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jgordosea
jgordosea, Enrolled Agent
Category: Finance
Satisfied Customers: 3161
Experience:  Registered Investment Advisor and prior licensure = life and health insurance, mortgage broker
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1). What are the tax implications of US Resident investing

Customer Question

1). What are the tax implications of US Resident investing in foreign shares directly vis a vis investing in foreign Mutual Funds?2). Which is a better option and why?3). How best to utilise it?4). What is meant by QEF election in evaluating tax liability of foreign Mutual Funds, in the IRS form, whereby tax liability is reduced?5). Keeping all variables is it better to invest in the US especially w.r.t. Returns and Tax Liability?PS: I am a LPR working in a US based company, currently deputed outside; And hence would ideally prefer to keep my funds with me for logistic purposes.Please advise.
Submitted: 5 months ago.
Category: Finance
Expert:  jgordosea replied 4 months ago.

Rather than answer the five questions my reply is that there are several clear advantages for a US resident or citizen to invest US rather than non-US mutual funds.

First, since the IRS treats the non-US mutual fund as a PFIC all of the income (including capital gains) will be treated as ordinary income and none of the capital gain can qualify for the low long-term capital gains rate of 15% if the fund is held for more than one year.

The QEF election can in some cases mitigate this for capital gain distributions but it does require an annual statement from the non-US mutual fund so it not universally even available and will not help with the ultimate sale of the shares.

For more see http://www.rewardlaw.com/internal-revenue-service-treating-non-us-mutual-funds-as-pfics/

Second, the task of complying with IRS reporting rules for PFICs will add complexity and cost to the investment.

Some financial advisors (which I am NOT licensed at this time) go so far as to say that a US resident or citizen should never use non-US mutual funds.

For example, see https://thunfinancial.com/why-americans-should-never-ever-own-shares-in-a-non-us-incorporated-mutual-fund/

As to logistics, with online access to accounts it is not clear to me what benefit you seek as you "prefer to keep my funds with me "

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