Beware the passive foreign investment company
Have you considered investing into an investment partnership that invests in PFICs? If so, think twice. The rules for such investments are very onerous, and apply to many foreign investments.
A foreign corporation is a PFIC if 1) 75% or more of its gross income is passive (interest and dividends, for example), or 2) at least 50% of its assets are held for production of passive income. In other words, this applies to most foreign-registered mutual funds, hedge funds and private equity funds.
U.S. investors in PFICs are subject to a highly punitive tax regime. Capital gains and dividends generally are taxed as ordinary income at the highest federal rate (currently 39.6%) regardless of your actual tax bracket and there are various interest charges to increase the effective tax rate well above the highest marginal tax rate.
Just as importantly, there are complex, extensive reporting requirements. Each investment must be reported on a separate Form 8621 each year, regardless of whether the investment is profitable or not, and must be cross referenced to the Form 8938. Delinquent Forms 8938 carry penalties of up to $10,000. These additional reports can be very costly.
Taxpayers should weigh the tax and compliance costs against the expected returns from investments in PFICs (and partnerships that invest in PFICs) before year end, consider avoiding making such investments, and possibly selling any PFIC invests they currently hold.
Dealing with concentrated stock positions
If investments are concentrated in a single stock, you may want to diversify your portfolio. But selling a large number of shares may trigger a significant tax liability. You can soften the blow by selling your shares over time to spread out the tax burden. Or defer the tax by trading for shares in an exchange fund, or donate shares to a charitable remainder trust, which sells the shares tax-free, reinvests the proceeds and pays you a portion of its income.
If you prefer to keep the stock, diversify your portfolio by buying other securities. If you’re short on funds and not averse to some additional risk, you might even buy additional investments on margin, using the stock as collateral.
9th Circuit doubles mortgage interest deduction for unmarried co-owners
Taxpayers are entitled to deduct interest on up to $1 million of acquisition indebtedness and $100,000 in home equity indebtedness on a primary residence and one additional residence. But what happens if unmarried taxpayers own a home together and borrow more than $1.1 million combined?
Recently, the Ninth U.S. Circuit Court of Appeals ruled that the deduction limit applies on a per-taxpayer basis, reversing a 2012 Tax Court decision holding that the limit applies on a per-residence basis. That is, each co-owner may deduct interest on up to $1.1 million of debt.