By Peter Dougherty

ONE of the first questions many Americans ask after moving to Spain is: “Should I keep my US accounts?” 

Those answering the question should keep in mind their unique circumstance: the US is one of only two countries in the world that taxes based on citizenship rather than residency (Eritrea is the other).

This means that no matter where an American lives, they still need to file taxes with — and comply with the rules of — the IRS every year. 

One of the most difficult of these rules is called “Passive Foreign Investment Company” (PFIC). When gains are realized in an investment that’s considered a PFIC, the IRS often treats them as “excess distributions.”

The result can be income taxed at the highest historical marginal rates and interest charges applied retroactively.

In addition, each PFIC investment generally requires filing a highly technical form every year that typically requires specialized tax preparation.

Most non-US investment funds — including European mutual funds — are considered PFICs. Because of this, many Americans living in Spain buy PFICs unintentionally and only discover the issue later. 

These rules were originally made to prevent US investors from deferring tax by investing in offshore funds. 

Unfortunately, they now affect numerous Americans simply because they live abroad. All of which makes straightforward investing in Spain more challenging.

But back home, their checking account, brokerage, and IRA are sitting quietly, waiting for them to decide what to do with them.

For most Americans in Spain, closing all US accounts is more trouble than it’s worth, and in some cases it’s a decision they may regret.

A US bank account makes it easy to receive Social Security payments, manage dollar-denominated investments, and handle any unexpected financial needs that might arise outside Spain.

Trying to untangle decades of US financial life from abroad, without a US account, is a headache few people want.

Keeping US accounts doesn’t mean ignoring them. Dividends, interest, and capital gains in those accounts still need to be reported — in most cases to both the IRS and Spain’s Hacienda.

The goal shouldn’t be to eliminate their US financial footprint — it’s to manage it deliberately. Keep accounts that serve a clear purpose. Consolidate where possible to reduce reporting complexity.

And make sure their financial advisor understands both sides of the Atlantic, because advice designed for one country can be expensive in the other.

The financial advisory industry remains domestic in nature. This creates a blind spot. Most financial advisors operate within just one country with one tax and investment framework.

Advisors in Europe comply with local tax laws and European Union structures.

Advisors in the US design portfolios within IRS rules and the constraints of American securities regulation. 

Their advice works fine inside their own system. The problem arises when a client belongs to two systems at once. 

Americans living in Spain are a good example. A Spanish portfolio may be perfectly suitable for a domestic investor, yet inefficient for a US taxpayer due to PFIC rules.

A US-based investment strategy may be tax-efficient under American rules but misaligned once Spanish taxation is considered.

Investing as an American in Spain doesn’t have to be complicated. Most of the problems expatriates face come from using investment structures that are perfectly-suited to work in one country—but not in the other. 

They can avoid those pitfallsby hiring a financial advisor with dual-sided financial expertise to help them choose investments that make sense on both sides of the Atlantic, and the rest of investing becomes surprisingly straightforward.

Which is exactly how investing should be.

Peter Dougherty is a Financial Planner at BISSAN Wealth Management in Spain. He holds an MBA in finance from Columbia University in New York and an MS in Spanish Taxation (Máster en Fiscalidad y Tributación) from Nebrija University in Spain. He is a European Financial Planner (EFP) in Spain and is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Retirement Planning Counselor® in the United States.

For more information: https://www.financial-planning-in-spain.com

Peter Dougherty

• MBA in finance
• MS in Spanish taxation
• BS in Economics
• European Financial Planner in Spain
• Chartered Retirement Planning Counselor® in U.S.
• Author of two financial planning books
• Certified Financial Planner™ in U.S.

Click here to read more Business & Finance News from The Olive Press.