February 24, 2014
Posted by Jill Kerby on February 24 2014 @ 09:00
MONEY OR ASSETS IN THE USA? THE TAX IMPLICATIONS COULD COST YOU DEARLY
The plight of illegal Irish workers in America has been a source of concern and behind the scenes diplomacy by the Irish government and emigrant support agencies for decades. Their personal finances can be very complicated.
But so too can the finances of legal Irish workers who eventually returned home, or ordinary Irish based investors in the US, both of whom have left money or assets in the United States.
First, the illegal worker. Let’s call him Sean X, who contacted me recently. His story is typical of many young Irish builders who lost their livelihood with the economic crash of 2007-8. With lots of friends and family already in the US he quickly found a place to live in a mainly Irish/American neighourhood with some friends.
He also quickly found good paying, temporary jobs on building sites where sympathetic Irish/American bosses were prepared to look the other way. For the past six years he has worked hard, kept under the authorities’ radar; he isn’t registered with the IRS, doesn’t have a US driver’s license or health insurance (which he couldn’t afford anyway) and hasn’t returned home for fear of being caught out by emigration officers.
Sean’s (tax-free) hard work and the loyalty of his new tribe means he’s been able to save a remarkable amount of money - $150,000, half of which he was able to repatriate and deposit in an Irish bank.
He contacted me because he wanted information about good investment opportunities in Ireland.
Financial advisers I spoke to about Sean X’s case were all surprised to hear that he – or more likely someone authorised by him - was able to make the $75,000 deposit. “How did he get around the ID and money-laundering requirements?” one asked.
As for what to do with the money, “he’s on his own”, said another. The advisors all suggested that too many tax, immigration and money laundering/banking violations have occurred on both sides of the Atlantic and that if and when he is caught - most likely by US or Irish tax authorities, emigration or customs officials at an airport or even his Irish bank - “he’ll be needing legal, not investment advice. The least he can expect is to lose quite a lot of his US dollars to taxes, penalties and surcharges.”
Meanwhile, Irish residents with perfectly legal financial assets in the United States (and the UK, too) have some pressing issues to deal with too.
The Irish couple who contacted me recently had invested a $10,000 lump sum in a US stock market indexed fund back in the late 1970’s when they were both legal resident immigrants. It’s now worth in the region of $150,000, such is the power of c35 years worth of compound interest. And while the annual dividends were subject to US withholding tax, and they have no further US tax liability, they’re wondering about a potential Irish tax bill.
Only by examining their original US fund document, said financial planner and adviser Marc Westlake of Goldcore Wealth Management, who specialises in advising foreign residents and Irish citizens with overseas investments, could he determine their Irish liability, either on the annual returns “which they should have been declaring to the Irish tax authorities, even if they might not have had an Irish tax bill due to double tax agreements” – or on the final encashment value.
As ‘Non Resident Aliens’ (NRA’s) however, their US tax category since they live here and not in the US and are not US citizens, Westlake warned that for so long as their fund remains in the United States, this couple are liable to US estate tax regulations “that could potentially cost them thousands”.
“Holding assets in foreign jurisdictions adds a significant layer of complexity to personal finances and is not generally recommended for the DIY investor,” Westlake told me. Under the US gift and estate tax system – the equivalent of our capital acquisition tax system - gifts or inheritances between married NRAs are not eligible for the unlimited, tax-free US marital deduction that applies to US citizens. (In the same way that such transfers/inheritance is tax-free between married couples here.)
Also, “NRAs only enjoy a $60,000 estate/gift tax exemption, as opposed to the current estate tax exemption of $5 million for US citizens.” The estate/gift tax rate is 35% on any value over that $60,000 tax-free threshold.
In other words, in the event of the death of a husband or wife, resident here, but with assets in the US such as cash, investment funds, property, stocks and shares, etc the surviving spouse would not enjoy the tax-free inheritance of US citizens and the tax free inheritance threshold would be just $60,000, not $5 million.
Thousands of Irish people with assets in the US could be affected by these transfer/inheritance regulations, he said, “and they haven’t got a clue.”