Investment Coordination for Expats in Los Angeles

Start with what it does not mean. The Reed Corporation is a certified public accounting and tax firm. We are not a registered investment adviser, we do not manage portfolios, we do not sell securities, and we never tell a client what to buy or when to sell. Your own licensed advisor holds that role and keeps it. Investment coordination for expats in Los Angeles means the tax work that sits around the portfolio somebody else manages, so that the decisions your advisor makes do not produce a surprise on your American return.

In practice the work is unglamorous. We read the statements your advisor and your custodians produce, we track cost basis across accounts that do not talk to each other, and we translate the year into the forms it has to live on. Realized gains land on Form 8949 and carry to Schedule D. Interest and ordinary dividends show up on Schedule B. The Net Investment Income Tax gets computed on Form 8960. Publication 550 is the reference that governs how each of those items is characterized.

An expat needs this more than a domestic client does, because the reporting chain breaks the moment an account sits outside the country. An American broker sends a basis figure to the IRS. A Swiss or Singaporean custodian sends nothing, and its year end statement is denominated in a currency the return cannot use. Someone has to rebuild the American tax history of that account by hand, and it is far cheaper to do it as the trades happen than four years later from a stack of PDFs.

The rhythm is simple once it exists. We ask for statements each quarter rather than each April, we keep a running basis schedule by lot, and we send your advisor a short projection of where the year is heading. Nothing in that projection recommends a position. It says what a given move would cost, which is the one input a brokerage screen cannot produce, and it lets a professional make a better version of the decision that was already his to make.

Los Angeles ties raise the stakes. California taxes capital gains as ordinary income with no preferred rate, so a portfolio decision that costs a Miami resident nothing at the state level can meet a bracket reaching past 13 percent for someone the Franchise Tax Board still counts as a resident. The state also refuses to follow several federal provisions, which means the state number rarely matches the federal one.

Here is a worked example. A client living in Amsterdam asks his advisor to rebalance in November, and the trades throw off 12,000 dollars of short term gain. Federally that 12,000 dollars is taxed at ordinary rates and may draw the 3.8 percent investment tax on top. California, if it still claims him, takes its own cut of the same 12,000 dollars. Nobody did anything wrong. The advisor simply had no reason to know the tax picture, and no one asked us before the ticket went in.

The common mistake is treating the advisor and the accountant as separate universes that meet once a year in April. By then every decision is final. Our tax strategy consulting team talks to your advisor while the year is still open, and our individual tax return preparation group carries the result onto the filing. Clients who want that conversation started can request a consultation. Set the connection up once and the November call happens before the trade instead of after it.

By staying firmly on our side of the line. Your advisor decides allocation, security selection, and timing. We supply the tax consequence of the choices under consideration, which is information rather than a recommendation. If your advisor asks what selling a particular lot would cost, we compute the number. We do not answer the question of whether the lot should be sold, because that question belongs to a licensed professional and we are not one. Investment coordination for expats in Los Angeles works precisely because the two roles stay separate.

What the advisor gets from us is arithmetic delivered before it matters. A running basis schedule by lot. A projection of the year to date realized position. An estimate of where adjusted gross income will land, which drives thresholds the advisor cannot see from a brokerage screen. The Net Investment Income Tax on Form 8960 keys off modified adjusted gross income, and a foreign salary that never appears on a statement can push a client over that line without a single trade.

Retirement accounts are the place this coordination pays for itself. An advisor may suggest converting part of a traditional account, and the tax cost of that conversion depends on the whole return rather than on the account alone. Publication 590-A covers contributions and Publication 590-B covers distributions, and the resulting income arrives on Form 1099-R. An expat has a special problem here, since the foreign earned income exclusion removes the very income that would have made a contribution possible in the first place, and a client who excludes everything may have no eligible compensation left. Self-employed clients abroad have other room described in Publication 560.

Charitable timing is another place where a number changes the plan. Giving appreciated shares held more than a year usually beats selling them and donating the cash, because the gain never gets realized and the deduction on Schedule A is measured differently. Whether an expat itemizes at all depends on the rest of a return that the advisor never sees, and a client who takes the standard deduction gets nothing from the gift no matter which asset funded it. We answer that question. Your advisor picks the shares.

Take a worked example. An advisor proposes harvesting a loss in December to offset 12,000 dollars of gains already realized in June. The offset works, the client saves real money, and the trade would have been pointless had we not told the advisor in October that the June gains existed. His statement showed the sale. It did not show what basis we had actually assigned to those shares, and the two figures were not close.

California sits on the outcome again. The state does not follow every federal rule on retirement accounts and it grants no preferred rate on the gains an advisor realizes, so the same December harvest is worth a different amount in Los Angeles than it would be in Austin. The Franchise Tax Board starts from the federal figure and then adds back what it declines to accept.

The common mistake is assuming the advisor already knows. Advisors are good at their work and they see one account. They cannot see the foreign salary, the rental in Highland Park, or the spouse consulting income. Our tax strategy consulting team supplies that missing context, and our bookkeeping group keeps the underlying records in order. Open the channel in the first quarter and every later conversation costs nothing but a short call.

Because basis is the only thing standing between a sale price and a tax bill, and a foreign broker will not supply it. An American custodian reports basis to the IRS and prints it on the statement. A custodian in Zurich or Sydney has no obligation to do either, so the number that determines the tax has to be built and kept by the taxpayer. Publication 551 sets out how basis is determined, and Form 8949 is where the missing figure eventually has to appear.

Currency is the reason this gets strange. Basis is measured in dollars at the moment of purchase, using that day exchange rate, and the sale is measured in dollars at that day rate. Shares bought in London for 10,000 pounds and sold years later for the same 10,000 pounds produced no profit in the mind of the investor and can still produce a taxable gain in dollars, because the pound moved. Nothing on the foreign statement will hint at this. Careful investment coordination for expats in Los Angeles catches it at purchase, when recording the rate takes one line.

Foreign funds carry a separate hazard. A mutual fund or exchange traded fund organized outside the United States is frequently treated as a passive foreign investment company under American law, and that regime is punitive enough that the tax can exceed what a plain gain would have produced. Local advisors abroad recommend these funds constantly because they are the ordinary products of that market. The client hears a reasonable suggestion, buys a perfectly normal European fund, and inherits a reporting problem that follows the position for as long as it is held.

Lot selection is the quiet lever. A holder who wants to sell specific shares has to identify them at the time of sale rather than at the time of filing, and a taxpayer who says nothing gets first in and first out by default. The oldest lot usually carries the lowest basis and the largest gain, which is the opposite of what most people want in a high income year. Wash sale rules described in Publication 550 then disallow a loss if substantially identical shares are repurchased inside the sixty one day window, and an advisor rebalancing two accounts can trigger that without noticing.

Inherited and gifted positions follow their own arithmetic. Property received from an estate generally takes a basis equal to value at the date of death, which can erase decades of appreciation in a single step. A lifetime gift usually carries the donor original basis instead, so the same shares handed over during life can be worth far less after tax than the same shares left in a will. Publication 544 covers how the resulting disposition is characterized once the shares are finally sold.

Here is the worked example. A client sells a position abroad for 40,000 dollars and cannot document what she paid. Her actual basis was 28,000 dollars, which would have produced 12,000 dollars of gain. Without records, the conservative position is a basis of zero, and the reported gain balloons to 40,000 dollars. The difference is not a rounding error, and it exists only because nobody wrote down a purchase price and an exchange rate on a Tuesday in 2016. IRS recordkeeping guidance is unsentimental about who carries that burden.

The common mistake is trusting the broker to remember. Custodians change, accounts transfer, and the basis history goes missing in the handoff more often than anyone admits. Our bookkeeping team keeps a lot level record that survives a custodian change, and our individual return preparation group ties it to the filed schedule each year. Build that record now and a sale ten years out becomes a lookup rather than an argument.

Through a door most people abroad never see coming. The Net Investment Income Tax adds 3.8 percent on the smaller of two figures, net investment income for the year or modified adjusted gross income above a threshold. The thresholds are 200,000 dollars for a single filer and 250,000 dollars for a married couple filing jointly, and they are not indexed for inflation, so they capture more households every year that passes. Form 8960 does the computation and it rides along with Form 1040.

Here is the expat trap. Modified adjusted gross income for this tax adds back the foreign earned income exclusion. A client who excludes a large foreign salary and believes his income is near zero for federal purposes still counts that salary when the threshold is measured. He may owe the 3.8 percent on his dividends and gains while paying almost no regular income tax at all. The result feels wrong to everyone who meets it for the first time, and it is the law.

The second half of the trap is the credit that does not help. Foreign income tax paid abroad can offset regular American income tax. It cannot offset this one. A client paying 45 percent to a European treasury on his salary gets no relief at all against the American investment tax on his portfolio, which is why the number surprises even taxpayers who are already overpaying somewhere else.

What counts as net investment income is broad. Interest reported on Form 1099-INT, dividends on Form 1099-DIV, capital gains carried from Schedule D, rents, royalties, and income from a business the taxpayer does not materially participate in under the rules of Publication 925. Wages are outside it. Self-employment earnings are outside it too, since they already carry their own tax. Planning around those edges is what investment coordination for expats in Los Angeles is for, and none of it involves telling anyone what to own.

The tax also has to be funded during the year. Nobody withholds against it, so a portfolio that throws off a large realized gain in June creates a payment due in June, made through Form 1040-ES rather than settled quietly in April. Publication 505 explains how the installments work and how the safe harbor protects a taxpayer who pays in enough. An expat who lets a whole year of investment tax ride until the return is filed pays interest on the delay for the privilege.

Take a worked example. A married couple in Singapore excludes most of a foreign salary and reports 12,000 dollars of dividends and gains for the year. Add the excluded salary back and their modified adjusted gross income runs 90,000 dollars past the 250,000 dollar threshold. The tax applies to the smaller figure, so the 3.8 percent hits the full 12,000 dollars and costs 456 dollars. Small, annoying, and completely invisible on any brokerage statement they own.

The common mistake is assuming the exclusion protects everything it touches. It handles regular income tax on the salary and nothing else. It does not reach this tax, it does not reach self-employment tax, and it means nothing to California. Our tax strategy consulting team models the threshold before December, and our Form 1040 preparation group carries the result through the return. Run that projection in the third quarter and the December decisions get made with the real number in hand.

Harshly, and the answer turns entirely on whether the state still counts you as a resident. A California resident is taxed on investment income from everywhere, no matter which custodian holds it or which ocean sits between. A true nonresident is taxed only on California source income, and intangible income such as dividends and interest is generally sourced to where the owner lives. That single distinction is worth more than any trading decision a client is likely to make, which is why the Franchise Tax Board examines it so closely.

Residency here does not turn on a day count. California weighs closest connections, and it looks at where the family lives, which state issued the driver license, where the safe deposit box sits, and how long the Los Angeles property stayed titled in the same name. Keeping an empty house in Los Feliz available for your return is one of the loudest facts in that file. Real investment coordination for expats in Los Angeles has to know the residency answer first, because every number downstream depends on it.

One safe harbor exists for people who left under an employment contract. An individual absent from the state for at least 546 consecutive days under such a contract may be treated as a nonresident for that period, subject to caps on days spent back in California and on the amount of intangible income involved. That last cap matters here, because a client with a large portfolio can fail the intangible income limit and lose the harbor even after staying away the full stretch. Someone who moved abroad on his own initiative, with no contract behind it, never had the option in the first place.

Assume the state still claims you. California grants no preferred rate on long term capital gains, so a gain that federal law taxes at 15 or 20 percent meets an ordinary state bracket that reaches above 13 percent at the top. The gentle federal treatment of qualified dividends reported on Form 1099-DIV gets no state echo either. California also runs its own alternative minimum tax alongside the federal version computed on Form 6251, and it declines to follow the federal qualified business income deduction entirely. Holding the portfolio inside a California limited liability company adds the 800 dollar minimum franchise tax and a fee on gross receipts, which surprises clients who set the entity up for reasons that had nothing to do with tax.

Real property is the exception that never goes away. A rental in Highland Park reported on Schedule E stays California source income for a resident of Tokyo, because the building cannot move. Gain on selling it is California source too, reported federally through Form 8949 or Form 4797 depending on how the place was used, with the depreciation history from Publication 946 coming back into the calculation at sale.

Here is the worked example. Two former neighbors both move to Tokyo. One severs his California ties cleanly and the other keeps the empty Los Feliz house. Each realizes 12,000 dollars of gain on a foreign brokerage account. The first owes California nothing on the 12,000 dollars, since intangible gain follows the person. The second owes California ordinary rates on all of it. Same trade, same broker, different residency file.

The common mistake is asking about residency in the year of the sale rather than in the year of the move. By then the facts are set and the file reads however it reads. Our tax strategy consulting team documents the departure while it is happening, and our bookkeeping group keeps the property records ready for a notice. Settle the residency question early and the portfolio conversations that follow get much simpler.