Many professionals and scientists working in the US on an H1-B visa need to understand IRS PFIC taxation and the implications of continuing many offshore investments. What are PFICs and why would high income professionals in the US on an H1-B visa need to understand IRS PFIC taxation rules? The challenge arises when the IRS attempts to calculate tax on “Passive Foreign Investment Companies” or PFICs. These are usually mutual funds or pooled investments outside of the United States as well as insurance or pension plans. PFICs generate more than 75% of their income from passive sources, or own real estate and other assets which are held primarily to generate passive income.
The IRS considers you to be a US resident the first day you are present in the United States as a lawful permanent resident. US residents are required to file IRS tax returns. The surprise for many H1-B visa holders is the harsh taxation upon their “offshore” (non-US) investments which the IRS characterizes as PFICs. PFIC income and capital gains are considered to be “ordinary income” PFICs are taxed at the highest US individual tax rate (presently 39.5%) regardless of other income and assets contained within the return. The total tax on your PFIC investment can actually exceed 50%, and capital losses experienced in PFIC investments cannot be used to offset other capital gains in your portfolio. This is due to the extensive calculations which are required to determine the portion of your portfolio which is considered by the IRS to fall under PFIC regulations as well as the computation of the percentages of income or capital gains which are to be taxed at PFIC rates.
There are elections which you can take to reduce the impact of the harsh PFIC taxation. The experienced international tax attorneys at Allen Barron have extensive experience helping US residents, H1-B visa holders and other foreign nationals to comply with IRS tax reporting requirements including FBAR compliance. Those who are living and working in the US on an H1-B visa need to understand IRS PFIC taxation regulations and the costly impact this can have upon their investment portfolio. Allen Barron can help you to minimize the potential impact of taxation going forward and ensure your compliance with IRS FBAR and PFIC regulations.