Jill Kerby

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.” 

CLEVER ENERGY SWITCHES PRODUCE ANNUAL SAVINGS

You could be forgiven for thinking that the consumer energy market, with its collection of different gas and electricity suppliers, is beginning to resemble the private health insurance market, what with all the  existing and stand-alone offers and the dizzying number of not-very-transparent individual usage and standing charges.

A fortnight ago, a new company, Energia, owned by Belfast based Veridian, launched itself on the Irish market, joining Bord Gais Energy, Electric Ireland, SSE Airtricity, PrePay Power and Pinergy (the meter-based providers) in the scramble for your business.

Energy – electricity and gas – is one of the essential, big ticket purchases in every Irish household, along with housing costs and grocery bills.

Average bills for a typical three bedroomed house amount to about €1,179 per annum for electricity. Typical gas use in the same household for heat and cooking, according to Bord Gais, will be about €727 per year or about €120 per bi-monthly bill. (A large four or five bedroom house will use between €1,469 and €1,752 worth of electricity a year, according the energy price comparison website, www.bonkers.ie.)

Most of us have a pretty good idea how to reduce our electricity and gas consumption: you turn down the central heating a degree or two and set timers for when it is needed.  You don’t leave lights burning in empty rooms or turn off electrical appliances like TVs, stereos and computer equipment overnight.

Energy saving light bulbs, lagging jackets, eco-wash settings and night rates are all sensible way to reduce consumption, and cut your bills by perhaps 10%-20% depending on how consistent and diligent you are. But shopping around for best rates and tariffs is another way to seriously cut energy costs.

Remarkably, fewer than one in seven Irish households, or just over 266,000 of us bothered to switch energy providers last year, compared to the 470,000 who did in 2010,the year after the ESB monopoly was broken and Bord Gais Energy and Airtricity began offering their gas and electricity services.

The switching fall-off is mostly blamed on consumer inertia and complacency – a mistaken belief that the savings aren’t high enough to bother doing annual comparisons.

The switching experts from the comparison sites bonkers.ie and uSwitch.ie couldn’t disagree more.

More players have entered the market since 2010; Energia is the latest, but the meter providers PrePay Power and Pinergy also offering an interesting product for households that want to monitor and control their usage and stick to their own budget.

An annual switch, claim the experts, will at very least keep you level with the inevitable annual price hikes, and assuming you get the very best deal on the market at the time, a sufficient discount to even keep your bill under the average annual national charge.

I asked Simon Moynihan of bonkers.ie to answer the two most common questions I get from readers about the energy switching process: “The process looks difficult. Where do I start?” and “Is it always better to combine your gas and electricity?”

According to Moynihan, if you want a successful shopping and switching outcome you need to do two or three things before you go onto a comparison website: “One, take out your latest electricity and/or gas bill for your account details. Two, take your latest meter readings for the units or kilowatts used, or call your supplier and get this information from them.  You don’t have to worry about how much you’ve spent in the last 12 months or anything like that,” he explained.

You then go onto the comparison site and follow the instructions, choosing your existing energy provider – either an electricity and gas combination, or electricity company only or gas company. You then fill in your unit and kilowatt details.

It is your usage level (light, moderate or heavy) that allows the comparison site to find the best tariffs/charges available and that ideally, produces a savings for you. Once you’ve pressed the ‘Compare Prices’ key, the best option – and the potential annual savings – typically €120 per electricity/gas supply - will appear. Bonkers and uSwitch can then process the switch for you, for which they may receive a small commission. Or you can do it yourself by contacting the new provider.

With Energia’s entrance to the market, and Bord Gais’ latest discount loyalty offer to customers plus €40 cashback at the end of 12 months Moynihan said that Energia or Bord Gais will be hard to beat for customers with average gas/electricity combination usage.

For electricity only switches, Electric Ireland and Bord Gais are the most competitive, he said, (the latter only because of their €40 cash loyalty payment) while gas only users will get the best deal from FloGas (which doesn’t offer electricity).

Meanwhile, Bord Gais’ Tesco Rewards Club points have helped 150,000 customers cut their costs and they remain the only provider that doesn’t tie customers into a 12 month contract.

VODAFONE SHARES...IT'S DECISION TIME

Do you have Vodafone shares?  400,000 of us do and you have only until February 20 to inform the company how you wish to be paid the cash and shares they are awarding shareholders after selling their share of their US mobile phone company to the US company, Verizon Communications Inc. the other shareholder.

This story begins with the 1999/2000 privatisation of Eircom, the state owned telecoms company, which we bought into big-time after the slickest of PR and marketing campaigns. It raised €8 billion.

However, it also didn’t take long for the great share event of the millennium to go pear-shaped:  Eircom ended up changing hands three or four times between a bunch of rich guys and their private equity companies, resulting in a financial losses for practically every citizen shareholder, who didn’t sell out shortly after the flotation.

The mobile phone division, Eircel was also eventually sold off, but to the global giant Vodafone and shareholders received Vodafone shares in 2001 in exchange. 

Fastforward to late 2013 and it was announced that Vodafone was selling off its stake in its US mobile phone business to the other owner of that company, Verizon plc. This time, Vodafone shareholders are to receive a combination of cash and some Verizon shares that is expected to be worth about €1.25 per every Vodafone share held. (Cash of 36c and share value worth 89c. The actual price will be declared on February 21.)

It’s a nice little windfall, but cash/share issues like this attract the attention of the taxman. Which is why it might be important that you take another look at that package of documents that was sent to you several weeks ago from Vodafone that explained what they are doing.

The documents provided a time-line in which to choose your method of payment for the windfall, whether you wanted to attend the general shareholders meeting on January 28 (that deadline has passed) and finally, if you’d like to sell your shares via a limited period, free share dealing service.

First, the payment option – “B” shares or “C” shares?

Most people with Vodafone shares are still nursing capital gains losses dating all the way back to the Eircom flotation.  Computing gains and losses has been a minor nightmare because of all the share issue permutations and issues over the years and so the Revenue sent out a guidance note stating that anyone with, for example a typical 1000 Vodafone shareholding are unlikely to face any CGT bill this time if they opt for the “B” share and income option. But tick the “C” share option, which converts this windfall into income, and you could end up paying 52% marginal income tax, USC and PRSI.

If you don’t bother to send the share option form back by February 20, Vodafone will automatically allocate “C” shares and you could end up paying a tax bill (if you are taxed at the higher rate) of  €650 out of the €1,250 allocation you can expect if you own 1,000 shares.

(“B” shareholder certificates will be sent to you by February 24. If you opt for “C” shares, your cash payment will be sent either to your bank account if it is registered with Computershare or sent by cheque to you on March 4.)

Finally, anyone who wants to sell their Verizon share allocation at no cost, needs to let Vodafone know that they are taking up the free dealing offer before 5pm on Saturday, April 4. This income must be declared and paid in a pay and file tax return by the October 2014 deadline, or by November 15 if you file via ROS, the on-line Revenue service.

The process above applies to every Irish Vodafone shareholder. The windfall, no matter how small, is very welcome in these tight economic times. But analysts expect that the majority of the 400,000 shareholders will keep their Vodafone/Verizon shares (assuming they don’t end up with the “C” share income.)  Just like we did with our original Eircom/Eircel/Vodafone shares.

Are they worth keeping?

The verdict is out but Verizon (VZ) is a substantial US mobile phone player with global interests. It’s share price hit a 1999 tech bubble high of nearly $60 per share; its low was in 2011 when they were worth under $30. At time of writing the price was nearly $47 a share. Like most big, global blue-chip companies, the Vodafone (VOD) share price ($47 at time of writing) fell sharply after the 2008 economic collapse (after hitting a 1999 high of about $65). It is up 130% since 2008.

Only you can decide whether it’s worth holding your Vodafone/Verizon shares and hope that they someday recover to offset the hammering you took with your Eircom outlay or cut your losses, as inexpensively as possible.

Part 2: Amateur Landlords …and Costly Evictions

Yes, the pick-up in property prices is good news, especially for people in negative equity.

But rising prices don’t necessarily reflect similar rises in rents, though there is certainly plenty of evidence that rents are going up as well in Dublin, especially for family sized homes in good neighbourhoods.

Anyone thinking of becoming an amateur landlord on foot of the burgeoning property recovery needs to watch the sale price/ rental yield very carefully.

Last week I wrote about the personal investment experiences of some friends and acquaintances.  The first example I gave was a very close friend in Canada who in her 50s became an amateur landlord, buying a large old house, converted to apartments in an established renting neighbourhood in Toronto. She used a large down-payment and carefully factored in every possible cost. She even  worked out how to accelerate her repayments in time to avoid carrying much debt into her retirement.

The second example was of a composite of the experience of most of my Irish friends who…well, did none of those prudent things during our mad, bad property boom years.

Needless to say, they are now watching property prices like hawks in the hope of cutting their negative equity and losses….before their banks force them to, with potentially dire consequences.

First, let me say that I’m not against investing in a property market where prices are keen and affordable.  Because I already own my own home and property funds exist in my pension fund, I prefer not to own individual properties.

Nevertheless I have three friends who are very successful amateur landlords. They bought their properties several years before, and a few years since, the property bubble burst. Their properties were (relatively) cheap and affordable and the rental stream still cover their costs.

However, when I asked my friends about their worst experiences as amateurs  –  something must have gone wrong at some time - I expected to hear about long void periods and expensive repair and redecoration costs.

All this can be a problem, they said, but no, each of their all time low points came when they had to deal with an – albeit - rare and unpleasant eviction.

Here in Ireland there is a statutory eviction process with set notice periods, including reasonable time given to the tenant to pay arrears (where it is the cause of the notice) and if not resolved, a final contract termination date. Where tenants refuse to leave, the Private Rental Tenancies Board (and perhaps even the courts) will intervene. Mediation and adjudication here can be time-consuming, but the process itself is not expensive. (Applying for a hearing is just €15-€25.)

Pursuing the arrears is another matter, and while loss of revenue is bad enough, my friends said, the worst thing, “is to be in the red from losing rent and to find your place has been wrecked by your angry ex-tenant when they finally leave.”

Back in Ontario, my new amateur landlord friend said she too has been warned a out messy evictions: there, the rental market is heavily regulated by the state (which caps rents hikes based on inflation figures) and rent evictions are frequently disputed by tenants, because they know they process is so long. The landlord’s final bill can eventually be as high as $5,000.

“I’ve inherited great tenants, so fingers crossed,” she said. “But it takes an average of 75 days for hearings to be completed in Ontario after waiting 28 days for the hearing. You should expect to lose three months rent, I was told. Meanwhile, eviction hearing applications cost $170 each; legal advice/representation averages $360, and if the sheriff has to be present at the eviction that’s another $300.

“A landlord organisation claims that the average amount of damage when there’s a disputed eviction is $500,” my friend explained, “and re-leasing costs – advertising, using a letting agent – can put you back another $1,200.”

“Loads of people gave me ‘eviction’ advice,” she said. “Mainly, it was to always follow the law and give proper notice, but to also try and avoid the official dispute process. 

“Instead, they suggested being sympathetic and trying to reason (at least at first) with your tenant. Point out the difficulties they’ll have – with their credit rating agency or, with you, in the small claims court.

“I even read where you should offer them a couple hundred bucks and agree to write off any arrears if they leave voluntarily, but only they leave your property in good order. It was even suggested that you hand them a list of local and voluntary community housing agencies and charities that can help people in financial distress.”

Irish housing and landlord blogging sites are full of hair-raising eviction stories, and such a generous strategy may or may not work.

But every experienced landlord repeats the same advice:  get an eviction over with as quickly and cost effectively as possible.

And if you really want to be a successful amateur landlord, double and treble check your prospective tenants’ bona fides…before they move in.