Last year, Congress passed a law which was supposed to get Americans back to work. Buried in it, however, are provisions for restricting the free flow of funds from US bank accounts to offshore accounts.
The Hiring Incentives to Restore Employment (HIRE) Act will require foreign financial institutions to report annually on accounts held by US citizens. This doesn’t just mean banks, it includes all financial institutions — trusts, investment funds, any and all investment “structures.”
The IRS has always required us to disclose our overseas holdings, so by itself this would not be a big deal for expats.
But wait, there’s more. . .
What is a big deal, however, is the imposition of a 30% withholding requirement.
This means when we move funds from our US accounts to foreign accounts, our banks will withhold 30% of the total just in case we owe any taxes on it.
Now, if the bank withholds 30% and you didn’t owe any taxes, they’re fine. But if they don’t withhold and you do owe taxes, they can be fined.
So, do you think they’ll give you the benefit of the doubt? Not likely. They will most likely withhold 30% on each and every transaction just to cover their own behinds. Of course, nobody knows for sure how the new law will be applied until after it goes into effect and gets tested in the courts. But experts agree that banks will most likely withhold every time rather than risking themselves.
Of course, when you file your taxes you’ll get back whatever they took that you didn’t owe the IRS, but in the meantime they’ve had the use of your money and you haven’t. . .
You’ll Need More Cash — A Lot More — to do Anything
What does this mean to you? Well, if you want to transfer money to purchase a home in another country, you’d better have quite a bit more cash on hand than you actually need.
Let’s just say, for the sake of easy math, that you need $100,000 to purchase the property, pay the closing costs, etc.
To end up with your $100,000, you’ll actually need to request a transfer of $142,858, which will net you $100,000.60.
Is this a problem for the very wealthy who may be attempting to hide funds overseas? Probably not. The people it hurts are the same folks this economic mess in the US has been impacting the most — the hardworking middle class who are just trying to survive.
A Little Good News
There is a tiny bit of good news in all of this. This provision of the law was scheduled to go into effect on January 1, 2013.
After an outcry by foreign banks, that date has now been pushed back. Parts will be implemented in mid-2014 and the remainder on January 1, 2014.
This gives most of you you an additional twelve months to get your finances in order and move funds offshore before your bank and the IRS start taking 30% off the top.
Do you have questions or concerns about how this law will affect you? If there’s enough interest, I will try to bring in an expert to talk further about how the HIRE Act is likely to be implemented. Leave a comment or send me an email.
photo by stevendepolo on flickr