Migrating to the US can be great for one’s career and quality of life. Thousands of qualified professionals from many developing countries choose this route every year. One of the important aspects of expat life in the US is managing finances. The savings and investment landscape can often be complex. Here are some pointers that can help make sense of it.
Saving is a profitable proposition only if the rate of interest on savings is higher than the rate of inflation. In 2008 the rate of inflation in the US was 3.8%. It gradually reduced following the 2008 global economic meltdown. According to figures published by the US Labor Department the inflation rate stands at 1.4% for the 12 months ended September 2020. Savings bank accounts and investments in government debt securities can be attractive risk-free options for expats. US deposits are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Term deposits give higher yields. Interest rate varies with bank, and generally ranges from 0.1-1%. For example, a 60 month deposit of $1,000 or more with US bank can generate annual interest at 0.40%.
Expats may find that bank interest rates are higher in their home countries. Millions of migrant workers in the US transfer money back to their home nations in the form of remittances for investment purposes. The US government does not impose any restrictions on the amount of money transfers sent outside the country.
Expats employed in the US are categorized either as non-resident alien (NRA) or resident alien (RA). Migrants without green cards are usually classified as NRAs. According to the IRS website NRAs are subjected to 30% tax on their income earned in the US when they file taxes online for free or with the help of an accountant. This includes income from trade and business.
RAs are green card holders or permanent residents. Their taxation criteria are same as US citizens. RAs are subjected to US taxation for their worldwide income even if they leave the country. The tax rate can vary between 10-37% depending on the income (tax bracket) and marital status. For example an unmarried RA earning $40,125-85,525 annually is liable to pay tax amounting to $4,617.50 plus 22% tax on any amount earned in excess of $40,125.
In 2010 the Foreign Account Tax Compliance Act (FATCA) was passed. This act encompasses all foreign financial institutions including banks, brokerage firms, mutual funds, investment companies, and insurance providers. They are required to report all financial assets owned by US citizens and taxpayers. Non US investments such as mutual funds are taxed at 15-20%. One can use US accounts and holding structures to make foreign investments and avoid the punitive tax treatment. This is an important consideration for expats choosing to invest in their home countries.
Subscribing to a US retirement plan can help expats reduce the burden of federal and state taxes. Qualified retirement plans such as IRAs 401k and 403b offer opportunities to delay taxation till retirement. Disbursements from a retirement plan are subjected to 30% taxation in the US. Some portion of this can be reclaimed by filing US tax return (Form 1040NR). For many expats a US retirement plan is a key component in their wealth management strategy. This holds true even if you plan to eventually return to your country of origin. Several countries including Australia, Canada, Thailand, and India have special tax treaties with the US.
Fixed income securities and bonds
Expats can opt for fixed income security investments. These provide regular interest payments. The principle amount is returned on maturity. Expats can invest in US treasury issued government bonds such as Treasury notes (T-notes) and Treasury bonds (T-bonds). These are popular and risk-free investments. A T-bond is a long-term bond with a maturity term of 10-30 years. In March 2020, 30-year T-bond yields closed at 2.81% .A T-note is an intermediate term bond with a maturity of 2, 3, 5, or 10 years. 10-year yields closed at 2.40%. There are other bonds such as treasury bills, treasury inflation-protected securities, corporate bonds, and municipal bonds. Expats are allowed to invest in any of these.
A brokerage account is something an investor uses to buy or sell stocks, bonds, and mutual funds. NRAs are not taxed on capital gains in their US brokerage accounts. They are also not taxed for income earned outside the country, which includes almost all publicly traded bonds and stocks of foreign companies. Federal income tax is withheld at a standard rate of 30%. The US has tax treaties with several countries. These reduce or eliminate the withholding rate.
Stocks are ‘high risk high reward’ investment options for expats with matching risk appetites. Traders require a keen knowledge of the stock markets to succeed. NRAs are not subjected to tax on income from stock trading. Long term capital gains from stock trading are taxed at 20% of the total gain.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.