.Jane Mepham, CFP (00:04.492)

What is English for life insurance, and how does it apply in a cross-border context?

In today's shortie episode, where in 10 minutes or less, we pick a term used in the cross-border space, we'll talk about what life insurance is, very high level, and whether you need it or not, and when you'd need it in a cross-border context.

Manasa Nadig, EA (00:30.707)

Alright, so Jane, what is life insurance?

Jane Mepham, CFP (00:35.936)

Okay, like the way you just jumped into it, but that's perfect. So, I'd like to think of life insurance as a contract between you, the insured and the insurance company. And essentially, what they're saying is you pay us a certain amount of money over a certain period of time. Obviously, there's more into it, and God forbid you get hit by a bus, we'll give a boatload of money to the person you've appointed to the beneficiary. In other words, think of it as we're replacing your income. So, if you have kids or family overseas, you're supporting and you were not there, what happens to them?

Manasa Nadig, EA (01:21.459)

That's essentially what life insurance is. Now, can we talk about what are all the different types of life insurance?

Types Of Life Insurance: Term And Permanent

Jane Mepham, CFP (01:32.96)

Okay, again, high level, this is a shortie. There are two types of life insurance that we commonly discuss in this space. One is what's called term life insurance.

Term life insurance gives you a certain amount of time, right? So, you buy a policy for let's say 30 years and you pay more or less the same amount, although you do have different ways of paying it, once the 30 years are over, you're done.

Sort of like the car insurance. If, during those 30 years, something happens to you, your beneficiary will receive a payout of whatever the face value was. So, let's say you do something like a 30-year term, with a million dollars, and 25 years into it, something happens to you; your beneficiaries will receive the $ 1 million.

And then the second type of life insurance is what's called permanent life insurance. And under this, there's two, there's whole life and there's universal, but I won't go into the details.

The main differences, there's a death benefit, one, but there's also what's called a cash value. So, something happens to you after a certain period of time, your beneficiaries will get a certain amount of death benefit, but there's also a certain amount of cash that goes along with that, that you can actually take out at some point, depending on the details of the contract.

These ones tend to be a little bit longer, so you can go to a hundred years or something like that. And that's key for the next thing I think you might ask me, but let's move on.

Manasa Nadig, EA (03:14.108)

Yes, you guessed it. Next, can we discuss what type of insurance would be suitable, especially in a cross-border context?

Life Insurance And The Cross-border Considerations

Jane Mepham, CFP (03:30.702)

Okay, so the people that we work with, have foreign nationals and work visas, and we know these work visas are non-immigrant visas, so the assumption is, or not the assumption, you're going to be leaving the country at some point at the end of your term, unless, of course, you end up getting the green card and you end up staying.

And then we have the second group, they're already here on green cards, or they're U.S. citizens, but they have assets, or they have ties overseas.

And then you have U.S. expat, which are U.S. citizens or green card holders who live overseas. So, when I think of that group, and this is where each case is very specific and needs to be custom designed, but at a very high level, if you're the main breadwinner for the family and you're supporting kids and family overseas, the term life insurance...most likely makes sense for you.

Again, remember, we're just trying to replace you. This is not about wealth building; we're not thinking of that. We're just replacing you in terms of support. And so, if you're working and a W-2 employee, term life insurance makes a lot of sense.

The only difference is, or the key thing to watch out for is, the time-life insurance from a company that's willing to pay out, pay to your beneficiaries, regardless of where they live.

And those are the type of companies that we use in all practice. As long as you continue paying the premiums, and we can discuss how you do that, and you end up leaving the country, you will continue paying for 20 years. If something happens to you, these U.S. companies should still be able to pay your beneficiaries that amount.

That’s probably the best case for term life. And it's almost what I advise everybody to get.

Using Life Insurance To Mitigate The 60k Estate Tax Exemption

The second case, the permanent, the universal, the whole life portion of it, the best-case scenario for it when you're in a cross-border context is if you become an NRI, non-resident, which is a word alien, but that's what the IRS uses. You know what I mean.

Jane Mepham, CFP (05:47.254)

And you're not in the US anymore and you have what's called U.S. Situs asset. This is, let's say, shares, property, and you're not here, there's a very high possibility that your estate taxes, the exemption you have is 60K, not the current 15 million that almost everybody else has.

So if your exemption is only 60k what this means is God forbid something happens to you your family most likely will have to sell everything because they need to pay 40 % taxes on anything over 60k so this is a really good use case for a permanent contract because you wanted to go on for a long time but of course you'd want to make sure you find the right people to design this for you so something happens to you there's this estate taxes your family needs to pay, the life insurance will pay out.

Because remember, at that point, it's not going to be taxed. It covers the taxes and your family can enjoy the money.

And so those are probably the two use cases that I can think of right now, contrasting use cases in the cross-border context when it comes to life insurance. There's a whole lot of other use cases, but I think those are probably the two main ones that would apply to just about everybody in this space. Does that answer your question?

Manasa Nadig, EA (07:17.391)

Yes, that perfectly answers all our questions and I'm sure it answers our question on “what is English for life insurance?”. So now that we've learned about that in this shortie episode, thanks for listening to friends and thanks for stopping by.

If you like the content we share, please go to our website, theimcafe and subscribe to our newsletter and you will know ahead of time when our episodes are dropping. So thanks for stopping by.

Jane Mepham, CFP (00:02.552)

You're a foreign executive coming to the U.S. on the L1 visa. Do you know the three most important considerations?

The Two Types Of L1 Visas

L1 visas are granted to foreign executives or managers coming to the U.S., which means there's a foreign office or foreign company and they have a U.S. branch and they send these executives or managers or specialized workers to come and work in that office.

They're classified into two. L1A is the manager or the executive officer, and then L1B is an individual with specialized skills who is still coming to work in the office.

Now, in terms of the validity of these visas, you initially get it for three years, but the L1A can be extended for up to seven and the L1B can be extended up to five years.

And this is critical for what we are going to address. But if you have, legal or immigration questions around U.S., those are best addressed by an immigration lawyer.

But now let's talk about the three most important financial and tax considerations if you're coming to the U.S. on the L1 visa.

Manasa Nadig, EA (01:27.599)

Yes, yes, yes. Considering that a foreign executive who is here on an L1 visa can be here for a pretty long period of time, these are three broad areas of what we think you should consider. And these are really important to know.

The first is the U.S. income tax filing and compliance.

Then the compliance with foreign financial assets and other assets.

And then lastly, but not least, are U.S. estate and gift tax considerations.

So as always, let me jump right into the U.S. income tax filing and compliance part of it, which...

As you know, when you become a tax resident in the U.S., you must declare your worldwide income and financial assets. And as an L1 visa holder, you are subject to that as well. So what are the considerations of that?

Timing your arrival, that can make a difference. If you're coming in the beginning of the year, then you have to take into account what that foreign income and assets are for the entire year versus towards the end. Doing pre-immigration tax planning would mean working with advisors on both sides, both in the U.S. and in the country where you're from, and maybe looking into investment reorganizations.

And if you're married and if your spouse is going to come here with you to the U.S. or not,they are coming to the U.S., then they are allowed to work here on a dependent visa.

But if they are not, then you have to factor in their status in the for tax planning. And you should always think about what could change if your non-U.S. spouse at some point might join you in the U.S.. So keep all of those big picture things in mind.

Manasa Nadig, EA (03:44.082)

So we did timing, pre-immigration tax planning, the spouse. And another important thing to consider when you're looking at timing your arrival is your substantial presence test. And we've talked about this in a different episode and we link it in our notes. Meeting this test may mean filing a Form 1040 and disclosing your worldwide income for the entire year.

Additionally, to determine if you are eligible for a closer connection exception, consider whether you are in the U.S. for less than 183 days and maintain a tax home elsewhere. A dual status filing based on the number of days you're in the U.S. versus the days you were still abroad as a non-resident alien.

And always looking at the treaty or the double tax avoidance agreement between the country you're a resident of and the U.S. to see what clauses are available to you to maybe mitigate some of all of these or help you with your tax planning. That was the first thing to consider.

Foreign Financial And Other Overseas Assets

Jane Mepham, CFP (05:10.074)

You've addressed a lot in this one thing. So, what I'm going to do is jump straight into point number two. This includes your foreign financial assets and other assets located overseas. You've already alluded to the fact that once you become a U.S. tax resident, you're subject to U.S. taxation in disclosure. And so, the thing you want to think about regarding your foreign assets is, one, do you have bank accounts? Check balances.

Do you have accounts where you just have signatory authority in FBAR and FATCA thresholds?

We joke a lot about you're in the U.S., your cousin adds you to a bank account somewhere overseas and right there, you need to start reporting that account.

So it's getting very clear on what your assets are. Check on your retirement account. And actually, this is both here and overseas. So you want to understand access.

On the U.S. side, you're thinking more about what your goal is, your end goal, as you think about what accounts you want to get into, what are the rollover options, and of course, the U.S. tax treatment.

Again, a lot of this, I know it sounds like I'm confusing the two, but it's both your overseas accounts and your U.S. accounts. Think about your investments.

You want to review your investment account. And the most significant danger of consideration on this is what we call PFIC, Passive Foreign Investment Companies or accounts.

So if you end up with a PIFIC and pretty much almost all foreign-based or foreign-registered mutual funds fall under this, your tax filing that Manasa had just talked about at the beginning is going to be a lot more complicated.

So, you want to examine those accounts, find out what's going to fall under PFIC filing, and come up with a game plan for treating this. And this, of course, includes even things like your foreign insurance, right?.

You need to think about your digital assets, your crypto, what are the reporting and taxation requirements again, because they are overseas and you're expected to report everything.

Jane Mepham, CFP (07:32.638)

If your company is going to be giving you equity compensation, so things like RSU stock options, you really need to be thinking about taxation and the taxation implications.

And again, how they end up being treated depends on how long you're going to be here. I know it's not an easy thing to figure out as you're arriving, but also where you're going to go when you leave and when these things vest. So, there's definitely a lot to be thinking about.

If you hold business interests in foreign countries or companies, you should consider this when making decisions. We need to think about your foreign income. And overall, the goal is we need to plan to be doing not only your tax returns on foreign income, which needs to be reported in the U.S., but most likely you'll need to continue filing your taxes in the foreign country.

We obviously cannot file foreign taxes for you, but the goal is to take all that into consideration. Start putting a plan together for how your overseas CPA or EA will work with your U.S. cross-border tax professional, because it's really the only way to consolidate all this under one roof and streamline it. Manasa, before we jump into three, anything else you want to add to that?

Manasa Nadig, EA (08:59.417)

Yes, yes. The foreign financial asset compliance, and we keep talking about this in our episodes, non-compliance or failure to report these come with humongous U.S. penalties. Just dealing with that can become quite a cumbersome affair. So, understand what

Jane Mepham, CFP (09:00.504)

Okay.

Manasa Nadig, EA (09:28.845)

Jane just talked about, and all of those assets that you have know that they have to be declared if the amounts are past the threshold. Working with professionals on both sides of the border is an extremely important thing to remember. Jane and I just cannot reiterate that enough.

U.S. Estate And Gift Tax Implications

So that being said, you moving on to the next biggest implication or aspect of moving to the U.S. as a foreign executive, we talk to wealthy or high net worth executives moving to the U.S. on L1 visas a lot. And we understand that you've already probably have a big financial footprint in the country where you are.

You have been living and working there for, you know, for a number of years. So we expect that you will have a high net worth investment. Going back to, you know, the aspect of planning for how many years you will be in the U.S., what your future plans out that determines our next part or the next big part, which is the U.S. estate and gift tax implications. So gifting can kind of take on its own ramifications. If you are getting a gift from a non-U.S. person, going over certain thresholds is reportable. Or if you're giving gifts to non-U.S. persons, then that might entail gift reporting or gift taxes also. So think about that.

Think about maybe setting up what are called blocker entities to organize your foreign assets and protect them from U.S. taxation and compliance. There is such a thing called a step-up in basis. And we won't go into it too much because that in itself is an entire episode.

Manasa Nadig, EA (11:52.942)

But step up in basis is an option that you should explore for your foreign investments. And Jane already covered this and I will say this briefly.

If you have holdings in foreign entities, then that needs compliance and declarations. So look at that and see what you want to do with it, where it's going, and how big a part of your tax and financial plan your business holding is going to be.

So you may need to plan for that as well. And of course, the covered expatriate status, if you're going to switch to a green card down the road, all of that comes into the long-term goals and plans on whether you want to stay here in the U.S..or go back to your country down the road and how much of a footprint you already have in the other country and what you want to keep really.

That's kind of what is something that you have to keep in mind no matter what you do, of course, but it gets to be really important if you are a high net worth foreign executive coming to the U.S. on an L1 visa. Anything else you would like to add, Jane?

Jane Mepham, CFP (13:17.71)

So we have those three points. I think the bottom line is, before you actually get to the U.S., work with a tax advisor, a financial planner, a cross-border financial planner, a cross-border tax advisor to get all these things into place. Because if you wait until you get here, it might be too late for some of it.

But if you're already here, let's make sure we fix these three things by addressing those three key points. I think in terms of that, we've addressed the three main considerations. So yeah, I think I'm good there.

Manasa Nadig, EA (13:59.895)

All right, so thank you dear listener for tuning in and listening to our episode. Don't forget to subscribe for more insights. We have a newsletter, we'll send it to you as soon as a new episode drops. So until next time, stay informed and be prepared. Thanks for listening, bye.

Jane Mepham, CFP (00:03.114)

Do you know what a tax treaty is? And do you know how this impacts your taxation? By the end of this short guide, you'll know exactly what it is, how to use it, and what it does to your finances.

Manasa Nadig, EA (00:20.708)

Yes, so what is a tax treaty? A tax treaty is a bilateral agreement, which means a two-party agreement, basically a double tax avoidance agreement that resolves potential double taxation of citizens in two countries.

So what I mean is when an individual or a business invests in foreign country or moves to a foreign country and earns money in that country, the issue of which country should tax that investor's earnings or investment income may arise. So, then this tax treaty provides a blueprint of which country can tax that income.

A treaty could also cover income taxes, estate and gift taxes, and social security benefits.

And interestingly, there are some so-called tax havens which may not have any tax treaties with other countries, which kind of sounds, you know, that's why it would be called a tax haven.

Anyway, so the purpose of a tax treaty is that It avoids double taxation of the same income by more than one country, of course.

But then it also tells you which country has the right to tax that income. And this could be based on the source of the income and or the residency of the person or the business earning that income.

When Does A Tax Treaty Come Into Play

So then. When does this come into play? Let's say there is income in another country and you are resident in that country. Now the country that you're resident in wants to tax that income. So, what would you do? You would go to the articles on the tax treaty, which your country has with the income from the other country and

Manasa Nadig, EA (02:42.0)

See if any of those articles address the type of income that you have and help you mitigate double taxation.

Let me give you an example. So let's say that you used to live in the US, you were on a non-immigrant work visa and you had a 401k and some brokerage accounts. And let's say you're done with your work visa and you decided to go back to the country where you're from, let's say Spain. So we know that the US and Spain have a tax treaty with each other. So, once you're back in Spain, you still have the US brokerage account and it's earning interest and dividends. So now, because you are a citizen of Spain and you are a tax resident of Spain, Spain wants to tax your interest and dividends.

And because now this is US source income, the US also wants to tax that income too. You would look at the treaty to see if there is some kind of mitigation available.

There are many court cases that have been fought in the courts, and some of them have gone on the side of the taxpayer.

Basically, these court cases kind of give you guidance on how to interpret the tax treaties. And I’m going to kind of leave it at that, but sometimes you have to look at both the tax treaty and the court case to get more solid guidance on the income that you’re looking at for that country.

Jane Mepham, CFP (04:28.242)

That’s a fantastic way of addressing this. One thing I do want to call out about these tax treaties, every tax treaty has what's called a saving clause. And the reason I bring it, because people will see the saving clause and assume it means, I'm going to save some money. But actually, no. When you look at the saving clause, the savings clause, what that means is that your country, for example, the US reserves the right to tax its own residents and citizens as if the tax treaty was not in place.

So if the saving clause comes into being, it's not a good thing, but there's not much you can do. Please be aware that you will be taxed as if the tax treaty did not exist.

Which Countries Have Tax Treaties With The U.S.?

And so the next question is, does my country have a tax treaty with the US?

I don't know, but here's what I'm going to tell you. There are approximately 70 countries that have income tax treaties with the U.S., and I think what we're going to do is we'll link a document or a link that tells you exactly what countries are on this list. And again,

remember the tax treaties work on both sides, right? Now, on top of that, there are two other types of agreements that Manasa has mentioned or alluded to.

Gift & Estate Tax Treaties

One is a separate estate or gift tax treaty. There are approximately 15 of these. So, there's about 15 countries that have this estate and or give tax treaties with the U.S. And when this comes into play I think the best use case for this is let's say you're an NRA, you're a foreign national resident, you already left the U.S., but you've left what's called US situs assets.

If something happens to you, these assets would be taxed at 40 % and only 60K or $60,000 is exempt from this taxation. Now, this is in contrast to a U.S. tax resident who now with the passage of the latest tax bill has up to $15 million that could be exempt.

This 60K, you can see how that would impact you. And so if there's an estate end or gift tax treaty with the U.S., the treaty will help mitigate some of that.

As part of your estate planning, you should definitely look into that.

Totalization Agreements

And then there's a second type, what we call totalization agreements. There are approximately 30 countries that have totalization agreements with the US.

And the whole idea with these totalization agreements is to eliminate social security coverage and taxation. They ensure that you're not paying social security on the same income to two different countries. So that does help to keep some of your income back.

So if you end up, let's say, working in a foreign country, check to see if your country is one of the 30 that has a totalization agreement with the U.S.

Manasa Nadig, EA (07:46.36)

Oh, yes, yes. And you know, the whole thing comes together when you're moving from one country to another or you'll have income in another country, but you're a resident of a different country like we talked about.

But all of this comes together when you have to plan on how to mitigate double taxation. And it is important at that point to work with somebody who is very familiar with how these tax treaties work.

And you make sure that you make the right decisions, and maybe save taxes, or maybe not, because the savings clause has basically caught that.

So be careful when you're working with tax treaties if you are doing your own taxes, which I would not recommend. Let's wrap this up, Jane. What do you think?

Jane Mepham, CFP (08:42.966)

I'm happy with this,

Manasa Nadig, EA (08:46.058)

Okay cool, so thanks for hanging out with us dear listener and well, improving your English. So please keep coming back for more and subscribe to our newsletter. Thank you, bye.

What Is NIIT (Net Investment Income Tax)?

Jane Mepham, CFP®  

And we are back with one of our favorite formats, “a shortie”, in which in 10 minutes or less, we take a term used in used in the cross-border finance/tax space and kind of tell you at a very high level what it is.

So, the other day I was reviewing one of my clients' returns, let's call him John, and John had a really great income and he noticed as I started explaining that he had been charged 3.8 % tax on some income. And so, as I explained to him what this is my thought process was there are quite a few people who may not be aware of it.

So, in today's shortie we're going to tell you or explain what the Net Investment Income Tax is. Manasa, want to jump into it?

The Source Of NIIT

Manasa Nadig, EA

Yeah, it is pronounced NIIT  by the way. Because we know we love acronyms. So, the net investment income tax basically depends on two conditions.

-           One is that you have investment income and then your MAGI or the Modified Adjusted Gross Income exceeds a certain amount.

The net investment income tax was imposed by section 1411 of the Internal Revenue Code. And this applies a rate of 3.8 % tax on certain investment income of individuals, estates, and trusts that have income over the statutory thresholds. Now, the statutory thresholds are based on your filing status.

So, if you're married filing jointly, or you're a surviving spouse, it's $250,000. If you're single or married filing separately, it's $125,000, and all others are $200,000. So that's when the 3.8 % NIT is applied to your investment income. And basically, you should also note that even if you are someone who is exempt from Medicare taxes, you may still be subject to the NIIT because remember the NIIT is based on investment income and your MAGI being over the thresholds we just talked about.

What Contributes To NIIT

Jane Mepham, CFP®

Okay, so let's define what this net investment income tax itself is. So, in general, investment income includes, but is not limited to, you know, interest, dividends that you most likely see in your brokerage account, passive rental, and royalty income. What's the other one? Non-qualified annuities, income from businesses involved in the trading of financial instruments or commodities.

Manasa Nadig, EA

Good idea.

Jane Mepham, CFP®

Businesses that are passive activities to the taxpayer, and I'm sure Manasa can give you the exact code for that. Capital gains from the sale of stocks, mutual funds, and distributions from mutual funds. Again, this is where we see a lot of it. Sale of investment of real estate, including, which is interesting, the sale of a second home, but not the primary residence.

Sale of interest on partnerships and c-corps to the extent that you're the passive owner. And the way they calculate it, of course, this is higher, right? Your investment income is reduced by sudden expenses properly allocable years to the income. I had to think of that word.

And so then the question is what is not net investment income, Manasa?

Income Not Included In NIIT

Manasa Nadig, EA (04:04)

Yeah, so all of the income that is not investment income is basically, know, like your wages, your unemployment income, the operating income that you have from your non passive businesses, that is the businesses that in which you are an active participant in, of course, your social security benefits, your tax exempt interest, any self-employment income.

And there are some vague stuff in there, like Alaska permanent fund dividends and distributions from some qualified plans, et cetera. So those are not net investment income.

So you do not pay the 3.8 % net investment tax on that.

And so that brings us to how do you report and pay the net investment income tax? So all of this, the net investment income, and your MAGI is looked at on form 8960. And if all of these rules apply to you, then you calculate the 3.8 % tax and it flows to your form 1040 and the 8960 is attached to the1040. And basically you pay this tax.

The same for estates and trusts, but for them, It's calculated on form 1041, whereas the individuals, it's form 1040, of course. And you are also subject to estimated tax provisions if you are subject to this, which is if you fall short on paying your net investment income tax, there will be an income tax penalty that you might end up paying.

So make sure that you're looking at this if that applies to you.

Jane Mepham, CFP® (05:38)

Okay.

How Does NIIT Apply In A Cross-border Context

Manasa Nadig, EA (05:59)

Now, coming to the most interesting part of this is how does the NIIT apply in the cross-border context? So this has been something that we look at on a constant basis. Now, you have a client who's an expat who lives overseas or who lives in the US and has a large amount of foreign income, which comes from investments.

Then we have the net investment income tax apply to that investment income. Now, these same people might also be filing taxes in the other country, but then the income taxes that they are paying in the other country cannot be claimed as a foreign tax credit against the net.

Court Cases and NIIT

Having said that though, there have been recent court cases which have looked at this and for specific countries, which are France and Canada right now, and we link these court cases in our episode notes, they have allowed the tax paid in that country in France and in Canada to be claimed against the NIIT

Jane Mepham, CFP® (07:05)

Yep.

Manasa Nadig, EA (07:21)

On the US tax return. So if you're a financial planner or a tax preparer who sees this, then be aware that this is a possibility and is available. But for the most part, until we have more clarification on this for other countries, foreign tax credit is not allowed against the NIIT.

 So, that's more or less everything about the net investment income tax, Jane. Do you have anything to add?

Jane Mepham, CFP® (07:52)

The court cases are interesting and it might be interesting one of these days to just take a bunch of those and kind of talk through them, kind of nerd out on them. But I think you've addressed the most important aspect of it, the two conditions. And I think with that, we hopefully still under 10 minutes we can bring it to a close.

Manasa Nadig, EA (08:12)

Absolutely. one thing that I would like to add here is if you know that this is something that you're subject to and it's a possibility for you and you do not want to have the hassle of paying estimated taxes every quarter and you have a W-2, just increase your withholdings to cover for that. So yes, here's what we conclude the Shortie episode.

Jane Mepham, CFP® (08:32)

Great idea.

Manasa Nadig, EA (08:42)

Thank you so much for listening. If you like this episode and you want to hear more of our shorties, where we distill all of the complex stuff into quote-unquote plain English, please make sure to go on our YouTube and catch one of our episodes there. The handle is the International Money Cafe. So youtube.com forward slash at the International Money Cafe. Thank you so much for listening.