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Graham Macdonald MBMG International Ltd. Nominated for the Lorenzo Natali Prize |
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The Americans
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2012 |
2013 |
Top rate of Income tax |
35% |
39.60% |
Top rate of Capital Gains tax (Long Term Gains*) |
15% |
20.00% |
Top rate of Capital Gains tax (Short Terms Gains*) |
35% |
39.60% |
Top rate of tax on ordinary dividends |
15% |
39.60% |
Medicare surcharge** |
- |
3.80% |
* Short Term Gains are defined to be gains
realised within 12 months of purchase. |
**Medicare to be charged where total
unearned income exceeds $200,000 or $250,000 if individual is married
and filing jointly. |
Last week we looked at the Un-Americans and why US expats
were trying to give up citizenship. For those living and working offshore
and who want to remain as Americans there are still tax efficient ways of
saving money.
One of the biggest challenges for Americans who are offshore is how to get a
tax advantage on any savings that would otherwise be open to US tax at the
rates indicated on this page below:
I am the first to admit that Americans who are taxpayers can get both income
and capital gains tax deferral but it can be very costly just using the old
qualified variable annuity contracts - especially for those who in their
forties and fifties and saving for retirement. There is also the problem
that fund choice is limited so that, naturally, can inhibit potential
growth.
There are alternatives though some of which maybe thought of as a tax
efficient savings plan with Article 3 (1) (k) of the US-Malta Tax Treaty
which, with US approval, allows income and growth within the plan to be free
of US tax. These plans are only available to American tax payers or Maltese
residents. Because of this, there is no American withholding tax on US
source income and growth. Obviously, this gives some great advantages for
taxpayers who want to put money aside for their retirement.
Since these plans are Qualifying Plans from the American tax point of view,
investors are able to claim relief on realised income and growth made within
the Plan thus saving between 20.0% and 39.6%.
Once the plan owner has reached the age of fifty they can take out any
savings in the form of retirement benefits. These withdrawals can be taken
in the form of a lump sum - up to thirty percent of the Plan total and then
further lump sums can be taken under the guidelines stated in the Maltese
Programmed Withdrawals rules. Under Article 17 (1(b)) of the US:Malta Double
Taxation Treaty none of these withdrawals will be subject to either American
Federal tax or Maltese withholding taxes. This can be done since these lump
sums are ‘franked’ against untaxed income and growth thus allowing the taxed
‘basis’ to be taken out later tax free providing the payments are taken as
lump sums. The benefit of this type of plan is twofold. Firstly, it can give
gross roll up to defer US tax on realised income and growth on investments.
Second, savings will be gained via payments of untaxed income through the
aforementioned lump sum payment plan.
This type of investment vehicle is treated by the IRS as a Foreign Grantor
Trust. This means the plan is treated as part of an estate for American
Estate Tax when the holder passes away. This means there is no limit on the
amount of savings which can be contributed as they are not removed from the
estate itself. Any contributions will not get any US tax relief as they are
taken to be ‘tax-paid’ capital which gives it the ‘taxed basis’ of the fund.
The good news for investors is that the reporting requirements are done by
the company which operates the plan. They will also give the plan holder an
‘Owner Statement’ which will allow them to complete the 3520 forms and
obtain treaty relief. The plan also needs to be declared on the Report of
Foreign Bank and Financial Accounts (FBAR) and Form 8938 - again the company
will give you all the information needed.
This type of plan gives clients a tax efficient policy for American tax
payers who live overseas. This is because it allows for income and growth
gained from savings to grow without any American tax liabilities. As
explained above, there is also the benefit of an absolute saving in American
taxes.
This kind of plan should appeal to people who are over fifty years of age -
especially when compared to the more traditional forms of investment
available to US citizens. So, after all, it is possible to be American and
tax efficient - who would have thought it?
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the
above article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of reading the
above article. For more information please contact Graham Macdonald on
[email protected] |
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