We often meet people whose financial plan has gone wrong, not for lack of good intentions, but for lack of good advice. There are tax, financial planning, and law professionals specializing in specific areas of vast rules and regulations. It might seem obvious, but not all service providers are equal. If you're an American living or considering living abroad, it's even more critical to select the right professionals with international and cross-border expertise to support you. No matter which resources you use, the rules can change. And, for almost every situation, there are exceptions to rules, so you should consult your advisors before making any decisions.
At a minimum, we recommend you review your financial plan annually. A good plan is flexible and fluid. Regulations also change frequently and often in complex ways that you may not realize. The needs and wishes of your family members are also likely to change over time.
So, what should you consider when selecting the right resources for financial planning? We've outlined a couple of the most common challenges we see, along with guidance on how to find the appropriate advisor while living and working abroad.
If you're working in Hong Kong, you most likely contribute to a mandatory provident fund (MPF). This compulsory retirement plan requires you and your employer to contribute a minimum amount monthly. Many employers provide additional voluntary contributions. Employees do not have access to the funds until they retire or leave Hong Kong permanently. Because these plans are designed for retirement, CPAs who are not familiar with Hong Kong rules and tax treaties may treat these plans as tax-deferred retirement accounts, similar to a 401k and the pension plans that Americans working in Japan or the UK might have. They don't report the accounts or the annual employer contributions as taxable, nor do they report the underlying funds. Sometimes they even get omitted on the Foreign Bank Account Reports (FBARs).
Unfortunately, there is no tax treaty between the US and Hong Kong. The China treaty does not cover Hong Kong, which means that MPF contributions made by your employer are taxable income in the year they are received, even though you can't access the funds due to plan restrictions. You do not get a tax deduction for your portion of contributions. Even worse, the underlying funds are generally deemed to be treated as passive foreign investments and are reported on a mark-to-mark basis, creating phantom gain on unrealized gains.
Americans abroad are required to report foreign financial accounts in several different ways annually. Still, domestic CPAs are not always aware of this requirement and sometimes miss the FBARs and other tax forms. Americans who have a minimum total of $10,000 in foreign bank or investment accounts at any time during a tax year are required to file an FBAR. The FBAR does not create a tax obligation but is a requirement Americans should take seriously. Failure to file can result in criminal and civil penalties. The minimum penalty you could face for non-willful violation of the FBAR rules is $10,000 each year for each account you fail to file. If the IRS considers the failure to file as willful, meaning you knew you had to file and didn't, then the penalty will be $100,000 or 50% of the account balance at the time of the violation, whichever is larger.
Not all CPAs are familiar with The Foreign Account Tax Compliance Act (FATCA). The FATCA framework also requires Americans with assets abroad, not including property, worth over $200,000 per person to report them on Form 8938 with their federal return. Often the first step for new clients we meet is to unwind foreign investments that haven't been appropriately reported. Tax rules make reporting foreign investments punitive and complicated, so be careful before investing in these structures. This includes insurance-wrapped investment structures and foreign pension plans not protected by a tax treaty. You should seek tax advice before enrolling and ask your employer about the availability of US tax-advantaged options. If you don't have access to a US-qualified plan, you should be able to fund a traditional or Roth IRA and may be able to do other self-directed retirement planning.
Getting the right advice is critical. For investments, you should also ask questions of the custodian or product provider. Many foreign or offshore investment platforms, including private banks and offshore life insurance wrappers, cannot provide the necessary reports and information for US citizens to file their taxes. The added complications and tax difficulties may outweigh any benefit of the offshore structure.
Here are a few questions you can ask to determine if the tax advisor, attorney, financial planner, or investment adviser is equipped to support your needs as an American abroad:
Firms and practitioners have expertise in different areas and often spend most of their time and continuing professional development focusing on the areas that impact their core practice. One individual can't keep up with all the changes and best practices in these areas. If you wouldn't go to a dermatologist for your heart condition, don't select a CPA and attorney who is a generalist or lacks specific experience with international planning. While qualified counsel is often more expensive and can be harder to find, mistakes caused by an inexperienced advisor or an adviser lacking the proper technical knowledge and training can be far more costly.
Jessica Cutrera is the President at Leo Wealth and is based in Hong Kong. She provides comprehensive wealth management and planning services in several areas including tax, financial, and estate planning. She specializes in serving Americans living in Asia.
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