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|Personal Finance editor
© St. Petersburg Times, published December 17, 2000
U.S. income taxes doesn't stop when you cross the border
Q. What happens to an individual retirement account when a person no longer lives, works and pays taxes in this country? May one continue to contribute to it? If a traditional IRA was converted to a Roth IRA in 1998 with taxes to be paid over a four-year period, how are those taxes paid if no income tax forms are filed?
A. It sounds as though you are planning to leave the country and expecting to leave your tax obligations behind. Unfortunately for you, that's not how the law works. U.S. citizens owe U.S. taxes on their worldwide incomes whether they live in the United States or in a foreign country.
Those who are working in a foreign country can exclude up to $76,000 a year in foreign earned income on their U.S. tax returns for 2000. However, those who are self-employed still are expected to pay Social Security tax. In addition, citizens abroad get a deduction or credit for foreign income taxes paid. But these breaks can be claimed only by filing a return; they are not automatic.
The IRA rules will continue to apply to you just like other tax rules. To continue contributing to an IRA, you or your spouse will need earned income. Foreign earned income for which you claimed a tax exclusion does not count for this purpose.
I am sure many U.S. citizens living abroad don't pay taxes they owe. But if the IRS catches up with them, they could be assessed back taxes, interest and penalties. Obviously, the IRS already knows about your Roth conversion and will know about any future IRA distributions. The United States has tax treaties with many foreign countries, allowing for exchange of information in investigations.
Tax experts recommend that U.S. citizens living abroad file U.S. returns even if no taxes are due. Why? Because if you file a return, the IRS only has three years to assess additional taxes, assuming no fraud is involved. If you do not file a return, there is no time limit on the IRS.
It would be a good idea to learn more about the financial and legal aspects of living overseas before you pack your bags.
Q. I bought some stock, but I don't know much about stocks. I am trying to figure out what a stock split is. Say you have 100 shares and it splits 2-for-1. Does that mean you get two shares for each one you hold?
A. Stock splits can be tricky to understand. With a 2-for-1 split, you end up with two shares for every one you had before the split. If you had 100 shares, what typically happens is you keep your 100 old shares and receive 100 additional shares. The new shares are deposited in your brokerage account if that's where you keep your shares or sent to you by mail if you hold your shares in certificate form.
Q. I bought a mutual fund last year that I was led to believe would be like a CD. But my last statement shows a loss of $1,818. Is there any way we could get our money back and cancel this investment? Where can I complain?
A. If you think the investment was misrepresented, discuss the situation with your broker. If your concerns are not resolved quickly, complain to the branch manager and then to the compliance officer at the brokerage company's headquarters. Put your complaint in writing and ask for a written response to be received by a deadline you set. Under no circumstances should you continue doing business with a broker who misrepresents investments.
Your next step is to file a complaint with the Florida Department of Banking and Finance. Call (800) 848-3792 to request a form. That may be the last practical step you can take. Consulting a lawyer is a good idea for those with significant losses, but in your case the potential for recovery is very small, so it probably will be difficult to find a lawyer who will take your case.
Mutual fund companies scored high in DALBAR Inc.'s ratings of financial services Web sites. These ranked as the best of the best: Fidelity Investments (http://www.fidelity.com), Charles Schwab & Co. (http://www.schwab.com), Vanguard Group (http://www.vanguard.com), Invesco (http://www.invesco.com), Strong (http://www.estrong.com), MFS (http://www.mfs.com), T. Rowe Price (http://www.troweprice.com) and Prudential (http://www.prudential.com)
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to firstname.lastname@example.org by e-mail.