Depending on your immigration or work history, your financial resources, your estate planning goals, and other factors, there are countless financial strategies for retiring in the U.S. or abroad – but it is critical to plan carefully around the current and future tax ramifications. If you are either (1) a U.S. citizen retiring abroad, or (2) a U.S. tax resident that has a foreign pension plan, you will likely be required to report the income accruing in your offshore retirement plan on an annual basis and your current or future retirement distributions to the IRS as taxable income, unless certain exceptions apply relating to employees’ trusts, “highly compensated employees,” or under the provisions of various tax treaties. In short, the annual income that accrues within a foreign pension or annuity and the subsequent distributions at retirement are generally taxable except in a few specific cases, making it essential for taxpayers with foreign pensions to consult with a knowledgeable international tax law attorney for guidance.
Additionally, the income that accrues within the offshore pension plan on the invested plan assets may be taxable for federal and State purposes on an annual basis if not exempted by treaty, exempt because the plan meets the terms of ERISA or some other grounds for not treating the offshore pension plan as an offshore trust with a U.S. beneficiary, exists.
Are Foreign Retirement or Pension Plans Reportable to the IRS?
American expats who retire abroad often participate in foreign pensions or retirement plans. In Canada, for example – where somewhere between about 900,000 and 2 million Americans reside, according to Census data from 2006 – one popular option is a Tax-Free Savings Account (TFSA), which shares many features with the Roth IRA so common here in the United States (including tax-exempt status). Participation in foreign retirement plans is common not only among U.S. expats, but also among U.S. citizen, resident and non-resident aliens who live in the United States.
Regardless of whether the taxpayer is a tax resident in the U.S. or an expat overseas, he or she must typically report to the IRS, on an annual basis, any foreign retirement income that has accrued, even where no distributions have occurred, unless an exception applies. Taxpayers generally are required to annually report this taxable income on their federal and state personal income tax returns. In addition, they may also need to file several additional IRS offshore informational forms, depending on their individual facts and circumstances. These forms may include one or more of the following:
- FBAR (FinCEN Form 114) – The FBAR is the “Foreign Bank Account Report,” also known as FinCEN Form 114. The FBAR is used to disclose reportable foreign investments and financial accounts – including but not limited to bank accounts, stocks, securities, mutual funds, partnership interests, Bitcoin wallets, and, you guessed it, pension plans – if they exceed a $10,000 threshold, whether in a single account or distributed across multiple accounts. These FBAR requirements, which are monitored and enforced very aggressively by the IRS, apply broadly to U.S. citizens, residents, trusts, and business entities. For help in this tax area, speak to an experienced FBAR tax attorney or FinCEN Form 114 lawyer in Orange County right away.
- Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) – You may need to file this form with the IRS if you are the beneficiary of a foreign retirement plan that meets the definition of a trust. However, exceptions apply regarding “employees’ trusts,” which are trust funds created by employers on behalf of employees. The IRS explicitly provides for this exception in one of its own procedural manuals, stating the beneficiaries of foreign retirement plans are normally “subject to… United States income taxation on [foreign retirement] income… unless the plan is an employees’ trust within the meaning of section 402(b) of the Internal Revenue Code and the individual is not a highly compensated employee subject to the rule of section 402(b)(4)(A).” The IRS currently defines a “highly compensated employee” as a taxpayer who either:
- Earned income exceeding $125,000 or $120,000, depending on the year.
- “Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received” from the company.
- Form 8938 (Statement of Specified Foreign Financial Assets) – The Form 8938 filing requirement, which exists because of a law called FATCA or the Foreign Account Tax Compliance Act, is similar to the FBAR filing requirement with two major differences:
- In addition to citizens and residents, FATCA requirements may also apply to non-citizens (which is not true of FBAR requirements).
- The reporting threshold is significantly higher when it comes to FATCA compliance. This threshold ranges anywhere from $50,000 to $600,000, depending on filing status and financial timing. (For detailed information explaining which thresholds apply to whom, refer to the IRS Summary of FATCA Reporting for U.S. Taxpayers and scroll to the section titled “Reporting Thresholds.”)
Last, though certainly not least, it is vital for taxpayers to be aware that certain tax treaties with the United States may contain their own, unique provisions that take precedence over the normally-applicable IRS requirements. Therefore, no matter where you retire to, or receive retirement income from, make sure you choose a CPA or Tax Attorney who has ample international tax planning and compliance experience.
International Estate Planning Attorneys for Retired U.S. Expats, U.S. Citizens, Resident and Non-Residents Aliens.
At the Tax Law Office of David W. Klasing, the core of our trusted, award-winning practice is built on extensive experience helping individuals, businesses, and trusts resolve complex international tax issues. From FBAR audits and voluntary disclosures, to international business tax planning and international estate planning, our expat tax lawyers can help reduce your tax liabilities, fight improper tax assessments and penalties, bring you into compliance with tax reporting and foreign information disclosure laws, and build a stronger financial strategy for the future of your family.
Our firm has extensive experience with brining clients that have purposely or inadvertently omitted offshore taxable income or have omitted required foreign information returns into compliance. The options available are as follows:
These IRS proscribed procedures are appropriate where no foreign income has been omitted and reasonable cause can be established for the omitted foreign information reporting. If your reasonable cause explanation and penalty abatement request is accepted, no penalties will be assessed.
This program is appropriate where the taxpayer meets the program eligibility requirements and no penalties will ordinarily be assessed.
The program is appropriate where the taxpayer meets the program eligibility requirements. Three years of amended personal tax returns that pick up the previously negligently omitted taxable offshore income are required along with 6 years of FBARS and any other previously omitted foreign information or tax reporting form. A 5% FBAR penalty will ordinarily be assessed on the highest balance of the offshore accounts or tainted foreign assets where offshore taxable income was omitted.
The program is appropriate where the taxpayer meets the program eligibility requirements. Six years of amended personal tax returns that pick up the previously willfully omitted taxable offshore income are required along with 6 years of FBARS and any other previously omitted foreign information or tax reporting form. A 50% FBAR penalty will ordinarily be assessed on the highest balance of the offshore accounts or tainted foreign assets where offshore taxable income was omitted. A 75% fraud penalty will also be assessed on the tax year with highest amount of unpaid federal tax.
Don’t let taxes ruin your retirement. Contact us online today to set up a reduced-rate consultation or call the Tax Law Office of David W. Klasing at (800) 681-1295 to talk about how we can help.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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