Maltese pensions are a financial tool that can function as a beneficial retirement plan for U.S. taxpayers hoping to avoid costly taxes imposed on the more common options available in the United States. These alternatives have been available since 2010 and are popular for those who do not neatly fit the parameters of a Roth IRA.
However, recent statements by the federal government suggest that the government is reconsidering whether they will continue to allow the Maltese pension to function for U.S. taxpayers as it has previously. Notably, the IRS recently added improper use of Maltese pensions to the annual “Dirty Dozen” list. These are statements that U.S. taxpayers who use Maltese pensions should note. If the IRS does take action against Maltese pension holders, you could be in for a rude awakening.
This is where the Tax Law Offices of David W. Klasing can help. Our dual licensed Tax Attorneys and CPAs stay on top of the latest developments in federal tax enforcement on offshore holdings so that you don’t have to. If you have concerns, you deserve our complete suite of services to preserve your offshore assets and property, wherever and however they may be held. Call us today to hear more at (800) 681-1295.
Maltese pensions are tax planning devices that U.S. taxpayers have utilized to secure certain tax deferral and avoidance benefits. These benefits are made possible through the U.S.-Malta Income Tax Treaty (referred to below as the “Treaty”), which stipulates that income earned by a Maltese pension fund cannot be taxed by the United States until a distribution is made from the fund to a U.S. resident.
These benefits resemble those available through a Roth IRA. Roth IRAs are retirement accounts which allow for U.S. taxpayers to avoid paying certain taxes on their retirement savings. While contributions into a Roth account are subject to taxation, the accumulated interest and earnings on the account itself are free from tax.
There are limitations on Roth IRAs that do not apply to Maltese pensions. For instance, Roth IRA benefits are only available to those taxpayers who fall within a certain range of adjusted gross income. Further, those taxpayers may only contribute up to $5,500 to their account each year. Excessive contributions trigger a six percent excise tax that is imposed annually until the discrepancy is rectified. Most critically, U.S. taxpayers may not transfer property to a Roth IRA account without significant tax implications.
In contrast, there are no limits on contributions (in size or type) to Maltese pension funds. The Treaty contains broad parameters for creating a Maltese pension fund, allowing the savvy U.S. taxpayer to utilize the Treaty to protect non-Maltese income.
The Maltese pension has remained a viable (and lawful) tax avoidance tool for high-income individuals since the Treaty was enacted in 2010. However, the IRS has recently signaled its intentions to reassess the validity of how some U.S. taxpayers are using the treaty.
In a July press release, the IRS added several notorious tools to its annual “Dirty Dozen” list of tax avoidance vehicles and schemes that it will be focusing on in 2021. The Dirty Dozen list (which frequently contains more than a dozen topics) is a signal to would-be evaders of the IRS’ plans for finding and penalizing them. Amongst these items, the IRS listed the “potentially abusive use of the U.S.-Malta tax treaty.” Below is the press release’s language that indicates the IRS initiative regarding its revised approach to Maltese pensions.
“Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan's assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment.”
It is clear that the IRS plans to retool its view of the viability of Maltese pensions as lawful methods of protecting U.S. taxpayer assets and property that generate untaxed value.
Other members of the IRS’ Dirty Dozen list for 2021, including the July additions featured in the press release, are as follows:
If you are concerned about how the IRS’ amplification of investigatory work into any of these areas, particularly as it pertains to Maltese pensions, you should contact the dual licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing immediately.
The Tax Law Offices of David W. Klasing knows how difficult it can be to ensure that your money is safe from the IRS. We make it our mission to keep our clients fully informed of current tax law developments and the best strategies available in response. To hear more about our plans for taxpaying Maltese pension holders who wish to remain compliant, give us a call today at (800) 681-1295.