digest
Short Summary
Main recommendation: U.S. citizens living in Israel (or elsewhere abroad) should avoid buying foreign mutual funds, which U.S. tax law treats as PFICs (passive foreign investment companies), because the tax and reporting consequences are much harsher than for comparable U.S. funds. The speaker, CPA Yosefa Huber, says many people discover this only after they have already invested, often when they need to catch up on years of unfiled returns.
Key Points
- A PFIC, or passive foreign investment company, is a non-U.S. company that mainly earns passive income, such as mutual funds, hedge funds, insurance products, or, for a startup, mostly bank interest while it has no active income yet.
- Israeli mutual funds are commonly called "karin nemanut" in Hebrew, and the speaker says people should recognize that term when they talk to their Israeli bank.
- The issue arose because the IRS closed a deferral loophole: earlier, foreign funds could be bought and left unreported until sale, which the IRS no longer accepts.
- Foreign funds do not send the U.S.-style annual statements (such as the 1099 for U.S. funds), so reporting annual dividends and capital gains is difficult.
- Local banks and bank investment advisers often do not understand the U.S. tax problem, and the speaker says the responsibility falls on the investor.
Details Worth Noting
- Concrete instructions:
- Before buying any fund outside the U.S., ask whether it is a PFIC and whether the fund will provide the information needed for annual U.S. reporting.
- If you already hold a foreign fund, discuss with a U.S. tax professional which elections are available (for example, annual reporting versus reporting only at sale), since the choice affects the tax owed.
- If you have lived abroad and never filed, get caught up with a qualified U.S. accountant who handles overseas compliance, which is the kind of help the speaker provides.
- Tax rate comparison: U.S. long-term gains are taxed at 0 to 20 percent, while PFICs are taxed at the highest individual rate for each year (39.6 percent in earlier years; 37 percent for 2018 through 2025, according to the speaker).
- Interest penalty: when a PFIC gain is reported on sale, interest is added for each year held. Using the speaker's example, a gain spread over ten years is taxed with interest for ten years on the first portion, nine years on the next, and so on.
- Tax can apply even without selling: the speaker's example shows a 100,000-shekel investment growing to 110,000 shekels, where tax may still be owed on the unrealized profit, depending on the election chosen.
- Contacts given: the speaker's website is taxCPA.com, and she is on Facebook as Yosefa Huber. Doug Goldstein's email is doug@profile-financial.com, and show notes are at goldstein on gelt dot com.
Bottom Line
Foreign mutual funds held by U.S. persons abroad can trigger a costly, interest-laden tax problem that ordinary local investment advice does not address, so the safest step is to check PFIC status with a U.S. tax professional before investing.
