{"id":1336,"date":"2015-08-31T23:10:46","date_gmt":"2015-09-01T04:10:46","guid":{"rendered":"http:\/\/www.patellawoffices.com\/blog\/?p=1240"},"modified":"2015-08-31T23:10:46","modified_gmt":"2015-09-01T04:10:46","slug":"watch-out-for-pfic-status-2","status":"publish","type":"post","link":"https:\/\/patellawoffices.com\/blog\/planning-for-tax-minimization\/watch-out-for-pfic-status-2\/","title":{"rendered":"Watch Out for PFIC Status"},"content":{"rendered":"<p>If you invest internationally a Passive Foreign Investment Company (PFIC) could be a nightmare that could become a reality if you happen to invest in what the IRS deems a PFIC, which are taxed at exorbitant rates and have highly complex reporting rules. Most foreign mutual funds are PFICs, as are certain foreign stocks.<\/p>\n<p>It is not illegal to invest in a PFIC, but practically speaking, the costs of doing it are so incredibly onerous that it\u2019s prohibitively expensive in the vast majority of cases.<\/p>\n<p><strong>What Is a PFIC Investment?<\/strong><\/p>\n<p>If a foreign corporation or investment vehicle meets either of the two conditions below, it will be deemed to be a PFIC.<\/p>\n<p>1) If passive income accounts for 75% or more of gross income (passive income includes income from interest, dividends, annuities, and certain rents and royalties) or<\/p>\n<p>2) 50% or more of its assets are assets that produce passive income.<\/p>\n<p>If you own a foreign mutual fund it probably (and unfortunately) qualifies as a PFIC. An offshore investment entity that makes an election (which is rare) to be classified as a disregarded entity or a partnership is not a PFIC.<\/p>\n<p><strong>What Are the Implications of the PFIC Rules?<\/strong><\/p>\n<p>The consequences of owning a PFIC are severe.\u00a0 The IRS estimates it takes up to\u00a0<strong>30 hours of tax preparation time<\/strong>\u00a0to complete Form 8621, which needs to be filed for each PFIC every year. \u00a0As a result, the benefit of holding a PFIC often outweighs even the cost of reporting it.<\/p>\n<p>Aside from the aforementioned complexity, unless a PFIC investor makes one of the elections explained below, he suffers the following punitive tax rates and special rules:<\/p>\n<ul>\n<li>For any year in which you receive a dividend or sell any PFIC shares, you face a complex calculation that involves prorating the PFIC\u2019s return over your entire holding period and applying an interest charge.<\/li>\n<\/ul>\n<ul>\n<li>Most capital gains are taxed at a top federal rate of 20%, plus the Obamacare surcharge of 3.8%, for a total of 23.8%, which is favorable compared to the top ordinary federal income tax rate of 39.6%. Capital gains in PFICs, however, are effectively taxed at the highest ordinary income rate\u00a0<strong>plus<\/strong>\u00a0the interest charge mentioned above. The tax and interest due can eat up 70% or more of your gain.<\/li>\n<\/ul>\n<ul>\n<li>A capital loss on a PFIC cannot be used to offset capital gains on other investments.<\/li>\n<\/ul>\n<p>Due to the\u00a0Foreign Account Tax Compliance Act (FATCA), which forces every single financial institution to submit information on their American clients to the IRS, PFIC rules will be enforced.<\/p>\n<p>Fortunately, there are a few solutions out of PFIC status:<\/p>\n<ul>\n<li>First, if the PFIC meets certain accounting and reporting requirements (which is rare), the US investor can elect to treat the PFIC as a Qualified Electing Fund (QEF), which eliminates the punitive tax rates.<\/li>\n<li>Second, generally speaking, there is an exemption from PFIC reporting if PFIC holdings do not exceed $25,000 ($50,000 for married couples filing jointly).<\/li>\n<li>Third, if you hold a PFIC through an IRA or other certain retirement accounts, you may be exempt from Form 8621 filing requirements.<\/li>\n<\/ul>\n<p>With the complexity and unfavorable tax rates that come with them, it is clearly better to avoid owning PFICs when investing offshore.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you invest internationally a Passive Foreign Investment Company (PFIC) could be a nightmare that could become a reality if you happen to invest in what the IRS deems a PFIC, which are taxed at exorbitant rates and have highly complex reporting rules. Most foreign mutual funds are PFICs, as are certain foreign stocks. It [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_daextam_enable_autolinks":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[90,24,52,54,101],"class_list":["post-1336","post","type-post","status-publish","format-standard","hentry","category-planning-for-tax-minimization","tag-fatca","tag-foreign-account","tag-offshore","tag-offshore-accounts","tag-pfic"],"_links":{"self":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/1336","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/comments?post=1336"}],"version-history":[{"count":0,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/1336\/revisions"}],"wp:attachment":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/media?parent=1336"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/categories?post=1336"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/tags?post=1336"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}