We need a sticky for Investments and Taxes

The financial implications of a US citizen moving to the UK can be quite intimidating. I've done a lot of reading and posted on this forum about the issues and after many headaches I think I have things relatively organized. But it was painful. Posters like Guya and Lizzit are very helpful and I'd like to suggest that we come up with a sticky to cover the basics of investing, finances and taxes for a US citizen living in the UK. Things that we should cover are:

Where should we invest, are UK unit trusts ok, is it best to use US based brokers
Declaration of foreign accounts form TD etc.....
Pensions, how do we deal with the contributions on our US taxes
Can we still do IRA and ROTH contributions?
SS and NI contributions
Foreign earned income exclusion vs foreign tax credits
UK taxation of US retirement income

This is a combo between tax and money matters so I'm not sure where it should go, but its important

You'd probably find more tax info here: http://talk.uk-yankee.com/index.php?board=11.0 than on the money matters forum.

You'd probably find more tax info here: http://talk.uk-yankee.com/index.php?board=11.0 than on the money matters forum.

Well investing, money matters and tax are all closely related so it was a toss up where to post. The response to my post hasn't been dramatic so I'll ask a question to get things moving.

Are you saving for retirement? Are you doing it via a UK based retirement fund or a US ROTH or IRA?

Hi, if you want to write  a post about the ins and outs of finances and taxes and post it in 'Just Do It', that'd be great. 

But if you're asking for someone else to write it, then you're better off pm-ing them and asking directly.  I'm afraid the moderators just really wouldn't have the time for that sort of thing as we're all volunteers here.

Hi, if you want to write  a post about the ins and outs of finances and taxes and post it in 'Just Do It', that'd be great. 

But if you're asking for someone else to write it, then you're better off pm-ing them and asking directly.  I'm afraid the moderators just really wouldn't have the time for that sort of thing as we're all volunteers here.

I was more thinking of us all sharing information about how we handled the financial side of moving to the UK. Things like.

1) As a US citizen its pointless to invest in an ISA as the IRS doesn't recognize it as tax free. So if you are non UK domiciled you are better off invetsing off shore, however, non US mutual funds and units trusts etc have potential IRS tax pitfalls so its best to buy US based mutual funds.

2) If you take foreign tax credits rather than using the foreign earned income exclusion you will have earned income on your 1040 and thus be able to contribute to a ROTH or an IRA.

Hi Masterblaster,

Now that I'm a little more settled over here, I've started to think about our long term financial planning. I've learned a lot from the tax board, but I still feel rather unknowledgable about all of the financial implications of expat life. One of the things on my to-do list for the new year is to seek professional advice!

To get to your question about retirement planning--my understanding is that it is not possible to invest in a Roth IRA if you do not have US based income. Is this your understanding?

Also, just to get an idea of your perspective--are you planning to return to the US, or are you over here permanently?

Also, just wanted to suggest--perhaps if you (or me, or anyone else who is interested) finds a post in the tax board history that is particularly useful on a certain subject, you can suggest that it be made sticky. I agree that there aren't many stickied topics over there. I think the list you came up with is a good basis for topics that most people would find useful.

To get to your question about retirement planning--my understanding is that it is not possible to invest in a Roth IRA if you do not have US based income. Is this your understanding?

Not quite, as my income tax is higher in the UK than in the US I was going to use the foreign tax credit, rather than the exclusion so that I will report earned income on my 1040 and thus be able to contribute to a ROTH. I wasn't aware that the source of the earned income was an issue, do you know that for sure? Also I was going to use my excess foreign tax credits to pay the US tax on contributions to my UK pension plan so that I'll avoid any US tax when I take income out.

No, I'm definitely not clear on the regulations, so maybe best to get clarification on the tax board. I'm not sure if guya or lizzit venture over to this neck of the woods.

I do hover and read!

Unfortunately life is never as simple as a short post in an open forum makes it seem.

masterblaster has suggested investing in US mutual funds can be a "good thing" because it gets over those nasty US PFIC rules. Unfortunately, the answer from a tax perspective depends on when you'll need the money (when you are living in the UK, after going home etc?), because the UK will never treat the gains on these as capital gains so the UK tax could be higher than the US tax on the gain (up to 40% in the UK even after April 2008, versus 15% currently in the US).

Similarly, an IRA defers US tax but saves no UK tax unless you fall within one of the few exceptions in the US/UK treaty and you claim under the tax treaty or domestic UK law on each UK tax return when you take lump-sum withdrawals or after you stop claiming the remittance basis in the UK.

These things are so much dependent both on personal circumstances (which change all the time) and laws in both countries (which also change all the time).

It is also worth cautioning that when masterblaster says he will not elect to claim the foreign earned income exclusion, this will mean he cannot claim this for 5 years hence, which may be a risky choice.  He also says he will not pay US taxes on UK pension distributions when he takes them out.  This is a significant undersimplification of IRS Code section 72 and the related IRS Regulations.  If he reads these carefully he'll find that basis for US tax purposes is figured using an acturial formula, so in practice there will be some US tax on withdrawals.

I agree 100% that these things are really important. Lizzit & I are sad people who have spent dozens of years reading about taxes and almost nothing else.  You probably do something much more fun, so hopefully can't quote IRS code sections!  If you can't afford annual assistance then the easiest way to make sure these things are done to save you the most money is to sit down with a dual US/UK qualified adviser to discuss tax issues on a one-off basis. 

Providing financial advice is a criminal offence in the UK unless the adviser is registered with the FSA. I know no FSA registered advisers who can advise on US based investments (Lizzit may) so you are unlikely to find someone who can handle everything masterblaster wants.  A dual US/UK qualified adviser with tax qualifications in both both countries could however review financial planning advice on a one-off basis to give "health warnings" over tax issues (such as ISAs or mutual funds or jointly held accounts between a US citizen and a non-US citizen).

I was more thinking of us all sharing information about how we handled the financial side of moving to the UK. Things like.

1) As a US citizen its pointless to invest in an ISA as the IRS doesn't recognize it as tax free. So if you are non UK domiciled you are better off invetsing off shore, however, non US mutual funds and units trusts etc have potential IRS tax pitfalls so its best to buy US based mutual funds.

2) If you take foreign tax credits rather than using the foreign earned income exclusion you will have earned income on your 1040 and thus be able to contribute to a ROTH or an IRA.

In that case I think you're better off starting individual topics for each question as information tends to get lost in long multi topic threads, and to be perfectly honest I don't read a lot of the money/tax stuff so wouldn't be on hand to split and merge important stuff.

I think it's easiest to just search for individual threads on whatever topic you are interested in, which is what people have been doing anyway.

I do hover and read!

Unfortunately life is never as simple as a short post in an open forum makes it seem.

masterblaster has suggested investing in US mutual funds can be a "good thing" because it gets over those nasty US PFIC rules. Unfortunately, the answer from a tax perspective depends on when you'll need the money (when you are living in the UK, after going home etc?), because the UK will never treat the gains on these as capital gains so the UK tax could be higher than the US tax on the gain (up to 40% in the UK even after April 2008, versus 15% currently in the US).

Similarly, an IRA defers US tax but saves no UK tax unless you fall within one of the few exceptions in the US/UK treaty and you claim under the tax treaty or domestic UK law on each UK tax return when you take lump-sum withdrawals or after you stop claiming the remittance basis in the UK.

These things are so much dependent both on personal circumstances (which change all the time) and laws in both countries (which also change all the time).

It is also worth cautioning that when masterblaster says he will not elect to claim the foreign earned income exclusion, this will mean he cannot claim this for 5 years hence, which may be a risky choice.  He also says he will not pay US taxes on UK pension distributions when he takes them out.  This is a significant undersimplification of IRS Code section 72 and the related IRS Regulations.  If he reads these carefully he'll find that basis for US tax purposes is figured using an acturial formula, so in practice there will be some US tax on withdrawals.

I always defer to Guya's knowledge, and I too advise you to get professional advice, but as a US citizen in the UK who might be returning to the US someday, I've tried to come up with sensible financial solutions that I wanted to share to get folks thinking and I think that Guya is being a bit negative.

I wanted to invest some money and doing it in the US with a mutual fund account I already had seemed sensible as I'm not UK domiciled and the UK options seemed limited.
I've divided my money between a US inflation linked bond, and US and European Stock Index funds

I'm not doing a TIRA I'm contributing to a ROTH that I believe will be tax free in both the US and UK when I'm 59.5. I think commiting to taking the tax credit is worth it so that I can do a ROTH.

Finally I am trying to reduce my US tax liability on my UK pension by using excess foreign credits, as advised by Guya and Lizzit, thanks. Of course the US will want to tax the gains that I have in my UK pension fund, but when you go to a tax advisor I think its good to have some knowledge about this kind of thing, even if it is imperfect.

I know that this is all quite complicated and dependent on personal circumstances, but if we discuss what we are all doing we all might learn something and be a bit more prepared to evaluate and understand the advice we get. I'm a firm believer that you should understand everything in your finances and taxes and not just sign on the bottom line.