Looking for Financial Planning for American Expats Living in France? France is, for many American expats a popular retirement destination. France has so much to offer with Museums, cafes, amazing food, and a great work-life balance. There are also great income and tax treaties between the U.S. and France that provide benefits to Americans living in France. In this article, I will dive deeper into those benefits and identify unique strategies that can be used in France.
Qualified and Non-Qualified Investments
There are two types of investments for American expats. Qualified investments are retirement accounts. These are tax-deferred investments like IRA, ROTH IRA, 401K, etc. As an International Financial Advisor, I can service my clients with these accounts under a platform that allows Foreign addresses and residency. As I wrote in a previous article, many investment firms in the U.S. are prohibiting non-U.S. residents to open or keep a brokerage account. This is due to the FACTA regulation and all the burdens placed on financial institutions.
The other type of investment account is Non-Qualified. This type of investment is taxable and doesn’t have the tax-deferral of the qualified one. In a taxable account, there is a concern on taxation of the investment and as an expats you have to be aware of the rules regarding the purchase of mutual funds and ETFs while living abroad. In these accounts, it is important to know that holding a non-U.S. fund, such as an EU-registered fund, creates a costly and burdensome tax preparation. I will elaborate more on this subject below.
There is also an EU regulation known as MiFID II, which prevents EU residents from buying non-EU registered funds like American funds. This really complicates the portfolio allocation of American living in Europe. As an International Advisor, I have access to U.S.-compliant investment portfolios that provide a 1099 form at the end of the year for each account. This allows Americans to invest in their future while being abroad.
IRA contributions while living in France
There is a possibility to fund your retirement while living in France through an IRA contribution. In order to make a contribution, you would need non-excluded Earned income left over after using the Foreign Earned Income Exclusion and the Foreign Housing Exclusion when filing your U.S. taxes. For example, if your French income is $150 000 and you use the Foreign Earned income of $112 000 (2022) and a Standard Deduction of $12 950, your non-excluded taxable income would be $25 050. You could then contribute $6 000 to your IRA or $7 000. If you want to contribute to a ROTH IRA, there is an income limitation. The income limit for 2022 is $144 000.
Taxation for American Expats Living in France
As you probably know, U.S.-connected individuals are always subject to U.S. tax reporting and taxation regardless of their country of residence. France and the U.S. have a special tax treaty and I will give you a few examples. It is possible for American Expats to reduce their French taxable income by deducting contributions made to a U.S. IRA. Also, distributions from U.S. retirement accounts made to a French resident are only taxable in the U.S. It is the case as well for ROTH IRAs. That means that ROTH IRAs distributions stay tax-free in the U.S. and in France.
Americans living in France with French tax liability on U.S. investment income are offered a French tax credit for the same amount of liability. This is a great benefit to the American Expat with investment in the U.S. since it excludes the income from French taxation.
Facts to remember about taxation in France for American expats
- U.S. source pensions and retirement income from IRA, 401K are only taxable in the U.S.
- French source pensions for an American expat in France is not taxed in the U.S.
- IRA contribution possible which reduces your French taxable income
- ROTH IRA contribution available with income limitations
- ROTH IRA tax-free distribution in both the U.S. and France
Types of Investments for American expats to avoid in France
Many French citizens use Assurance vie or Life assurance as a tax-efficient savings vehicle. Unfortunately, this strategy is not available to U.S.-connected individuals because the IRS considers Assurance Vie a Passive Foreign Investment Companies (PFICs). Using PFICs required additional tax forms and burdens on the investor. It will most likely create taxation of the PFICs and it is not favorable. Foreign Mutual funds are considered investing in PFICs. If you own one of these funds you will have to maintain an accurate record of all transactions related to the PFICs, such as cost basis, dividend received, and undistributed income that the PFIC may earn. This is one of the reasons you should not invest in one of them while living abroad.
If you are an American living in France and you don’t have a cross-border financial advisor, I would love to share more about how we can create a financial plan for you and your family that is personalized and specific to your situation. If you want to know more about the strategies mentioned in this article, please don’t hesitate to get in touch.