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Could you benefit from a tax shelter or offshore account?
Learn more about how these financial tools could help strengthen your fiscal life.
The terms “offshore account” or “tax shelter” may bring to mind the shady dealings of people trying to hide money. Yet these financial tools are legal and even considered a sound part of financial planning decisions.
If you’re an overseas worker, you might benefit from having an account in a country other than the United States. Likewise, if you’re planning to retire as an expat, having an account in your future foreign home will certainly make life easier. Meanwhile, IRAs and similar tax shelters are commonly used to manage long-term wealth wisely.
Considering their fiscal usefulness, don’t completely rule out shelters and offshore accounts without first knowing more.
What are the benefits of storing funds abroad?
Despite its mysterious cachet, an offshore account is simply an account in a country other than your own — or a foreign bank account. A tax shelter, meanwhile, is a tool that people use to manage tax liability. Neither of these financial tools are only for the wealthy.
An offshore account is a solution for expats, students, business owners and others to manage their money overseas.
Opening up an offshore account isn’t a one-size-fits-all solution, however. Depending on your overseas bank and even the country you’re living in, you will encounter particular requirements and procedures to follow. Among the hurdles you may face are various forms of identification, a recommendation from your current bank, minimum deposits and proof of residence.
Not all banks look forward to working with US citizens. Looking to crack down on offshore tax evasion, the United States enacted the Foreign Account Tax Compliance Act in 2010. Among other conditions, the act requires foreign banks to report on the banking activity of Americans holding offshore accounts. Even the once opaque Swiss banks are obligated to comply.
Because complying with FATCA adds extra expenses and paperwork for foreign banks, some avoid doing business with would-be American account holders altogether.
While you may not be as familiar with the term “tax shelter,” you undoubtedly participate in some form of one. Your IRAs, pensions, charitable contributions, 401(k) and bond investments are all examples of tools used to defer or lower your tax burden.
To simplify what it means to shelter your taxes, your IRA allows you to defer paying taxes on money parked within it until you withdraw what you’ve saved there during retirement. At that point, you’re likely to be in a lower tax bracket, which means you’ll typically pay less tax on that income when the IRA deferment ends than you would have paid on during your peak earning years. Another example of a tax shelter is municipal bonds, because the IRS exempts them from federal income taxes.
Regardless of your income, you have many financial tools that you can use to shelter your income from taxes, so exploring these options when considering how you’ll grow your money. Also keep in mind that as tax laws change, so will your tax-shelter options, so ask your tax professional about these options annually.
Staying on the good side of the IRS
It’s the job of the federal government to make sure that Americans pay their fair share of taxes. Part of its purview is also ensuring that money isn’t leaving the US to fund terrorism and guarding against international money-laundering schemes.
Make sure you handle your international money affairs in a way that doesn’t raise red flags for vigilant government agencies. First, be aware of the government’s power to investigate potential illegalities. For instance, the Bank Secrecy Act lets the government look into large money transfers that you may intend to use for opening an overseas account.
Also be aware of your responsibilities. Failing to file required IRS tax forms for larger money transfers could result in you paying thousands or more in fines for up to six years.
In addition to filing IRS forms, you must notify the IRS of your offshore accounts once your total hits $10,000 by filing a Foreign Bank Account Report (FBAR), which is due annually on June 30.
Finally, the United States expects you to pay taxes on any income you earn, even if you earn it overseas. If you’re working abroad, this could mean that you’re taxed twice: once by the country in which you earned it and once by the United States. You may want to speak to a tax professional or financial adviser about a foreign tax credit from the IRS.
Making informed decisions
With better knowledge of tax shelters and offshore accounts under your belt, you’ll see that they’re not merely a part of wealthy lifestyles. These financial tools could offer you ways to handle your money to your advantage, whether you’re looking to build a solid foundation for retirement or find your footing as a young professional abroad.
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Frequently asked questions
I need an offshore bank account, but how can I get the money overseas in the first place?
To move your money abroad, use the services of a bank or money transfer specialist. Compare the transfer fees, exchange rates and other details of money transfer providers to get the best deal for your situation.
I need to put a large amount of money into an offshore account. Is it better to send it all at once, or make several smaller transfers?
Many banks and money transfer specialists will limit how much you can transfer at one time or even over the course of a month or year. You’ll want to compare your options for sending large sums internationally to save on transfer fees and exchange rates.
When do I have to pay taxes on large international money transfers?
In short, it depends on how much you’re sending. Learn more about your responsibilities to the IRS when sending a lot of money across borders.
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