Source: https://sigmataxes.com/tax-implications-of-foreign-mutual-funds/
Timestamp: 2020-02-20 16:46:06
Document Index: 118900217

Matched Legal Cases: ['§1291', '§1295', '§ 1296', '§1291', '§1295', '§1296']

Tax Implications of Foreign Mutual Funds | Sigma Accountants LLC
U.S. persons who own foreign mutual funds can sometimes be in for an unpleasant surprise when it comes to filing their taxes. The tax treatment of overseas funds differs considerably from those of domestic funds under the Internal Revenue Code’s rules for “Passive Foreign Investment Companies” (PFICs). Passive income includes dividends, interest, gains from the disposition of stocks and securities, and gains from commodities trading. A foreign company is considered a PFIC if at least 75% of its gross income is passive income and/or if at least 50% of its assets produce passive income.
Because most of the income of a mutual fund consists of items that can be defined as passive income, nearly all overseas mutual funds are PFICs. This can be the case even if such funds are held through a tax-deferred savings account (e.g., U.K. individual savings accounts (“ISAs”) and Canadian tax-free savings accounts (“TFSAs”)) or a non-qualified pension and retirement account. A PFIC is not the account – but each investment inside of the account may be a PFIC.
PFIC investment income is generally subject to highly punitive U.S. federal tax rates. A non-deductible penalty interest charge can also compound regularly while holding an interest in a PFIC.
Tax Tip: U.S. expats considering an investment in a foreign mutual fund should proceed with caution because this type of investment is often subject to the onerous PFIC regime.
When is Form 8621 required?
You have to file when you have direct or indirect ownership of a PFIC.
There is a Mark to Market election in place
There is a QEF election in place
The shareholder wants to make an election
No election in place, but the shareholder receives a distribution from or disposes of a PFIC
Absent any of the above bullets – Form 8621 does not need to be filed unless:-
-The aggregate direct and indirect ownership at the end of the year for all §1291, §1295 & § 1296 PFICs exceeds $25,000 ($50,000 MFJ), or
-The indirect ownership at the end of the year for all §1291, §1295 & §1296 PFICs exceeds$5,000
Note: Your ownership can be direct or indirect. If you own stock in a PFIC you are a direct owner. Check your investments carefully because one of your mutual funds or custodial accounts could include shares in a PFIC, making you a direct owner which could mandate 8621 filing requirements.