US Reporting Obligations for Foreign Retirement

One idea clients have to accept about the US tax system; it isn’t fair or logical. The US saves tax benefits for its own retirement plans, but often there aren’t any similar benefits when it comes to foreign retirement plans. Pretty much all US retirement accounts are set up as trusts, and the US calls them ‘qualified plans’, which just means you don’t pay US tax on the investment activity in that account. Foreign retirement plans are also considered trusts, but because the IRS can’t force those plans to report on their activity, it requires the plan owner to report instead. The IRS also requires the owner of foreign retirement plans to report any investment income in these ‘nonqualified plans’ as taxable income on their US returns. This makes clients upset, understandably, because they are being taxed in the US on income that often isn’t taxable in their home country. Some advisors have tried to come up with complicated arguments to avoid this result, often by claiming relief under Revenue Procedure 2020-17 (which has six separate requirements that many foreign plans would struggle to meet), or by comparing employer and employee retirement contributions to say that the employee doesn’t own their own plan. Our advice: Ask yourself if the IRS would really intend for these confusing practitioner arguments to work?

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Understanding US Residency

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Key Changes from Tax Cuts and Jobs Act (TCJA)