I am a US citizen who is a longterm (+14 years) resident in the UK and I am having trouble finding tax efficient ways to save for my childrens university education. The problem is that as of last year, I am liable for world wide investment income in both countries, both want to lump children's income with the parent's, but neither of the tax authorities seem to want to recognize the tax advantaged saving/investing schemes of the other. So while I can start a Child Trust Fund in the UK or a 529 Educational savings plan in the US, most of the advantages are undone by the fact that the gains are taxable in the other country. I am not a banker who can afford expensive tax advice or trust schemes and so I am having trouble finding useful and reliable information. Has anyone got any ideas on the following:How would the inland revenue treat a 529 plan where I was the "account owner" and my son (also UK resident) was the beneficiary? Would it be regarded as a bare trust? Or would it simply count as my investiment income?Or does anyone have any pertinent advice about how to save for my kids while keeping two sets of taxmen's mits off the results?
Not really sure how the tax laws would apply, but see how this might fit in for your situation. As a US citizen, you are exempt from taxes on a certain amount of foreign income (up to $80 thousand I believe). One choice would be to open the fund specifically in the child's name. Possibly investing in higher dividend paying stocks. Then each year file a tax return for the child. I know even with my earned income exemption, the dividends I have earned over the past 4 years haven't been hit by any kind of taxes based on whatever my accountant does. Maybe it would work the same. Either that or my accountant is doing something illegal.fool on~Charm
Thanks for that. I thought that the foreign income exclusion is only for earned income, not dividends or interest, though. And even if I open an account in my son's name, once it earns more than $1600, it gets lumped together with my unearned income and taxed at my rate. And, to add insult to injury, it also needs to be reported in the UK as well, which is a record keeping nightmare even when it doesn't lead to higher taxes. Arghhhhhhh!
You are probably right on the earned income, why I am not sure what my accountant did is legal or not. But whatever he has done for the past few years has kept me from paying any taxes on my income or other, like dividends. He's the expert, not me. . .and being half way across the world I guess I really just don't make the effort to do any more than send him year end documents. Maybe a person with tax law knowledge there could help you find the best solution. International tax accountants, and financial advisors I'm sure have some workable and legal solutions of handling this issue.Good luck,Charm~
I thought that the foreign income exclusion is only for earned income, not dividends or interest, though. correct. but depending on how much you earn, the exclusion can affect taxes on dividends and interest as well. for instance, if the exclusion plus your deductions are less than your total (earned and non-earned) income.also, there is the foreign tax credit, which can reduce taxes in case the foreign earned income exclusion didn't get rid of them completely.finally, don't forget the additional child tax credit. this is different than the child tax credit -- it is a refundable credit, which means that it can be used to reduce your tax to below zero. in other words, you can get a refund even if you owe no taxes. i know it sounds crazy, but that's the way it works, and i've used it since the irs sent me a letter a number of years ago telling me that i forgot to claim it. if you haven't been claiming it, you can file amended returns for previous years.so -- regarding the "expensive tax advice" that you feel you can't afford: think again. it may save you thousands of dollars a year, and my specialist accountant costs much less than that.on the other hand, if you really want to do it on your own, i recommend irs publication 54 "tax guide for u.s. citizens and resident aliens abroad":http://www.irs.gov/pub/irs-pdf/p54.pdfc.not an accountant or a tax professional -- just a u.s. citizen who has lived abroad for almost thirty years now
as per my previous post, additional child tax credit can be claimed using this form:http://www.irs.gov/pub/irs-pdf/f8812.pdfc.
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