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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Speaker 1 (00:06):
Welcome to the International Money Cafe podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host, Jen Hams, certified financial planner, founder and owner of Elgon Financial Advisors,
Speaker 2 (00:21):
And I'm your host, man Nadi, enrolled agent, owner and founder of Amman Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance and financial planning. Let's get to the show.
5 Questions to Create a Financial Planning Framework for Foreign Born Families
Speaker 1 (00:43):
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 visa. And I actually think this is a planning framework or a framework that you can actually apply to your life in the US 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 US in general, alright, onto the show. When I meet somebody for the first time and we get talking about financial planning, there's a very specific number of questions that I'm always looking for answers because that will determine the kind of recommendations I'm going to make, the kind of conversations that we are going to have.
1. What’s your Immigration Status?
Speaker 1 (01:56):
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 are good. Nothing wrong with that or you're a green card cardholder 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 work visas, we're talking about, let's see, H one B, L one, E three T and L one, H one, B one in maybe the old visa, right? As soon as I know or I understand the kind of visa that you are on, and I'll give you an example. I know there are things we may not be able to do because of the specific type of visa you are on, so I'll give you an example.
Speaker 1 (02:58):
If John is on the H one B visa and Peter is on the L one visa, and let's assume both these candidates brought their spouses to the us, the H one B dependent is not able to work until they're way down the process for getting the green card. On the other hand, the L one 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. 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 key. The other thing as far as the visa or your immigration status is again, if you tell me for example, you're on the E three visa, I know right away you are from Australia, right?
Speaker 1 (03:57):
And you tell me you are on the T end 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 are in the us. 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.
2. What’s Your Tax Residency Status?
The next question I'll ask is what's your tax residency status?
Speaker 1 (04:50):
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 tax ratio. What this means is once you become a US tax resident, you are always taxed on your worldwide income. You come to the us, you're on the H one B visa for example, you become a tax resident and you happen to own 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 where 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 are still a non-resident where we can actually make some changes before you become a tax resident.
Speaker 1 (05:51):
I'll give you an example. Last year I was working with a citizen from Canada though here on the O PTF one visa in a couple months, actually the following year they were going to be switching to H one B visa and they had some great Canadian accounts. 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. What we ended up doing is working with cross border CPS 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 are able to take advantage of that. And of course this goes into, you probably have us talk about things like pay fix, which we 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 US taxation system, that would be fantastic. So that part is really, really key.
Speaker 2 (07:08):
Hey dear I'm C listener. Let me tell you a little story. Coincidentally, when I started my practice, it was the same year in which FATCA was passed into law. FATCA stands for Foreign Account Tax Compliance Act. The government started to crack down on those who had financial assets overseas and the not compliant in disclosing these funds to the US government. The FinCEN Fbar filing requirement has been around since 1970, since the Bank Secrecy Act was passed. Well, even though it has been more than 10 years since these laws were passed, we still have many, many US taxpayers who may have the filing requirement but are completely unaware of it. I'm talking about that joint account with your dad with over 10 K back home. So this is in fact our most frequently asked question. We've put together a comprehensive free ebook which goes over the most important compliance requirements for overseas financial assets and we want you IMC listener to have this ebook completely free. All you need to do is go to our website, www the im cafe.com and scroll to the bottom of the homepage and enter your first name and email address and you will be able to download this handy ebook. Now, hurry, go get your free and fabulous.
3. What is your Home Country?
Speaker 1 (08:55):
The next question I'll ask is what's your home country? And part B of this question is what are the citizenships are involved? 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 are determined, but 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 cut priority date if again you're on a work visa. Let's start with the question of a tax treaty. 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 let's say if you leave a country and you are 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 are doing it at retirement age.
Speaker 1 (10:12):
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 a tax treat 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-US citizen who's not Thomas South in the US has an estate tax exemption of 60 K compared to a US tax resident domiciled in the US who at the moment has about $13 million. Think of somebody who came to the US years ago, they got a bunch of shares of a US company and then they ended up leaving so they're not domiciled and by domicile, we have a couple of episodes on this.
Speaker 1 (11:10):
I'm going to be linking all this in the show notes. Domicile is your permanent abort as they call it. And so if this person ends up dying in that kind of a situation, he's or her beneficiaries will only get a 60 K tax exemption, meaning they're paying up to 40% of the value of what's being left behind. Hence, you can appreciate now why it's so key that we understand what country you are coming from. Another example where your home country matters a lot is when it comes to green card priority date. For most people who are on a work visa, majority of them want to stay in us. 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 if You Don’t Get a Green Card?
Speaker 1 (12:12):
What happens is you don't get the green card even though it's been approved until your date becomes current. What this means, the easiest way of explaining it is think of the green card as a queue, right? Let's assume you're from x, Y, Z country and every year they allow a thousand people to get the green cuts, but let's say 2000 people apply for the green cut, they will assign them to a thousand and then the other thousand is going to move forward in line. Right now the situation we are 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 are now looking at something like 10, 15, 20 years before you can actually get that green card. And so if we are planning, we are doing financial planning, one of the ideas behind financial planning is to ensure you have peace of mind.
Speaker 1 (13:12):
We probably need to have conversations or make it normal to say, what happens if you don't get the green card? 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, so 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. They could end up now being considered undocumented. So 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. It doesn't mean that if we come up with a plan today, we are 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.
Speaker 1 (14:09):
Now if you are married and you are 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 are 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's no unlimited marital deduction rule. Typically if a US citizen is married to another US citizen and one of them 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.
4. What are Your Long-Term Residency Plans?
Speaker 1 (15:03):
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-term residency plans? Where this becomes interesting is your wishes may not be the government's wishes. A lot of people will tell me, I want to say in the US permanently, I want to retire here. But of course we know it all depends on whether you can get, let's say that green card for example and what country you are from. It's good to know what you are thinking in terms of your planning and then bring it into the situation and say, is the government is a system going to allow you to do this? I can think of an example. A couple years ago I worked with an executive who had moved from Australia to the US on an L one visa and the company was very, very quick.
Speaker 1 (16:05):
They wanted to file for him, they wanted him to become a green cut holder. They had given him a bunch of stock options, millions of dollars, what? 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. We ended up having a long discussion and part of the concern that was coming up is there's something called an exit task. 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've become as a green card holder or you're a 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.
Speaker 1 (16:57):
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 dunno that I really want to be here for the long haul. I dunno that I want to give up the green card and all that. In his situation, we ended up making the decision that, yeah, I think really 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 cut, he's going to be moving back. Other cases where I've seen when we are discussing long-term residency plans is really interesting where folks are here on work visas for example, and they're like, I know for sure I'm going to be leaving. So that's your long-term plan.
Speaker 1 (17:45):
You plan on leaving and I want to make sure I'm tied to the US Once I decide to leave, I'm going to be able to make a clean break. One of the cases that I've seen is where I have this couple they're from, we'll just say X, Y, Z 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 a month, I think six, seven or something like that and go back home and have the kids in the home country and then come back with them as dependent. 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.
Speaker 1 (18:47):
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, oh, by the way, remember you're an American. We want our cut of that you 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 are things you really don't want to do, you know don't want to be tied to the us, you may have to take drastic steps like this couple moving back home to have their kids and then coming back and bringing them up here.
5. What are Your Financial Ties to Other Countries?
Speaker 1 (19:50):
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 FPA report of foreign bank and financial accounts. What happens is anytime any of your foreign bank accounts hit 10 KIRS 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 they have a small project they're 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.
Speaker 1 (20:59):
And so the total balance is 10 K, and by that happening, he has to report that account. There are also other forms you're expected to fill. Others are like form 89, 38 reporting foreign assets. And the worst, probably the one that we always caution people about is a pay 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, oh, 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 perfect, and the issue with that is they're attacked 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.
Speaker 1 (22:05):
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, what's your home country? And part B of that question, what are the citizenships involved and what are your long-term residency plans? And finally, what are your financial ties to those countries? And with that, we are going to bring this to an end for all the links and there's going to be a lot of resources attached to this episode. Please go to the I am Cafe the i cafe.com and thank you. Bye.
Speaker 3 (23:09):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only, and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross order finances and tax needs.