US brokerage account while living abroad

Hello all, I'm wondering the following: if a person lives outside the US but still has a US online brokerage account open, are there limitations or rules as to what investment instruments he/she is allowed to trade?  I mean, the operation will go through as the website doesn't know you live abroad, but I was under the impression that one is not supposed to buy US stocks or stock funds directly from a US brokerage while living abroad, but rather one must go through an international brokerage account (many US brokerage firms do offer international accounts). Can anyone enlighten me?

i have a schwab account.  i trade mutual funds and the like that way.  now, i've never changed my address from my parent's in new jersey to the UK one.

my sister changed her address to her new canadian address and now she is not able to trade in some vehicles.

so yes, there is some limitations.  unforutnatly, you'll have to wait until someone wiser comes along to clarify futher.

You should maintain a US address to handle certain transactions in your life.  For example, when I want to buy some stuff from some random US website, they often can't deal with "no state" as an option.  They often can't deal with the address on the CC being outside the US.  They often can't deal with a non-US fone #.  So I keep a US address (my sister-in-law) and a US CC linked to that address.  I use my sister-in-law's US fone #.  I use this whenever I buy from a US website so that I don't have to deal with overseas confusion.  I just pick up the purchased item next time I visit the US.

Thanks for the replies. I agree that one can keep a US address, but what I was wondering is if this is legal.
Specifically: is it legal to maintain a US address for the purpose of trading US stocks and mutual funds while actually living and working outside the US (but still filing federal taxes)? The reason I'm asking is because a friend of mine, who was also going overseas, was told by a Schwab agent that he *had* to register the change of address and open an international account...  He doesn't know why. I'm guessing it's a tax regulation? 

1. From a UK personal tax perspective US mutual funds do not qualify for capital gains treatment.  So if either you domiciled in the UK or are remitting the proceeds to the UK these will not be a good investment choice.
2. Most US brokers do not want to offer investments in countries where they are not regulated.  This is for good reason because it could cause the brokerage to be closed down by regulators.
3. Schwab International does offer investments in the UK, so it is probably related to reducing risk for them by keeping different groups of investors in different group companies.

1. From a UK personal tax perspective US mutual funds do not qualify for capital gains treatment.  So if either you domiciled in the UK or are remitting the proceeds to the UK these will not be a good investment choice.
2. Most US brokers do not want to offer investments in countries where they are not regulated.  This is for good reason because it could cause the brokerage to be closed down by regulators.

What would be a good investment for a US citizen who needs the funds in the UK?
I have a US fidelity account so if I sell some US mutual funds and pay the US 15% capital gains and then move the proceeds to a UK bank account how would the UK tax the money? How would the tax treatment be different from buying individual UK stocks?

I talked to Fidelity and they are ok with trading funds to a US citizen with a foreign address, its only some internet transactions that are an issue so you have to do the trades by phone.

I cannot explain the UK tax rules very clearly, but on the assumption you are non-UK domiciled what you would be remitting to the UK is treated as a gain net of the 15% foreign tax, so you have to start by grossing up the remittance for the 15% US tax on the gain (eg say your gain is $85 then you are deemed to have remitted $100).

Then you figure the gain in Sterling using the spot rates at dates of purchase/sale; next you figure out the UK tax on the gain at your marginal UK tax rate.  This gain is taxed as income because you hold a non-UK approved fund.  So the grossed up gain is declared on your UK tax return and you pay UK tax on the profit (after credit for the 15% US tax).

This is quite different from individual stocks because it is not subject to the rules for non-UK funds.

If you need the funds in the UK your issues are whether the after US and UK tax growth will be better by buying managed funds/individual stocks/ISAs/tax-exempt munis etc etc as against holding cash in the UK/US/offshore.  The answer to this point will depend on individual circumstances, so there is no single answer.

I cannot explain the UK tax rules very clearly, but on the assumption you are non-UK domiciled what you would be remitting to the UK is treated as a gain net of the 15% foreign tax, so you have to start by grossing up the remittance for the 15% US tax on the gain (eg say your gain is $85 then you are deemed to have remitted $100).

Then you figure the gain in Sterling using the spot rates at dates of purchase/sale; next you figure out the UK tax on the gain at your marginal UK tax rate.  This gain is taxed as income because you hold a non-UK approved fund.  So the grossed up gain is declared on your UK tax return and you pay UK tax on the profit (after credit for the 15% US tax).

This is quite different from individual stocks because it is not subject to the rules for non-UK funds.

If you need the funds in the UK your issues are whether the after US and UK tax growth will be better by buying managed funds/individual stocks/ISAs/tax-exempt munis etc etc as against holding cash in the UK/US/offshore.  The answer to this point will depend on individual circumstances, so there is no single answer.

Thanks Guya, I'm assuming the same investment returns form similar investments in the UK or US. So for compariosn I'd assume I'd get the same ereturn from US stocks and mutual funds as I would UK stocks, I don't include UK unit trusts as they are a tax no no for a US citizen. Given the same return it looks like investing in US or UK stock market is a taxation wash if you remit the funds to the UK. If I invest in UK stocks I'll pay capital gains at a rate depending on my income which I can claim as a credit on my US taxes, and if I invest in US stocks and remit the funds to the UK I'll claim a credit on my UK taxes and pay the difference. So I end up paying capital gains at the larger of either the US or UK rates.

If you could get stock market type returns from investments in an ISA would that be the way to go becasue you'd be free of UK tax and only liable to US tax on the gains. Do you know if you can buy individual stocks inside an ISA?

1. It is very unlikely that you'd credit in the US for UK CGT because most gains on UK stocks are treated as US source on a Form 1116.
2. You can indeed hold a stocks & shares ISA if you wish.  You'll have to avoid UK investment trusts, REITS (from next year) and companies in the real estate sector that are almost all going to convert to REITS.  You'll also need to declare the ISA on your TDF 90-22.1.

1. It is very unlikely that you'd credit in the US for UK CGT because most gains on UK stocks are treated as US source on a Form 1116.

What? I don't understand, if I sell a stock in the UK and pay 20% capital gains tax to the HMRC, I don't get credit for that on my US tax? What do you mean by US source on Form 1116?

I'd suggest you read the special rules for high-taxed income on page 4 here:
http://www.irs.gov/pub/irs-pdf/i1116.pdf#search=%22form%201116%20instructions%22

There is no simple solution to your issue.  I recommend professional advice to find what gives you the lowest global tax bills.

Again, I experience a sinking feeling in my guts as my eyes bug out!  Why do you do this to me guya?  Can't I just cover my head with a paper bag and pretend this kind of stuff isn't there?

Thank you kit for agreeing that tax is horrid.  Major political debates are currently taking place in the United States over:
a) the tax-gap (the difference between what is due to the IRS compared to what they collect), and
b) moving the United States to a territorial tax base.

While there is support on the Hill for (b), my view is that it is unlikely to happen.  Luckily most of us have the democratic right and opportunity to vote and lobby our Congressman/woman.  If you dislike the tax law on which IRS instructions are based you have the democratic right to do so, and right now more than any time in history you might see some change.  The rationale on the Hill is that because the US is now politically unpopular overseas the current tax rules  are only making it more difficult for the US to conduct business.  Your vote/lobby may just work!

We will certainly see more efforts to deal with (a) especially overseas.

Register to vote NOW at http://www.votefromabroad.org/! 

Here's a hint:  The ones who are in power now are the ones who keep taxing and legislating the heck out of Americans citizens abroad.   But the Dems have made some hefty tax proposals on offshore companies; many of you work for these and would be adversely affected if offshore company legislation passes. 

You have to look at the party's whole platform.  This issue is just one tiny issue in a giant bag of issues.  You just might think other things are more important.

I'd suggest you read the special rules for high-taxed income on page 4 here:
http://www.irs.gov/pub/irs-pdf/i1116.pdf#search=%22form%201116%20instructions%22

There is no simple solution to your issue.  I recommend professional advice to find what gives you the lowest global tax bills.

Waded through the 1116 and instructions. One question, what IRS category do UK capital gains fall into, are they Passive Income? I assumed so and ran some numbers through TurboTax. When I entered my foreign salary of $60k and some estimates of foreign dividends and captial gains, $10k (maybe a bit optimistic for me), Turbotax eneterd my salary as -$60k, entered the amounts on the 1116, and came up with no foreign tax credit as all the foreign dividends etc were wiped out by my foreign income exclusion and my net tax due was zero, does this sound right?

PS  I am amazed at the poorly written instructions for form 1116.