Fiscal Cliff and FATCA – What Do They Mean For US Expat Investors?

To contact Tom for a free, no-obligation discussion of your financial situation please use our US expat investment enquiry form.

I have just returned from the town of Ajijic, a half hour out of Guadalajara, Mexico and home to about 10,000, mostly retired, Americans (as well as a large number of Canadians and even the odd Brit). During my week there, my colleague Marian Wellman and I put on a seminar on the topics of the coming US fiscal cliff, FATCA regulations, and the current investment climate. Much to my surprise, given the dry nature of anything concerning taxes, the seminar was heavily attended and standing room only, with most of the interest directed towards the first two topics – so I thought Expat Focus readers might also be interested in our overview.“Fiscal Cliff” refers to the set of, mostly tax-related, changes which are due to take place at the beginning of 2013 unless congress comes together on alternatives. This issue is of importance to all investors since, if nothing is done, it is forecast that the fiscal cliff will result in approximately a 3% drag on US GDP next year. This could well throw the United States into recession, and with Europe and Japan already struggling and many other economies slowing, we could end up with a global recession.

There are a number of parts to the fiscal cliff but, in essence, it is comprised of increases in income, estate, and investment tax rates as well as a decrease in the AMT threshold. Also the recent payroll tax cut would expire along with various tax credits. There will also be a new tax of 3.8% on investment income for what are called “high-income” earners to help fund Obamacare. In addition, there will be government spending cuts and expiry of long-term unemployment benefits.

If congress can’t get its act together (which has pretty much been the status quo for the last four years), then indeed this would be serious for investors as there would likely be a considerable sell-off in the US and global equity markets. However, it seems like there is some progress, with the democrats suggesting they might be flexible on entitlement reform and the republicans giving some way on the possibility of raising taxes or at least doing away with some tax loopholes. So more likely than not, we will end up with what Warren Buffett recently called a “fiscal hill” rather than a fiscal cliff and hopefully we will at last have some clarity with respect to certain taxes – clarity goes a long way to reassuring both business and the investment markets.

To sum up this issue, the recent post-election sell-off in the US stock market could present a buying opportunity if congress mitigates the effects of the fiscal cliff and brings clarity to the US tax situation.

The other topic of interest is the FATCA regulations which are due to start going into effect next year. FATCA refers to a series of laws that are designed to crack down on tax avoidance by wealthy US citizens investing offshore – but it will effect every US person (citizen, Green Card holder, etc.) living outside the United States.

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FATCA came about as a result of the successful efforts in recent years by the IRS to identify and tax US persons hiding money offshore. Apparently the IRS has assessed over $4 billion in taxes and penalties as a result of these efforts and now it wants more. However, it is expensive for the IRS to pursue tax-avoiders outside the United States and so it came up with FATCA; which, in essence, aims to turn non-US financial institutions into whistleblowers and tax collectors.

Foreign (non-US) financial institutions (FFI) will have to scour their client files for “indicia” of US ties. “Indicia” would be things like: Birth in the USA, income from the USA, frequent transfers to a US account, a US “in care of” address, and so on. If indicia are found then the account holder will be contacted and information will be requested to prove or disprove their US tax status. If the account holder does not provide the necessary information they will be deemed a “recalcitrant” account holder and the account will be reported to the IRS and the FFI may have to withhold on certain US-source payments to the account.

So, you may ask, why should I care unless I really am trying to cheat the IRS by hiding my US tax status? Put yourself in the shoes of the FFIs – it will take considerable resources to ensure compliance with FATCA. This translates into considerable cost. It may be easier for the FFI to simply cease doing business with US persons altogether – or at least with US persons who don’t have a considerable sum with them and are already clearly identified as being US. The FFI doesn’t have to worry about FATCA compliance if they just avoid anyone with any type of US ties.

So the bottom line is that it may become even more difficult for US persons to open and hold non-US bank and investment accounts. This, along with the fact that many US financial institutions are already shunning non-US residents, is making it increasingly difficult for US expats to manage their financial affairs and highlights the important role that specialists in US cross-border financial services will continue to play.

Tom Zachystal, CFA, CFP

Tom Zachystal is President of Individual Asset Management, a Registered Investment Advisor specializing in investment management and financial planning for expatriates.

This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.

Individual Asset Management is a U.S. Registered Investment Advisor; Tom Zachystal is a Chartered Financial Analyst, and Certified Financial Planner™ professional with over ten years expatriate portfolio management and financial planning experience. He has clients on four continents in over a dozen countries and is one of the original members of the Expat Focus Trusted Partner Network, a small group of financial advisors selected specifically for their professionalism and integrity. His services include: US or offshore investment accounts, IRAs, 401ks, portfolio/investment management, UK SIPPs, UK pension transfer to the US or elsewhere (QROPS), retirement planning and other financial planning services for US citizens living abroad or residents of any nationality living in the US.

To contact Tom for a free, no-obligation discussion of your financial situation please use our US expat investment enquiry form.

Tom Zachystal

Tom Zachystal is President of Individual Asset Management, a Registered Investment Advisor specializing in investment management and financial planning for expatriates.

Contact Tom for a free, no-obligation discussion of your financial situation if you are a US citizen living abroad or a foreign national living in the USA.

Articles are for informational purposes only; they are not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.


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