’t need to advertise and don’t need to look for new clients; they can also afford to reject new clients who are not good for their business.
8 - Managing currency risk
Holding cash in one currency that will need to be spent in another currency is risky (exchange rates)
Holding cash for “long term” investment in the currency it will be spent is risky (inflation)
Global stocks including a large part of the SMI are highly correlated to the US Dollar, not the Swiss Franc. Nestle, Novartis and Roche – Buying shares in a company that are dominated in Swiss Francs are not much “safe” than holding stocks in dollars or euros
Holding dollars for the last 40 years you saw the dollar go from buying 4 Swiss Francs to buying less than 1 Swiss Franc. Holding shares in the S&P saw an annual return, in Swiss Francs of close to 10%.
9 - Real estate
Make sure you understand the income tax implications in the US of your Swiss real estate in terms of : Mortgage interest deduction, the sale of your home (capital gains or losses), and the paying off of your mortgage (capital gains and losses). This is a big shock to lots of US persons, see your tax advisor for good advice.
The main reasons people make money in real estate is leverage and forced savings (to pay down a mortgage) over a long period of time. Luck helps.
The main reason people lose money in real estate is leverage, unfortunate timing and too short a time horizon.
10 - Feeling Powerless to “Change the System” to Be More Fair
Join ACA (or better, volunteer for ACA) and encourage your friends to join too. A very small organization with very little funding but lots of passion has a voice in Washington and in the US press; and it is increasing.
Vote in Federal Elections & contact your Representatives in Congress.
Contact the US Embassy.
Talk to the press.
Nothing will change in Washington DC without individual citizens working for change.
Summary for Foreign Information on “Common” US Tax Forms
Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, due on the date that the taxpayer’s individual income tax return is due (generally April 15), including extensions;
Form 3520A – Annual Information Return of Foreign Trust with a US Owner, generally due March 15;
Form 5471 – Information Return of US Persons with Respect to Certain Foreign Corporations, attached to and filed with the taxpayer’s income tax return;
Form 8621 – Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, attached to and filed with the taxpayer’s income tax return;
Form 8865 – Return of US Persons with Respect to Certain Foreign Partnerships, attached and filed with the taxpayer’s income tax return;
Form 926 - Return by a US Transferor of Property to a Foreign Corporation, filed with the taxpayer’s income return;;
Form 8621 – Must be filed for each PFIC held each year;
Form 8832 – Entity Classification Election, often filed for a foreign company to elect disregarded entity status; thus, the tax responsibility flows through to the owner so that there is no tax at the company level;
Form 8858 – Information Return of US Persons with Respect to Foreign Disregarded Entities, filed with the taxpayer’s income tax return;
Form 8891 – information Return of US Persons for Beneficiaries of Certain Canadian Registered Retirement Plans
Form 8938 – New form to be included with tax return for individuals with foreign assets over $50,000
Form TD F 90-22.1 New FinCEN 114 – Report of Foreign Banks and Financial Accounts, filed by June 30 of each year when, in the previous year, the taxpayer had a foreign bank or financial account worth over $10,000 (for a discussion of recent changes to this form please see “IRS Releases Revised Foreign Bank Accounting Form”); and
Form 2555 – Foreign Earned Income, generally due by April 15 for US citizens and resident aliens living abroad to exclude a certain amount of foreign earnings form taxes and/or to claim the housing exclusion.
Retirement Planning for Americans in Switzerland – Should I Stay (In Switzerland) Or Should I Go (Back To The US)?
Often a lifestyle not a financial decision
Crossing borders presents threats and opportunities
Cost of Living: Matching income to expenses – currency
Tax System
Health Benefits
Language
What’s New For US Taxes in 2014
Gift and Estate Tax Limits
Tax Summary Pages 1-6
2014 Gift & Estate Limitations
Annual gift exclusion amount increased to $14,000 in 2013 from $13,000. Remains at $14,000 for 2014.
Federal Estate Tax (Lifetime Gift Exclusion Amount) $5.4 Million and Indexed annually for inflation.
2014 Gift Exclusion amount to non-citizen spouse increases to $145,000 (up from $143K in 2013)
Federal Estate Tax is not scheduled to sunset though the President has already proposed reducing it.
2014 Tax Summary – What’s New
FEIE – $99,000 for 2014
Top US Federal Tax Rate 39.6% for income $457,600 and up (married filing jointly, $432K HOH, $406K single)
http://forbes.com/sites/kellyphillipserb/2013/10/31/irs-announces-2014-tax-brackets-standard-deduction-amounts-and-more
US Long Term Capital Gains rate: 20%
Medicare Surcharge (Obamacare Tax) 3.8%: for joint filers >$250K, individuals >$200K
Itemized Deductions & Personal Exemptions phase out for individuals earning > $254K and couples >$305K
AMT has been “permanently” inflation adjusted
Personal Exemption is $3950, but starts to phase out at $350K, completely phased out for income above $427K (both limits for MFJ, less for individuals)
Kiddie Tax – Children can earn $1000 with no taxes, up to $2000 at reduced rate, and over $2000 at parents rates
$5500 IRA contribution limit (traditional IRA) $6500 if over 50 years old
Federal Gift Tax Exclusion $14,000
Federal Estate Tax Exclusion (for US persons) $5,430,000 – Only $60,000 for non-US persons holding US situs assets - Federal Estate Tax Rate 40%
Obamacare
Net Investment Income Tax: 3.8% on the lesser of:
Your net investment income
The amount of your modified adjusted gross income (basically, your adjusted gross income increased by an amount associated with any foreign earned income exclusion) that exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return)
Effective 2013 tax year and does apply to foreign income
For 2013 tax returns, if you are a high-income wage earner [over $250K MFJ] with a W-2 [and self-employment income] at the end of the year, you will have a .9% ‘Additional Medicare Tax’ (AdMT) on income over $200K. This will be reported on a new IRS Form 8959. [Effective 2013 tax year and does not apply to foreign income] and will not be matched by employers.
No mandatory health insurance if you live outside the US
FBAR
FBAR and FinCEN 114 can only be e-filed – on the FINANCIAL CRIMES ENFORCEMENT NETWORK
Link: http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html
The old FBAR form TD F90-22.1 will be replaced by the FinCEN 114. The TD F form had 3 pages of instructions. The FinCEN 114 has 19 pages of instructions.
If your tax status is MFJ you must also prepare FinCEN 114A. Both spouses having to sign this form.
If your computer does not use a Windows operating system, you cannot access this site. If you use either Firefox or Google Chrome as your browser, you might have difficulty accessing this site.
If a ‘third party’ (ie tax preparer) will be e-filing for you, you must present a signed FinCEN 114A to that preparer.
Form 8938
Specified foreign financial assets must be reported on this form. There are filing level ‘differentials’ with lower amounts for US domiciled filers and expat filers:
MFJ overseas : $US400,000 balance for all specified foreign financial assets as of 31 December 2013 or balances on any day during the year that value was $US600,000
MFS or Single overseas: $US200,000 at 31 December or $US300,000 as highest aggregate amount during the year
The 2012 Form 8938 was 2 pages. The 2013 version is 3 full pages.
There is a 12-page set of instructions, with examples, explaining what is considered a specified foreign financial asset.
Passive Foreign Investment Corporations - PFICs - Non US Investment Funds
Form 8621 – For filing by the Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund.
This includes any business investment with under 10% ownership but with a market value of over $US25,000
At the end of 13 pages of instruction for this form, the IRS estimates that it will take a PFIC owner 15 hours, 4 minutes for annual record keeping, 11 hours, 13 minutes for learning about this form and 20 hours, 21 minutes for form preparation and filing…Just for owning an investment outside with an end year value of $US25,000
PFIC Taxation
Preferred Method is Market to Market (assume it is sold at the end of each year and report income annually) – No Long Term Gains Treatment
If not Market to Market – Other options include getting the funds to report “property” for the US or possibly paying large taxes and penalties if profitable and held for a long time.
Message – It is not worth owning PFICs for 99% of Americans overseas
Concluding Thoughts
Time and education are your best assets
Are you passionate about what you are doing? If not, what are you doing about it?
Are you saving enough? Save early and often – Time Value of Money is a Miracle
Are your expectations realistic?
Keep fees and expenses low – But not too low
Find professional help when you n. ed it – Hire people who are more qualified than you: A financial planner can help you stick to your plan!
Understand the real difference between gambling and investing
Don’t expect government, company, family, or children to take care of you: If they do, that’s a bonus. You are in the driver’s seat.
Don’t look at your portfolio too often.
Things change, be prepared!