The Americans


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:

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.

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]