As the debt-ridden U.S. government takes steps to boost revenues, financial advisors could find their American clients facing higher taxes and stricter filing obligations, according to Terry Ritchie, a registered financial planner and partner with Transition Financial Advisors, Inc. in Phoenix.
Speaking at the Institute of Advanced Financial Planners’ (IAFP) annual symposium in Vancouver on Saturday, Ritchie said financial planners should be aware of the increasingly complex set of rules facing cross-border taxpayers. He explained that many mechanisms being used by the U.S. Internal Revenue Service (IRS) to increase revenues specifically target foreign taxpayers.
“They need money, and it’s not very popular to be taking that off the backs of those who live in the U.S., in their own backyard,” Ritchie said. “[They’d rather] get it from those who live abroad and should effectively be paying tax.”
This means plenty of Canadian residents will be impacted by new rules and initiatives south of the border. Of roughly 7 million American who live or work abroad, it’s estimated that 1 million are in Canada, Ritchie said. These individuals are required to file tax returns with the IRS each year, in addition to their Canadian tax returns.
However, very few taxpayers living abroad actually file returns, according to Ritchie.
In an effort to get more taxpayers to comply with their obligations, the U.S. government has launched several voluntary disclosure initiatives that encourage Americans living abroad to come forward and catch up with their filing obligations, with reduced penalties.
The latest such program came into effect on Sept. 1st. Under the program, taxpayers are classified as either high compliance risk or low compliance risk, depending on a variety of factors. Based on the criteria that the IRS has laid out, Ritchie expects that many Americans living in Canada will be considered high risk, and will therefore be subject to greater scrutiny from the IRS.
“I think that many of our clients will not be low risk; they’ll be high risk,” he said.
At the same time, new legislation known as Foreign Account Tax Compliance Act (FATCA), also promises to beef up the penalties and reporting requirements for U.S. citizens in Canada, with respect to their investment accounts.
And, the upcoming U.S. presidential election could lead to further changes in the tax obligations of Americans living in Canada, Ritchie added. While another term for President Barack Obama would be great for businesses generally, he said, it could also lead to a greater tax burden for Americans living abroad.
“If Obama wins,” he said, “life is going to be really complicated for a number of our clients who live in Canada.” Ritchie urges advisors with American clients to carefully consider the implications of the election results on those clients.
The complex tax planning needs of these clients presents a key opportunity for financial planners, Ritchie said. He said he regularly gets approached by prospective clients seeking advice in this area.
“It’s a great niche to get involved in,” he said. “There’s a lot of folks who are really confused.”
Beyond the realm of tax planning, many U.S. citizens in Canada also need help with aspects of their finances such as estate planning, investing and insurance planning, all of which have considerations that are unique to Americans living abroad.
“There’s tons and tons of work that has to be done here,” Ritchie said.