Foreign mutual funds & 8621

Forum|Forum|1 year ago
January 2, 2025
2 replies
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Hi,

I have mutual fund investments in India (no dividend) that have been held prior to me moving to the US. There are no distributions from those mutual funds, so no income. There have been no investments made into those after moving to the US.

One of the tax consultants whom i consulted asked me to enter these as 'Custodial accounts' . While these mutual fund investments may be used for my child's education in the future, these MFs do not have my child's name in them as they were opened when I lived in India.

My questions are

1. Is it right to file these as 'Custodial accounts' ?

2. Is there unrealized gains that I need to pay tax on though all of these mutual funds were opened when I was not a US tax person ?

Opus 17

Employee

If you are a US person and you control certain foreign financial accounts worth more than $10,000, you must report them using the "FBAR" report. This is a reporting requirement only, no tax is owed. I don't know if a mutual fund must be reported, you can look here for the rules and a link to the report.

https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar

As far as taxes are concerned, you pay US tax according to US law. US law does not tax unrealized gains.

Now, that can get a little tricky depending on what you own and how it works. For example, dividends may be taxed as ordinary income or as capital gains. And if the dividends are reinvested to buy more shares, that can be a taxable event that increases your basis in the fund, or it could be a non-taxable event that does not raise your basis (but results in more tax when you withdraw because you have more shares with a lower average basis). So I don't feel 100% confident in saying you owe nothing until you withdraw funds.

I don't think your advisor is correct about calling these custodial accounts.

I also don't see where form 8621 comes into play.

@pk12_2

pk12_2

Employee

@iceman321 , generally agreeing with my colleague ( @Opus 17 ) as to the tax handling of Mutual Funds in general. However, for foreign Mutual Funds there may be another wrinkle, depending on exact facts. This is because these are often ( based on characteristics of the entity and investment pattern ) classified as PFIC ( Passive Foreign Investment Company ) with a whole bunch of generally onerous / punishing taxing regime. That is where the form 8621 comes in. You also then have to choose mark-to-market or backward allocation of imputed gain over the holding period.

For a more detailed and focused answer on this ( and as applicable to you specifically ) you will have to provide more details about the fund, where constituted etc. etc. If you are uncomfortable detailing in this public forum, you can choose to use PM ( but again NO Personally Identifiable Information).

I also agree with @Opus 17 that this is not a "custodial account" for purposes of FBAR ( form 114 at FinCen.gov ) or FATCA ( form 8938 along with your return ).

Another issue to be aware of is even in mark-to-market, your foreign taxes associated with this imputed income kind of gets in trouble -- no foreign taxes to offset US taxes and similar issue if you choose to use the delayed / allocated actual income and taxes thereon.

Depending on the amounts involved , you may want to divest this and/or use the services of a tax professional familiar with PFIC.

Is there more I can do for you /

Namaste ji