Given the close historical and economic relations between Ireland and the U.S. it is not uncommon to find U.S. citizens living in Ireland. Some may be here as result of a temporary employment transfer, while others may have been living here for many years. In this paper we identify some important financial planning issues that affect US persons living in Ireland today.
The source of much of the complexity for US persons is that while they are resident in Ireland and subject to Irish tax laws they continue to be liable to US taxation that impact all areas of their financial decision making.
Filing US tax returns
Liability for U.S. income tax is based on citizenship, as well as residence. As a U.S. person, you must file annual U.S. income tax return regardless of where you live or how long you have been away from the U.S. For U.S. tax purposes, you must report your worldwide income from all sources. Generally speaking if you live and work outside the U.S. you may exclude overseas earned income up to USD$105,900 for tax year 2019 tax.
You can also claim a credit against your U.S. tax liability for tax you pay in Ireland. In most cases the credit will be enough to eliminate any U.S. tax liability since Irish taxes are general higher.
If you invest in a US mutual fund you are taxed on the income and gain within the fund every year whether or not you receive an income payment. In contrast if you invest in an Irish Unit-linked fund your gain is only subject to exit tax on redemption or on the 8th year anniversary. To prevent this deferral of taxation the U.S. uses anti-deferral regimes such as the Passive Foreign Investment Company (PFIC) rules. IF you own an Irish Unit-linked fund you may be subject to the PFIC regime.
This regime imposes tax on a current basis or on a deferred basis with an interest charge on income earned by a U.S. person through the fund. For example you may be required to include a portion of the passive income of the Irish Unit-linked fund in your taxable income, even though you may not have received an actual distribution from the fund.
This treatment result in mismatches with the timing of Irish tax and may result in double taxation. On that basis we do not recommend investing in Irish investment funds or Unit-Linked insurance bonds.
The impact of the PFIC regime illustrates the importance for US persons in Ireland to invest in US compliant investments to minimise tax and reduce the cost of reporting to the Inland Revenue Service.
Under the United States and the Irish Income Tax Treaty a US citizen employed in Ireland and participating in a pension plan established by the Irish employer, the rules are that the employee may deduct (or exclude) contributions made by or on behalf of the individual to the plan; and benefits accrued under the plan are not taxable income. The Treaty further provides that the deduction (or exclusion) rule only applies to the extent the contributions or benefits qualify for tax relief in Ireland and that such relief may not exceed the reliefs that would be allowed in the US under its domestic rules.
Distributions or lump sum payments from a pension to the U.S. residents living in Ireland are subject to taxation in the U.S. based on the “Saving clause” in the Ireland-U.S. Tax Treaty Article 1:
“Notwithstanding any provision of the Convention, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect”
To avoid double taxation, the United States allows a credit against United States tax through tax paid to Ireland on the same income
A key to any financial plan is the preparation of a comprehensive estate plan to minimise the cost of transferring the family’s wealth to the next generation.
As a U.S person on your death U.S. estate tax will apply to the value of your entire worldwide estate, not just those assets situated in the U.S. If you are resident longer than 5 years in Ireland you are also subject to Irish inheritance tax.
While double taxation rules will apply it is important that you understand your liability to death taxes and if relevant implement strategies to minimise the impact on your estate.
It is important to remember that although you are an Irish resident, as a U.S. citizen you continue to have U.S. tax obligations and you need to ensure that all of your U.S. tax obligations are met on a timely basis.
The building of any financial strategy needs to take into account a range of tax, investment and estate planning issues spanning both sides of the Atlantic and it is important to obtain professional advice.
Trinity Financial Management work with Expatriates to help them navigate the complex financial situation they find themselves in when they move abroad. Contact Frank on firstname.lastname@example.org to discuss your needs.
Disclaimer: This article discusses tax and investment issues, but it does not constitute advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of expert counsel.