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How Does The CARES Act Impact American Expats?

How Does The CARES Act Impact American Expats?

The most important item to note for American expats is that being abroad will not disqualify you from eligibility for the Coronavirus Aid, Relief, and Economic Security (CARES) Act, should you meet the requirements. 

Americans who filed taxes abroad in 2019 (or if those have not yet been filed yet, 2018) are eligible for the tax credit. For those that earn under $75,000 in adjusted gross income for singles and $150,000 for married filers, they will receive direct payments from the government in the amount of $1,200 (single) or $2,400 (married).This will be sent via direct deposit for those that have set up ACH with the IRS, and a check can be sent to those that do not have that established. There is a phaseout for those earning above $75k/$150k, ending at $99k for single filers and $198k married.  

There are a couple of other lesser known provisions in the bill that may impact Americans abroad and we’re happy to discuss for how these changes may apply to your situation:

Required Minimum Distributions

For 2020, Required Minimum Distributions (RMDs) have been waived for all retirement accounts, including IRA, 401(k), 403(b), and 457 plans. This includes beneficiary IRAs as well. If you were in the category where you were required to take two RMDs in one year due to delaying your first RMD, you happen to be in luck – no RMD is required. 

No 10% Penalty For Early Retirees

For early retirees that qualify for “coronavirus-related distributions” (an intentionally broad definition), if you took out money prior to age 59 ½ or 55 depending on the type of retirement account, you were potentially subject to a 10% penalty. For 2020 you may now take up to $100k out of your pre-tax retirement accounts without penalty. You are still subject to reporting your distributions as income, though you are allowed to stretch the recognition of this income over three years. 

Additional Resources

As noted by our friends at American Expat Finance, a number of groups have hosted webinars discussing the various ways to apply or tax considerations involved in these “checks” from the US government.  Perhaps the most universally applicable is one hosted by the American Citizens Abroad, or ACA. As part of their newly announced Tax Cast series, President Mary Louise Serrato speaks with accountant Glen Frost to discuss the specifics of these benefits for Americans abroad from a tax perspective. The AARO (Association of Americans Resident Overseas) also hosted a webinar for its members

Keith Poniewaz

Schwab Closing Accounts in Italy and France

Schwab Closing Accounts in Italy and France

In addition to our announcement regarding the account closures for Italy and France for retail customers, we wanted to include an additional FAQ regarding account closures for Charles Schwab retail clients.

Q: Why is Charles Schwab UK closing accounts for clients in France and Italy?

A:  The initial claim is Brexit.  While Brexit is not yet a fait accompli, indications are that it will mean the end of the passporting regime, which allows for companies registered in one EU country to be registered in all of them. However, it is also likely that Schwab is– in the wake of their decision regarding PRIIPs and KIIDS and the decision to no longer sell ETFs to EU-based clients (which was much later than other brokerage firms)– taking a closer look at European compliance and realizing that it is more complicated than they’ve originally anticipated. 

Schwab is more flexible than many U.S. based brokers in their account closures as they are not yet at the stage where they are announcing they will close all accounts in a period of time, but they are now limiting actions in the accounts to sales and liquidation in terms of moving out the accounts by December 31.

Q: What can I do, where can I open accounts?

A: The number one resource for Americans abroad in our opinion should be Interactive Brokers, which is a truly international brokerage. The drawbacks of Interactive Brokers– as we discuss in our piece on the topic— are that it tends to be a bit more complex than a standard brokerage interface and generally the customer service is not as strong as other retail brokerages. That said, IB has made strides on both fronts and will likely continue to improve.  

If you split time between the EU and the United States, maintaining a U.S. address is the easiest solution as well. However, individuals should resist those Advisors who push them to keep an American address or encourage other schemes to subvert U.S. and EU rules.  

Q:  How do we know that this won’t happen to IB clients?

A: As a truly global brokerage– rather than a US brokerage serving international clients– the incentives for IB to comply are much greater.  First, they are generally listed as members of international exchanges in the various countries where they do business, so they were less reliant on “passporting” than Schwab. Additionally, IB has already taken steps to move operations to Lichtenstein for those clients in the European Union.

This issue is still ongoing and we will update clients and the public as we learn more. For investors that would like to discuss their specific situation, we welcome you to schedule an initial no-cost, no-obligation consultation with our Director of International Advisory services, Keith Poniewaz. Keith works with U.S. expats on financial planning and wealth management. You may also email Keith as well.

Schwab no longer selling U.S.-based ETFs to Clients in the European Union: Our FAQ

Schwab no longer selling U.S.-based ETFs to Clients in the European Union: Our FAQ

Frequently Asked Questions as interpreted by Keith Poniewaz, Director of International Advisory Services at Walkner Condon Financial Advisors 

This week, Charles Schwab announced that it will no longer be selling Exchange Traded Funds or Exchange Traded Notes to clients who are resident in the E.U.: “Beginning September 19, 2019, Schwab clients who are residents of the E.U. will no longer be able to purchase U.S.-registered exchange-traded funds (ETFs) and exchange-traded notes (ETNs)…This restriction results from regulatory changes and affects all residents of the E.U.”

As we noted back in February 2019, this is unsurprising and we have been preparing our clients for this, as Schwab has been a hold-out on these regulatory restrictions. Other brokerages which have worked or work with expats started complying with these restrictions as early as last January. The restrictions are related to MiFID II, which are sweeping regulatory changes to the financial industry. These particular regulations affect what are called PRIIPs (or Packaged Retail Investment and Insurance Products) and KIIDs. As we have written on and been cited on these regulations extensively in order to help investors understand their options, we’ve provided the following FAQ as a service along with links to our relevant white papers and articles. In particular, readers should look at our white paper “Are you KIDing Me? PRIIPs, KIDs and new obstacles for Americans Abroad” and a previous and more technical FAQ on the subject “It’s 2019, Do You Know Where Your KIDs Are?

Q: WHO DO THESE REGULATIONS AFFECT?

Any investor residing in the European Union, American or otherwise. 

Q: IS THERE A PLACE I CAN READ MORE ABOUT THE REGULATIONS AND HOW THEY WORK?

We have been warning Americans abroad about this possible complication for quite some time, and we’ve written a number of blog posts on the topic since January of this year: 

https://usexpatinvesting.com/educational-materials-for-ex-pats/its-2019-do-you-know-where-your-kids-key-information-documents-are

We’ve also published articles on the topic: 

https://americanexpatfinance.com/legislation/item/142-u-s-expats-in-eu-prepare-for-for-priips-and-kids-regs

Q: WHAT DOES THIS MEAN FOR MY ACCOUNT?

First, there is no need to panic– any existing positions you hold will be maintained. Your account will not be closed. Everything will remain as is. However, going forward there will be certain restrictions on what you can buy and sell:

As Schwab themselves put it in their letter: 

  • You will be able to maintain any existing U.S. ETF or ETN positions you hold, but you will not be able to purchase more.

  • Dividends can no longer be reinvested in U.S. ETFs or ETNs.

  • You may liquidate U.S. ETFs or ETNs, but you will not be able to repurchase them.

Q: WHY ARE THESE PARTICULARLY ONEROUS ON AMERICANS?

While European-based clients can now buy select UCITs (the EU equivalent of ETFs), these are considered Passive Foreign Investment Companies in the United States and are taxed at an extremely high rate if they are held in taxable brokerage accounts (more on that in a blog post by The CPA Journal). Additionally, the filing requirements are quite substantial. More details about PFICs can be found in our Expat Investing Guide.

Q: MY ADVISOR SAID THAT SCHWAB ISN’T EU-REGULATED AND SHOULDN’T BE AFFECTED BY THESE RULES?

First, Schwab is EU-regulated. They register with the Financial Conduct Authority in the UK.  Moreover, these regulations are “extra-territorial,” which means that it doesn’t matter where the company performing the business is registered, simply that they are helping a client in the European Union. See the insights of several top international law firms and investment banks who note that the law has extra-jurisdictional reach: KL MillerMorrison FoersterBrown Brother Harriman amongst others.  

Q: MY ADVISOR SAYS THEY SHOULDN’T BE AFFECTED BECAUSE THEY DON’T HAVE TO REGISTER IN THE EUROPEAN UNION?

It is important to note that this regulation applies to where the client resides and doesn’t exempt Advisors: as the Financial Conduct Authority’s website indicates in their notes on the regulations, it doesn’t simply apply to brokerages or custodians, but anyone offering packaged investment products in the European Union: “The KID Regulation applies to all manufacturers (or remanufacturers) and financial intermediaries (including advisors) who distribute ‘packaged retail and insurance-based investment products’ (or PRIIPs) which are invested in by retail clients.”  It is uncertain as to whether there are carve-outs for Registered Investment Advisors (RIAs).

Q: WHAT CAN I INVEST IN?

First, investors can continue to purchase individual securities in both the U.S. and abroad.  Thus, a simple solution is to assemble a diversified portfolio of individual stocks and bonds. There are a variety of methods of doing this. We have discussed the various options in a podcast, “The Future of Taxable Investing.” Additionally, we have discussed the options available to Americans abroad in a blog post perhaps inopportunely titled “More than One Way to Skin a Cat.” Finally, we recently published a post regarding SMAs as the best tool for Americans investing abroad since it allows them more precise tax management, helping them reduce their significant tax bills.

Ultimately, Americans should investigate our white paper on investment strategy for Americans abroad.

Q: SHOULD I CONTINUE WITH SCHWAB AS MY CUSTODIAN? MY CURRENT ADVISOR?

We can’t say before discussing your situation and what you would like to accomplish. Set up a no-cost, no-obligation appointment with us to explore your options.

Here is a link to our disclosures.

 

 

The Expense of Accidental Americanism

The Expense of Accidental Americanism

With headway on reform of the U.S. tax-code towards residency-based taxation seemingly having hit a standstill, victims of the various U.S. tax and compliance rules have turned their sights towards local courts in attempts to undo some of the burdens of citizenship-based taxation.  

One of the chief targets of this legislation is FATCA (the Foreign Account Tax Compliance Act), which had the effect of causing the United States to begin enforcing many other laws and regulations affecting investments outside of the United States, as we explain in our white Paper “Why is it So Hard to Open Accounts for American Expats.”  One of the groups who have pursued this with some vehemance are “Accidental Americans”: people who were born outside of the United States to the American parents and may have never set foot in the United States (or born in the United States to foreign parents like new UK Prime Minister Boris Johnson– who will be the subject of a forthcoming blog post).  These groups, in both Canada and France, have taken an interesting approach to attempting to convince the local governments to reject the enforcement of FATCA.

The lawsuits are tailored to the intricacies of the Canadian and French constitutions, but effectively boil down to claiming that enforcement of FATCA is a violation of their respective constitutions and national sovereignty.  In Canada, which reached its decision yesterday, advocates for Accidental Americans argued that the enforcement of the law violated Canada’s protections against “unreasonable” seizure of financial information.  Justice Mactavish, the presiding judge, found in her decision that while FATCA was a “seizure” of financial information, it was not “unreasonable,” because there was a “limited expectation” of privacy of this data.  

In France, the lawsuit brought by the Association des Americans Accidentels (AAA) was decided late last week against the plaintiffs in rather harsh fashion by the Conseil d’État (France’s highest administrative court), who found that the plantiffs had insufficient legal claims to bring their case. In response, the AAA will be turning to the courts of the European Union.  Additionally, there is support for revisiting FATCA from in a recent report from the French Legislature.  As Helen Burggraf has reported, France’s government has found that FATCA has placed “”considerable injustices in banking and taxation” on American-French bi-nationals.

While legislative and legal efforts will continue, the big question may become: how many more will follow BoJo in renouncing their citizenship?  

The “Third” Culture: U.S.-China Trade Talks and International Diplomacy

The “Third” Culture: U.S.-China Trade Talks and International Diplomacy

There’s a term often used in child development circles “Third Culture Kids” for children whose  parents were born in bred in one country but are being raised in another (think Mom and Dad born in the U.S. raising their child in Germany): ultimately, the theory is that the children build themselves a “third” culture outside of that of their parents or their new homeland. The idea of the “third culture” is, I think, useful for understanding the diplomatic problems between the United States and China.  

International diplomacy is a complicated, nuanced and odd world with many formal protocols, strange (and likely outdated) rules and methods, but there is a reason for this: it is an attempt to create a “third country” outside of those of the participants so that neither country is on home territory. If we relied on the codes and customs of one country while negotiating with another one, the diplomats (schooled in the ways of their own land) would be at a disadvantage as they would be operating on unfamiliar ground. In the language of sports, think “home field advantage” versus a neutral playing field.  

The chief problem of the U.S.-China Trade talks is that neither side seems to want to get to that third culture, never mind building off of that neutral territory in order to accomplish a trade deal. On the surface, we can see how the United States’ democratic system can be a hindrance to this sort of long-term dealmaking as each new administration will partially need to learn the “diplomatic culture” frequently swing power between rival parties and politicians and likely committing faux pas along the way. For this reason, the United States has a system of “career diplomats” in place to help handle the day-to-day diplomacy and smooth the transition of any new administration. However, the Trump administration’s commitment to starting from scratch has often led to disregarding this advice. Moreover, this disregard for diplomatic protocol is compounded by the fact that the current administration is more committed to treating the negotiations more like a business negotiation or athletic competition (“we must win”) than a diplomatic one (“we both need to win”).  

On the Chinese side, because of a history of unfair trade deals during the 19th Century, China has maintained a historical skepticism of the very notion of the “Neutral Field” of International Diplomacy. This skepticism means that their general position towards international diplomacy is a harder line one. There is also a sort of diplomatic identity crisis at play in China as they want to be treated as a major player in the “Diplomatic” field and are superficially committed to the rules and protocols when meeting with the United States and other foreign powers, while maintaining freedom to disregard those rules and protocols in their own domestic dealings both in terms of free markets and human rights, oversights that were more tolerable when it wasn’t a major economic and diplomatic power. Consequently, opposing diplomats are forgiven of thinking of Eddie Haskell from “Leave it to Beaver” or the old Shakespearean line “That one may smile and smile and be a villain” as they attempt to reach accords which will be ignored once they return home from diplomacy.

Consequently, the major issues at play in the negotiations (tariffs and state support of industry, Intellectual Property protections, etc.) won’t come to any meaningful resolution until both sides can move gingerly and carefully towards “true diplomacy.”  Relatedly, the best thing for markets and diplomacy is for both sides to remain at the negotiating table (in “Diplomacyland”) for as long as possible without either side running off to claim early victory or to ratchet up the already high stakes. In this case, talk is cheap is a good thing: it is cheaper than not talking.

Unfortunately, while the Chinese administration has time on its side (no real elections to worry about), the pressure 2020 looms over the American side of things and, in general, pressure doesn’t generally lead to the cooler heads necessary for this sort of complicated negotiation.  

Keith Poniewaz