Death And Taxes
Don’t Listen To Me, But Please, Hear Me Out: # 19
Shaheeda Abdul Kader, Updated Sep 14 2020, Originally Published On Sep 9 2020
Taxes are a lot like Golf. We drive hard to reach the green, only to end up in a hole.Modified from here
Now that you have decided to start investing, you already know how to choose a broker/brokerage platform (referred to as broker from now on) and what questions to ask your broker. It is time to figure out how to plan for taxes.
I’ve never met a single person who loves to talk about death or taxes, let alone plan for them. Unpleasant as it is, it is prudent to plan now. If we are lucky and do it right the first time, we may never have to think about it again. I know, you’re thinking, “I’d rather have a root canal.”
In this blog, I will lay out my findings on taxes if you are a Foreign Investor in US assets such as Stocks, Bonds or ETF’s. I am not a Tax Professional and this is a large field, however, I will share my research and hopefully help you manage your taxes.
As I learn more and if there is significant interest from you, my readers, I’ll try to research other tax regimes and update the information later.
Why USA? Because, historically the US markets have given the best returns on investments, especially in stocks.
Foreign Investor or Non-US Resident Alien (NRA)
NRAs have to pay US taxes on US sources only. You are an NRA if you meet all of the following criteria:
- Not a US citizen
- Not a green card holder
- Do not meet the Substantial Presence Test. (So, if you are a student or living in the US as a student, or on a work Visa such as H1, L1, etc, you will need to consult your tax advisor.)
The following taxes could apply on your assets in the US. If applicable, you have to file taxes in the US declaring these incomes and hopefully get a refund.
- Income Tax on Dividends
- If you invested in Stocks, ETF’s or Mutual Funds and if you received dividends from your investments, then usually your Broker would deduct 30% from those dividends before crediting your account.
- If your tax residency is in a country that has a double tax treaty with the US, then your deductions would be based on the treaty. See Table 2 below.
- For example, if Dividends distributed is $1,000 then you would get $700 credited to your account after withholding taxes at 30%.
- Capital Gains Tax
- NRA’s DO NOT have to pay Capital Gains Tax in the USA.
- Your Broker will not withhold capital gains tax as an NRA.
- For example, if you bought a stock or ETF at $1,000 and sold it at $1,500, then you have capital gains of $500. Your broker should credit the entire $1,500 in your account (less any fees the broker may charge).
- Interest Income
- NRA’s DO NOT have to pay Tax on Interest earned in the USA.
- Your Broker will not withhold capital gains tax as an NRA.
- Tax on Bonds
- NRA’s DO NOT have to pay Tax on Income from Coupon (Interest) earned from Bonds in the USA.
- Your Broker will not withhold taxes on coupon or interest income earned from Bonds as an NRA.
- Death Tax or Estate Tax
- This is the trickiest one. NRA’s are at a huge disadvantage here. Should you die, anything over $60,000 you have in US assets including cash would be taxed up to 40% based on a banded scale. So, your beneficiary could potentially lose a large portion of the wealth you built. See Table 1 below.
|Lower Limit||Upper Limit||Initial Taxation||Further Taxation|
|$0||$10,000||$0||18% of the amount|
|$10,000||$20,000||$1,800||20% of the excess|
|$20,000||$40,000||$3,800||22% of the excess|
|$40,000||$60,000||$8,200||24% of the excess|
|$60,000||$80,000||$13,000||26% of the excess|
|$80,000||$100,000||$18,200||28% of the excess|
|$100,000||$150,000||$23,800||30% of the excess|
|$150,000||$250,000||$38,800||32% of the excess|
|$250,000||$500,000||$70,800||34% of the excess|
|$500,000||$750,000||$155,800||37% of the excess|
|$750,000||$1,000,000||$248,300||39% of the excess|
|$1,000,000||and over||$345,800||40% of the excess|
Table 1: Estate Tax in USA
Filing Your Taxes in the US
The good news is just because your broker may withhold 30% in taxes on dividend distribution, does not mean that your net taxes in the US will be 30%. You must file a 1040NR or 1040NR-EZ to declare all your income from US sources. Based on the total income you earned in the US, your tax liability could be much lower than 30%. In this case, you would file your taxes requesting a refund and it can be directly credited to your bank or brokerage account.
|#||Country of Tax Residency||Effective Date*||Treaty withholding rate on dividends||Treaty withholding rate on interest**||Specific LOB Article in the treaty included?|
|2||Australia||01.12.1983||15.0%||10.0%||Article 16 / Protocol|
|6||Barbados||01.01.1984||15.0%||5.0%||Article 22 / Protocol|
|9||Bulgaria||01.01.2009||10.0%||5.0%||Article 21 / Protocol|
|10||Canada||01.01.1985||15.0%||0.0%||Article XXIX A / Protocol|
|12||Czech Republic||01.01.1993||15.0%||0.0%||Article 17|
|13||Denmark||01.01.2001||15.0%||0.0%||Article 22 / Protocol|
|16||Finland||01.01.1991||15.0%||0.0%||Article 16 / Protocol|
|17||France||01.01.1996||15.0%||0.0%||Article 30 / Protocol|
|19||Germany||01.01.1990||15.0%||0.0%||Article 28 / Protocol|
|22||Iceland||01.01.2009||15.0%||0.0%||Art. 21 / Protocol|
|25||Ireland||01.01.1998||15.0%||0.0%||Article 23 / Protocol|
|26||Israel||01.01.1995||25.0%||17.5%||Article 25 / Protocol|
|28||Jamaica||01.01.1982||15.0%||12.5%||Article 17 / Protocol|
|29||Japan||01.01.2005||10.0%||0.0%||Article 22 / Protocol|
|30||Kazakhstan||01.01.1996||15.0%||10.0%||Article 21 / Protocol|
|37||Mexico||01.01.1994||10.0%||15.0%||Article 17 / Protocol|
|40||Netherlands||01.01.1994||15.0%||0.0%||Article 26 / Protocol|
|41||New Zealand||01.01.1984||15.0%||10.0%||Article 16 / Protocol|
|44||People’s Republic of China||01.01.1987||10.0%||10.0%||Protocol|
|49||Russia||01.01.1994||10.0%||0.0%||Article 20 / Protocol|
|50||Slovak Republic||01.01.1993||15.0%||0.0%||Article 17|
|52||South Africa||01.01.1998||15.0%||0.0%||Article 22|
|53||Spain||01.01.1991||15.0%||0.0%||Article 17 / Protocol|
|54||Sri Lanka||01.01.2004||15.0%||10.0%||Article 23 / Protocol|
|55||Sweden||01.01.1996||15.0%||0.0%||Article 17 / Protocol|
|56||Switzerland||01.01.1998||15.0%||0.0%||Article 22 / Protocol|
|59||Trinidad & Tobago||01.01.1970||30.0%||30.0%||n.a.|
|60||Tunisia||01.01.1990||20.0%||15.0%||Article 25 / Protocol|
|63||Ukraine||01.01.2001||15.0%||0.0%||Article 22 / Protocol|
|64||United Kingdom||01.01.2004||15.0%||0.0%||Article 23 / Protocol|
|66||Venezuela||01.01.2000||15.0%||10.0%||Article 17 / Protocol|
This is the effective date when the latest income tax treaty with the United States became effective
** Please note that on most US interest payments the portfolio interest exemption applies. In these cases the withholding tax on interest payments is reduced to 0%.
*** The U.S.-U.S.S.R. DTT applies to Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Uzbekistan (Commonwealth of Independent States).
Table 2: Countries that have a Double Tax Treaty with the USA
Ernst & Young have compiled a comprehensive tax and immigration guide for 160 countries or tax jurisdictions. I highly recommend that you download the PDF and review the information on the country of your tax residency (and USA if you invest in US assets. ) Table 3 below is from this PDF and as you can see you may not pay the full 30% based on the bands of total earnings from US assets.
Filing as an Individual
|Taxable Income||Amount of Tax|
|Not over USD9,700||10% of the taxable income|
|Over USD9,700 but not over USD39,475||USD970 plus 12% of the excess over USD9,700|
|Over USD39,475 but not over USD84,200||USD4,543 plus 22% of the excess over USD39,475|
|Over USD84,200 but not over USD160,725||USD14,382.50 plus 24% of the excess over USD84,200|
|Over USD160,725 but not over USD204,100||USD32,748.50 plus 32% of the excess over USD160,725|
|Over USD204,100 but not over USD510,300||USD46,628.50 plus 35% of the excess over USD204,100|
|Over USD510,300||USD153,798.50 plus 37% of the excess over USD510,300|
Table 3: Individual Tax Rates Based on Total Income from US Sources
How to Plan for Taxes
- Estate Tax Planning
- Turns out its not just a Green Card a US Spouse can get you (wink, wink). If you have a spouse who is a US citizen or Green Card holder, consider making all US investments in the spouse’s name and all foreign investments in your name. US Citizens & US Tax Residents currently enjoy a tax exemption of over $11.18 million (2018) filing as an individual.
- If you have over $11.8 million in wealth, then it is better to consider Trusts (more on this later).
- The USA has Estate Tax Treaties on Estate Tax with the following 15 Countries. You can choose to take advantage of your home country’s Estate Tax policies if they are better for you. This article compares the benefits of estate tax planning in one versus the other.
|#||Country||ESTATE or GIFT TAX TREATY|
|1||Australia||Estate & Gift|
|2||Austria||Estate & Gift|
|4||Denmark||Estate & Gift|
|6||France||Estate & Gift|
|7||Germany||Estate & Gift|
|11||Japan||Estate & Gift|
|15||United Kingdom||Estate & Gift|
- Set up a C-Corporation or an LLC in the USA in a state with no taxes such as Delaware, Nevada or Florida for example. Generally speaking, companies pay less in taxes than individuals. Moreover, since companies can be perpetual, Estate Taxes may not apply. I spoke to a few tax consultants about this. The concern is that even the company pays lower taxes, when you take dividends or payments out of the company, you would have to pay income tax at 30% or less. So essentially, you would be paying double tax. So, perhaps not a worthwhile option.
- Set up a Trust. There are several options in setting up Trusts. I am told that NRA’s cannot set up Trusts in the USA. So, you may have to consult a lawyer specializing in trusts in your country of citizenship and/or tax residency.
Here are a few quick points to note:
- If you are under 60, you may still have time to think about Estate Planning.
- Make sure you learn about the tax treaties pertaining to your tax residency, you may save a lot of money.
- For residents in tax havens such as UAE, unfortunately, the maximum rates will be withheld, but you can always claim back some of it, if not all, once you file your income tax in the USA.
- If your income in the US is from single source like your brokerage account, you can probably file online using a 1040NR-EZ form. Use a tax advisor for the first time. H&R Block used to charge about $100 to file taxes. Once you see how it is done the first time, you could file on your own the following years. Tools like, Turbo Tax make it quite easy. You could deduct the cost of filing from your income as well.
- I am grateful to some wonderful professionals who helped me with my tax queries even though I am not a client. You are welcome to reach out to them for individual concerns or questions.
- Dru Donatelli, Legal Counsel and Risk Officer at Hoxton Capital Management that advices on pension management. Dru was especially helpful in confirming that NRA’s do not pay taxes on Capital Gains, Interest Income or Bond Yields. We also discussed the difference between a Roth IRA and a Rollover IRA for those who worked in the USA and had a 401K plan.
- Vince Treung is a Partner at Holborn Assets, established in 1998, a global financial services company that provides wealth management advice to international clients. He educated me about a Roth IRA and Rollover IRA. Vince especially helped me understand US Estate Tax and suggested that foreign investors could consider investing in US assets where the assets are not domiciled in the USA. You can consult with him or Lydia Andrews who is also a wealth advisor at Holborn Assets.
- Axel Burre, Accountant at Online Taxman, that provides tax consulting and services for US Expats. Axel was also helpful and confirmed that NRA’s do not pay Capital Gains, Interest Income or Taxes on Bond Yields. He also confirmed that Estate Taxes would have to be paid based on the banded rates.
If you would like help on how to budget to save more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at firstname.lastname@example.org. I’d be happy to offer you my services. Please do check my other blogs here.
I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.