Many investors look outside of the USA for investment opportunities. Our focus in this article is to look at US tax on foreign source income. Before looking at specifics of US tax on foreign source income let us look at foreign investing. We are not talking about illegal tax havens here but rather smart ways to invest your money and perhaps legally reduce your tax burden when investing outside of the USA. Valid reasons for investing offshore include the following and many more:
- Diversification of an investment portfolio
- Taking advantage of growth in evolving offshore economies
- Foreign government sponsored investment opportunities
- For example a developing nation may wish to develop a given industry and will provide land at a low price, extended freedom from local taxation and other significant benefits to a specific type of foreign investment
- Low cost labor
- Proximity to attractive markets
- Likelihood of appreciation of the currency in which the investment will be made
- Legal means of reducing a tax burden
- Taking advantage of cheap investment opportunities with the likelihood of substantial growth
Some time back we wrote about Foreign Real Estate Investments. In the Panama section of the article we noted that
one can buy commercial real estate in growing market like Panama and collect rent checks as property values go up. Even in good markets there are business failures. Buying repossessed properties in a country like Panama can be lucrative if one has the services of a local firm that will scout out investment opportunities.
We also noted that
the rent checks from commercial property in Bogotá, or Buenos Aires can be banked in Colombia pesos or Brazilian reals.
Bank the proceeds from your property offshore, make good interest from the local bank, and watch your assets, denominated in a healthy foreign currency, growth as US debt eats into the value of the US dollar.
US Tax on Foreign Investment Income
The key part of all this is that income is taxed when it is realized. Here are a few key features of current US tax law regarding US tax on foreign source income.
What Counts as a Foreign Financial Asset
- Bank accounts, investment accounts and mutual funds maintained at financial institutions outside the USA
- Stocks, bonds or other securities issued an entity not of the USA and not an ADR or other asset held in an US investment account
- Any interest in a foreign corporation, partnership trust or other legal entity
- Any financial instrument or contract issued by an entity from outside of the USA
How much do you have to invest or make in order to worry about US tax on foreign source income? This ranges from $50,000 on the last day of the year or $75,000 on any day of the year for a single person living in the USA with assets abroad to $400,000 at the end of the year or $600,000 at any time of the year for a married couple living abroad. As always there are tests to pass in order to qualify according to IRS rules.
Our point of mentioning realized income is that real property in an offshore location does not appear to be in the list of offshore assets considered taxable by the US government. If you would like to consider any of our Three Good Offshore Investment Ideas, think of offshore property either to buy and hold, or for eventual sale and profit or for rental income. Think of investing where the currency is weak and likely to strengthen over time, making your investment more valuable as well. In the end it is not so important to reduce your tax burden as to find solid investments.
AND, as always consult a tax attorney for the details before investing as laws change as do investment opportunities.