Ep 31: Five Important Financial Planning Questions For Foreign Born Families!
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In this solo episode, I discuss the five questions I ask to create the financial planning framework for foreign-born families.
Each question has many nuances and determines which way we go with the plan.
I believe any foreign-born individual should ask themselves these questions as part of the settling process in the US. Money is tied to all aspects of our lives.
What's your Immigration status?
What's tax residency status
What are your long-term residency status?
What's your home country of citizenship, what other citizenships do you have, and if married, what's your spouse's citizenship?
What assets do you have in foreign countries?
The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Jane Mepham, Cfp (00:04.876)
Welcome to another episode of the International Money Cafe podcast. In today's episode, which is actually a solo episode, I'm going to answer or talk to you about the five questions that I use to create the financial planning framework that I use for foreign born families and foreign nationals and work users. And I actually think this is a planning framework or a framework that you can actually
applied to your life in the U.S. actually outside of your finances. But of course, as we know, finances are a big part of your life. And I think as we go through the five questions, you'll understand or appreciate just how much they affect your life in the U.S. in general. All right, on to the show. When I meet somebody for the first time and we get talking about financial planning,
There is are very specific number of questions that I'm always looking for answers because that that will determine the kind of recommendations I'm going to make, the kind of conversations that we're going to have. OK, the first question is one, what's your visa or what's your immigration status? Now, if you tell me you're foreign born, but you're a US citizen, then
We're good. Nothing wrong with that. Or you're a green card holder. As far as your finances are concerned, you can pretty much do just about everything. Obviously, we know you can't vote, but it does make your life a little bit easier in the US. And as we all know, not all visas are created equal. Now, when I think about foreign nationals on one visa, we're talking about
Let's see, H1B, L1, E3, TN, O1, H1B1, and what's the other one? Maybe the O visa, right? So as soon as I know or I understand the kind of visa that you're on, and I'll give you an example, I know there things we may not be able to do because of the specific type of visa you're on. So I'll give you an example. If John is on the H1B visa,
Jane Mepham, Cfp (02:30.562)
And Peter is on the L1 visa. And let's assume both these candidates brought their spouses to the US. The H1B dependent is not able to work until they're way down the process for getting the green card. On the other hand, the L1 spouse or dependent is actually able to work in the US. And of course, you can already see that makes a really, really huge difference.
And so these are some of the things you really want to think about even before you get to the US as to whether your spouse is going to be able to work, whether you want them to work or not. But anyway, at this point, that's really, really is here. The other thing as far as the visa or your immigration status is again, if you tell me, for example, you own the E3 visa, I know right away you're from Australia, right? And you tell me you're
on the TN visa, I know right away you're from Canada or you're from Mexico. And based on the visas, we know not only are there things you can do or can't do, when it comes to, for example, trying to get your green card, some of them are what's called dual status visas, which means we know it's a non-immigrant visa, but it allows you to change to an immigrant visa while you're in the U.S
Otherwise, if it does not, it's one area I always say we need to make sure that we have legal involved. And I don't mean your company lawyer. So you can already see how some of this is going to impact what we end up talking about, what we end up planning for. So that really is key. The next question I'll ask is what's your tax residency status? The reason why this is so key is because we know
the US and Eritrea are probably really the only two countries that tax you on what's called citizenship based taxation. What this means is once you become a US tax resident, you're always taxed on your worldwide income. And so you come to the US, you're on the H1B visa, for example, you become a tax resident and you happen to own
Jane Mepham, Cfp (04:55.616)
a rental property back in your home country, you need to start reporting income from that rental property on your US taxes. So you can see why it's really important that we understand what your tax residency status is. And what happens is when you first come into the US, we have a very small window of opportunity when you're still a non-resident.
where we can actually make some changes before you become a tax resident. I'll give you an example. Last year, I was working with a citizen from Canada, though here on the OPT F1 visa. And in a couple months, actually the following year, they were gonna be switching to H1 visa. And they had some great Canadian account. There's one specific account called the TFSA, which is, I think of it as like a ROTH on steroids.
The only problem is the US likes to tax them and tax them heavily. And so what we ended up doing is working with cross-border CPAs is claim what's called a closer connection. And so we were able to still get her to file as a non-resident, meaning she could keep her Canadian assets out of the US taxation system while she took care of them. So again, like I said, it's a very small window of opportunity.
But if you're new in the country, it's absolutely worth looking to see whether you're able to take advantage of that. And of course, this goes into you probably had us talk about things like PFICs which are these kind of describe them as toxic investments. If there's any way we can get out of them without having to put them into the U.S. taxation system, that would be fantastic. So that part is really, really key. The next question I'll ask is,
What's your home country? And part B of this question is what other citizenships are involved? Because you do have people who have more than one home country, right? They're citizens of two countries. There are lots and lots of considerations that go into this specific question. And the easiest way to explain is really think of, give you three examples that actually
Jane Mepham, Cfp (07:19.886)
are determined by your home country and whatever other citizenships are involved. These are tax treaties, estate tax treaties. Let's see, I think we'll also throw in the green card priority date if the union or not work either. So let's start with the question of a tax treaty, right? The US has tax treaties with about 70 or so countries and the whole idea of a tax treaty
It basically helps you avoid double taxation. So a good example is, say if you're filing taxes the first year as a non-resident or no, no, no, let's say if you leave the country as a non-resident and let's say you have a 401k, basically you'll be taxed at 30 % if you're taking it out, assuming you're doing it at retirement age.
But if there's a tax treaty between your home country and the US, then that gets reduced to something like 15%. Just one quick example of where tax treaty is coming to the picture. The other one is estate tax treaties. The US has about 15 countries where they have estate tax treaties. And where this help is when it comes to estate taxes.
So what happens is the biggest concern or at least one of the concerns is, let's say a non-U.S. citizen who's not domiciled in the U.S. has an estate tax exemption of 60K compared to a U.S. resident domiciled in the U.S. who at the moment has about $13 million. Think of somebody who came to the U.S. years ago, they got a bunch of shares of a U.S. company and then they ended up leaving. So they're not
domiciled and by domiciled we have a couple of episodes on this. I'm going to be linking all this in the show notes. So domiciled is your permanent abode as they call it. And so if this person ends up dying in that kind of a situation, his or her beneficiaries will only get a 60k tax exemption, meaning they're paying up to 40 % of the value of what's been left behind. Hence,
Jane Mepham, Cfp (09:40.652)
You can appreciate now why it's so key that we understand what country you're coming from. Another example where your home country matters a lot is when it comes to green card priority date. So for most people who are on a work visa, majority of them want to stay in the US, right? And so you go through the whole employment based prioritization where
your company will say, okay, John, we're going to file a green card for you. And you go through the whole process, but getting the green card is not the same as the company applying for a green card for you. What happens is you don't get the green card, even though it's been approved until your, your, your date becomes current. What this means, the easiest way of explaining it is think of the green card as a queue right?
And so let's assume you're from a XYZ country and every year they allow a thousand people to get the green cards, right? But let's say 2000 people apply for the green card. They will assign them to a thousand and then the other thousand is going to move forward in line. And so right now the situation we're in is if you're from India or China, the joke is that
you may have to wait for your kids to petition for you because we're now looking at something like 10, 15, 20 years before you can actually get that green card. And so if we are planning, we're doing financial planning, one of the ideas behind financial planning is to ensure you have peace of mind, right? And so we probably need to have conversations or make it normal to say what happens if you don't get the green card, right?
what else should we be thinking about? And some people may say this is not an issue, but if your kids were born in your home country, they're here and they haven't become, they obviously haven't become green card holders, they're your dependent, it's okay, but once they get to 21, that becomes an issue, because they could end up now being considered undocumented. So.
Jane Mepham, Cfp (12:03.246)
There's a lot we need to talk about. And when it comes to planning for this group, the one thing I always, always talk about is let's be flexible, right? It doesn't mean that if we come up with a plan today, we're going to stick with this for the next 20 years. We need to be really, really flexible and be willing to change our planning based on your situation and what's happening with the visas and that type of thing. Now, if you're married,
and you're in a mixed marriage. And by mixed marriage in the cross border context means people from different countries. So for example, I'm in a mixed marriage because my spouse and I are not even from the US, we're from different countries. There are a lot of things we need to think about mainly when it comes to estate planning. So I'll give you an example. If a US citizen is married to a non-US citizen,
and God forbid the US citizen gets hit by a bus and dies. There is no unlimited marital deduction rule. Typically, if a US citizen is married to another US citizen and one of them, you know, dies, the other one is able to inherit everything, the unlimited marital deduction where they don't have to pay taxes. But in a mixed marriage, those are things we really need to think about. We need to think about the countries these two people
are from to really be able to move forwards with the planning. Okay. The other question I'll ask is what are your long time residency plans? Now, where this becomes interesting is your wishes may not be the government's wishes. A lot of people will tell me I want to stay in the US permanently. I want to retire here. But of course we know it all depends
depends on whether you can get, let's say that green card, for example, right? And what country you are from. So it's good to know what you're thinking in terms of your planning and then bring it into the situation and see is the government, is the system going to allow you to do this? I can think of an example. A couple of years ago, I worked with an executive who had moved from Australia to the U.S. on an L1 visa.
Jane Mepham, Cfp (14:28.174)
And the company was very, very quick. They wanted to file for him. They wanted him to become a green card holder. They'd given him a bunch of stock options, millions of dollars wide. And when he reached out and we talked, he wasn't quite sure if he really wanted to do it, but the company was really pushing for him to do it. And so we ended up having a long discussion and part of the concern that was coming up is there's something called an exit.
If you've been in the country on a green card for eight of the last 15 years, and it's very easy to hit that number, or you become, as a green card holder or you're US citizen, and you decide that you want to leave permanently, the US doesn't allow you to just go. There's a possibility you could end up having to pay an exit tax. And it's a whole process. There's a whole bunch of questions you have to go through.
But in this case, the more we talked about it, he was very concerned about that because he was doing pretty well back in Australia. And he kept saying, I don't know that I really want to be here for the long haul. I don't know that I want to give up the green card and all that. And so in his situation, we ended up making the decision that, yeah, I think he doesn't want to stay here long term. He's going to stay here as long as he needs to. He doesn't want to get the green card. He's going to be moving back.
Other cases where I've seen when we're discussing long-term residency plans is really interesting where folks are here on work visas, for example, and they are like, I know for sure I'm going to be leaving, right? So that's your long-term plan. You plan on leaving. But, and I want to make sure I'm not tied to the US that once I decide to leave, I'm going to be able to make a clean.
break. And so one of the cases that I've seen is where I have this couple, they're from, we'll just say XYZ country, they're on a work visa and she got pregnant and they're going to have kids. And what they've ended up doing now, they have two kids is they literally have her leave the country around, you know, month, I think six, seven or something like that, and go back home and have the kids in the
Jane Mepham, Cfp (16:53.006)
home country and then come back with them as dependents. And you can tell it's something they've really thought about because the US, we have this concept of what's called accidental Americans where folks were born in the US and they were very young. They weren't even aware of it and they've gone on to have great lives outside. But as soon as they have a financial thing happen, IRS comes calling. A really good example, probably
The most famous example is Boris Johnson, the former prime minister of the UK. He was born in New York. And when they were very young, they ended up leaving the country, went back to the UK. He had his life. He became the prime minister. Actually, this was before he became the prime minister. And he had an apartment somewhere in London. And he sold the apartment. And as soon as he did, IRS came calling saying,
by the way, remember, you're an American. We want our cut of that. And so you're finding and it's really become a big political issue. People don't want to become accidental Americans. And these all comes down to what are your long term residency plans? Again, what I counsel people is let's just be flexible. But if there things you know you really don't want to do, like you know you don't want to be tied to the US.
You may have to take drastic steps like this couple, you know, moving back home to have their kids and then coming back and bringing them up here. And then the last question I'll ask is what are your financial ties to those specific countries? I've already alluded to some of them. Again, it's a whole idea of citizenship based taxation.
The reason why it's important to understand, because you want to stay tax compliant. So what happens is there's a whole bunch of forms you need to file when you have overseas asset. Probably the most famous that everybody at least now is becoming familiar with is called the FBAR Report of Foreign Bank and Financial Accounts. What happens is any time any of your foreign bank accounts hit 10K,
Jane Mepham, Cfp (19:08.59)
IRS expects you to report that. And what tends to happen a lot of times, it hits the 10 K accidentally. The cases where I've seen is John decides, you know, they have a small project, they are working on home, or he's going to send some money to his cousin back home, sends the money, the money hits his account. And for two days he has maybe 10,000 in that account, or he has
6,000 but he happens to have another account that has 5,000 and so the total balance is 10k and by that happening he has to report that account. There are also other forms you're expected to fill. Others are like form 8938 reporting foreign assets and the worst probably the one that we probably don't want to we always caution people about is a P FIC
passive foreign investment company. And it sounds exotic, but the best example that I can think of is where you decide, okay, I'm going to go buy some foreign based mutual funds. I've seen folks, let's say from India deciding, the market is doing great over there. So let's go buy some foreign based mutual funds. As soon as you do that, you own a P FIC And the issue with that they are taxed
punitively. It's really the only way to explain it. And the reporting of those funds takes a lot of time. But there are cases where we really may choose to keep them and just deal with it, knowing what your long-term residency plans are. If you're only going to be in the US for a couple of years, then it probably makes sense to just deal with it and leave them alone. But then if you're planning on really being here for the long haul,
and the legal status allows you to do that, yeah, okay, we may really want to consider getting rid of that. Okay, and so those are the five questions that we ask or that I ask as I help you craft your financial planning framework. Remember, the questions are, what's your visa immigration status? What's your tax residency status?
Jane Mepham, Cfp (21:26.926)
What's your home country? And part B of that question, what are the citizenships that are involved? And what are your long-term residency plans? And finally, what are your financial ties to those countries? And with that, we're gonna bring this to an end. For all the links, and there's gonna be a lot of resources attached to this episode, please go to the IM Cafe, theimcafe.com. And thank you, bye.