Do ISAs make sense for us expats?

I've been hearing about ISAs, and how they are tax-free in the UK. But do they make sense for us as US expats?

Even though the ISA income is taxfree in the UK, we'd still be liable for US tax on it, yes? It wouldn't be earned income from a job, it'd be investment income, and therefore taxed in the US, as I understand it.

Can anybody shed any light on this?

For our part, we're thinking of using ISAs. Be aware though, that the principle itself is not tax-free in the UK, but rather any interest it earns (in US terms, it's post a tax investment and not tax deductible). And yes, you'd still be liable for paying taxes on it in the US, (it's not eligible to be included in the US foreign income exemption).

I'm still researching, but http://www.fool.co.uk and http://www.moneysavingexpert.com have very good information on ISAs.

Also, see this link for comparison to the US ROTH IRA. There are similarities that you may be familiar with:

http://en.wikipedia.org/wiki/Roth_IRA

I'm no tax expert, so I'm sure someone more knowledgeable than I will be able to chime is soon to answer your questions more authoritatively, but maybe this will get you started thinking.

With a view to subscribing to and bumping this thread, I will confess my dirty little ISA secret...

I've been contributing to a cash ISA for five years, and have never reported it on my US tax returns. The lady who did my taxes this year said I didn't have to, and now I know she was WRONG. That'll teach me to take free tax advice!

With a view to subscribing to and bumping this thread, I will confess my dirty little ISA secret...

I've been contributing to a cash ISA for five years, and have never reported it on my US tax returns. The lady who did my taxes this year said I didn't have to, and now I know she was WRONG. That'll teach me to take free tax advice!

Ah see...I was worried about this.  I've never started an ISA because I had a sneaking feeling something like that would crop up.  Sorry, hon. 

Ah see...I was worried about this.  I've never started an ISA because I had a sneaking feeling something like that would crop up.  Sorry, hon. 

I just wish I would have had a piece of your very sensible foresight!

The interest on a cash ISA, while tax free in the UK, is taxable in the US.  As it is investment income, you can not use the foreign earned income exclusion to reduce tax on this income.

If you invest in a stock and shares ISA, it will likely be considered a PFIC in the US.  PFICs have separate reporting and different taxation from regular stock/shares.  You can also incur a penalty with a PFIC, in some circumstances.

The interest on a cash ISA, while tax free in the UK, is taxable in the US.  As it is investment income, you can not use the foreign earned income exclusion to reduce tax on this income.

If you invest in a stock and shares ISA, it will likely be considered a PFIC in the US.  PFICs have separate reporting and different taxation from regular stock/shares.  You can also incur a penalty with a PFIC, in some circumstances.

I suppose that means I really should employ myself a proper US/UK tax accountant next year to get me back above board.    Will it be only the past three years I'll need to file?

Yes, good idea to talk to an US/UK tax accountant about this. But don't dismiss ISAs out of hand. You can't use the foreign earned income exemption against ISA interest, BUT, it may be that your other US tax deductions will reduce or even eliminate the taxes on ISA interest.

For instance, if you own a home back in the US:  mortgage interest, property taxes, depreciation if it's rented out and all the attendant expenses of doing so, such as advertising, property management fees, repairs, etc.

Also, your personal exemption (single, married filing jointly, head of household, etc.), dependants, etc. Unreimbursed job expenses, medical expenses above a certain amount, charitable donations (cash, stock or goods), and so on.

Consult a professional and be of good cheer!

LadyAnglesey is spot on.

You'd also need to know the exact maximum balance to report on Form TD F 90-22.1 each year but an ISA which avoids PFICS can still save tax globally especially with the newish UK non-dom rules now in play.

Are UK taxable savings account interest taxed the same way as Cash ISAs, ie they can't be excluded by foreign earned income?  I guess any kind of cash savings would fall under this umbrella?