At The US Tax Team, one of our key services is providing US tax advice. Part of this process usually involves discussing misconceptions regarding the US tax considerations and implications of a life in New Zealand.
Below, we’ll discuss some of the most common misconceptions we hear, and get into a round of mythbusting:
Myth #1 - KiwiSaver should be avoided at all cost
Almost daily, I speak to US citizens residing in New Zealand, or soon to be US migrants, who’ve read that KiwiSaver should be avoided at all costs for US persons.
Well, whilst KiwiSaver certainly does create some filing complications, these can be worked around.
For most US persons, KiwiSaver requires foreign trust reporting, and sometimes PFIC reporting on an annual basis. However, the actual tax liability as a result of KiwiSaver can be minimal in certain circumstances.
When comparing the cost of filing with the potential contributions from an employer and the NZ government, we usually see a ratio far in favour of having a KiwiSaver, compared to opting out.
It is important to obtain tax advice to ensure that US tax compliance obligations can be minimised.
Myth #2 - There is a $120,000 filing threshold
Whilst discussed in more detail in our article from earlier this year, it can be made categorically clear that there is no such $120,000 US filing threshold. Indeed, in many cases, this myth is a misunderstanding of the Foreign Earned Income Exclusion, which allows a US person to exclude a certain amount of foreign earned income (such as wages) from their taxable income. However, in order to claim this exclusion, a tax return must be filed.
In addition, this exclusion does not apply to unearned income, such as KiwiSaver growth, bank interest or dividends.
Myth #3 - The IRS can’t enforce tax collection here
Though this myth is less common nowadays, we do frequently see some online posts claiming that the IRS has no collection ability outside the United States. The odds of an IRS in person audit of a US taxpayer in New Zealand are incredibly slim, however this doesn’t mean that the IRS has no collection ability in New Zealand.
Through the FATCA legislation signed into place in New Zealand in 2014, the IRS has various means at their disposal to enforce US tax law, through relationships with NZ banks and the IRD.
Myth #4 - Double Taxation
A common fear for US persons is the concept of double taxation.
Fortunately, this is rare. New Zealand and the United States have a comprehensive double taxation agreement in place (DTA), and in most cases, our clients owe no US tax at all.
It is important to keep in mind however, that in certain circumstances, double taxation to both NZ and the US is possible. But, with correct tax planning, this can be prevented.
Obtaining US tax advice early, can prevent costly mistakes to be discovered only later down the line
Myth #5 - US Retirement Schemes and Investments are a safer option
I frequently see non-NZ articles claiming that the only safe bet for US citizens to plan for retirement, or to invest, is to focus on US based retirement schemes and brokerages.
However, these articles rarely take New Zealand tax considerations into account.
For many US or other foreign based retirement schemes and investments, there can be complex and costly NZ tax implications through the FIF regime, along with NZ tax on retirement fund withdrawals.
We work with NZ tax lawyers to ensure that all-round tax advice is provided regarding both NZ and US retirement possibilities, and the potential tax implications.
Summary
It is important to keep in mind that many articles and posts online do not take the NZ financial and tax environment into account. Whilst valid points exist, US tax for US persons in New Zealand is a field of its own, and only by obtaining local, expert advice, can you ensure a tax efficient and compliant situation.
We at The US Tax Team New Zealand offer US tax consulting services, and if you have any tax questions you’d like to address, reach out to us today – info@usatax.nz – 09-242-3445