PFIC Tax calculation

[shibupillai]

I became a tax resident in the US in 2017. I have investments in PFICs, that were started back in 2010 or earlier. According to IRS, when I make a sale of the PFIC, I have to allocate the profit to every year since I started the investment. Let's say that I have to allocate the amount to 10 past years.

Since I became a tax resident in the US in 2017, and had no financial activity or presence in the US prior to 2017, do I owe any tax to the US govt for those years (prior to 2017)? Can you guide me to the relevant IRS guidance?

I had purchased Turbotax premier hoping that it will have some information regarding PFIC tax calculations. However, after purchasing it, I realized that it support only US based mutual funds.

[SusanY1]

You are correct that TurboTax does not support PFIC taxations or the reporting form, Form 8621 due to their very complex nature. 

You are only responsible for reporting on PFICs that you have owned since the date you became a U.S. person for tax purposes.  In your case, this sounds like it would be 2017.

Most of the information that you are seeking can be found in the Form 8621 instructions here: Form 8621 Instructions.  However, the instructions aren't particularly user friendly.  

[shibupillai]

I have a followup question.

You said that: "You are only responsible for reporting on PFICs that you have owned since the date you became a U.S. person for tax purposes.  In your case, this sounds like it would be 2017."

Does it mean that I am not responsible for reporting the PFIC that was acquired before I became a US person?

Those PFICs were reported to IRS in my 2018 tax return. However there were no transactions on it. Can I not report those in 2019? Is there a way to inform IRS that those PFICs were acquired before I became a US person?

thanks,

Shibu Pillai.

[SusanY1]

My apologies for not being more clear.  You only report the transactions and income involving the PFICs from the date you became a U.S. person.  You do not have to report any transactions prior to the date that you became a resident for tax purposes. 

PFICs that you purchased prior to becoming a U.S. person are essentially treated as if you acquired them on that date. 

[shibupillai]

Thank you for your response. I need one clarification regarding the income calculation, and one question regarding SIP.

Let's say I purchase a Mutual Fund in 2010, and sold it in 2019 and received a gain of $1000. From what I understand, I have to distribute the gain of $1000 to the date from which I acquired, and calculate the tax.

So, should I allocate $1000 over the 10 years, from 2010 until 2019, ie, $100 per year, and then calculate the tax due for the years since I became a US tax resident (2017)?

Or should I spread the $1000 to 3 years from 2017-2019 at $333 per year, and then compute the tax liability?

SIP is Systematic Investment Plan, where you invest a small fixed amount, say $100 per month, over many years (5, 10, 15 and so on). There are purchases throughout the year. I have some that continued even after I became a US tax resident. For such funds, what is the proper start date? Should I use the date of acquisition for each set of shares, or a specific date, such as 1st of Jan or 31st of Dec?

[shibupillai]

When I complete the PFIC form, there are three amounts that are calculated.

1. The income that should be included with current year's taxable income. 

2. The computed tax for the prior years. The form says "include the amount on Form 1040, line 12a, checkbox 3, enter "1291TAX" in the entry space. 

3. The interest for prior year's tax. The instruction says "include the interest as part of the total for Schedule 2, line 8, checkbox c and enter 1291INT and the amount in the entry space".

How do I enter these items in the Turbotax software?

[shibupillai]

I think I found the answers to my questions, after some frustrating search.

All these can be entered on the "1040/1040SR Worksheet". Click on the Forms icon on the top left corner, and open the worksheet from the list on the left.

#1. Income can be reported in the section for "Schedule 1 - Additional Income and Adjustments", line #8, Other Income. I wrote a description to indicate what this correspond to. This income should also be reported on Form 8938 (Part III, 2 Other Foreign Assets - 2d Other Income), with a reference to "Schedule 1 Line 8".

#2. For Form 1040, Line 12A, go to the forms, select the 1040/1040SR Wks, scroll to the section 12a, enter the tax amount against the line that says "H Additional tax from Form 8621", in the "Tax Smart Worksheet" section right above the line for section 12.

#3, For Schedule 2, go to "Schedule 2 - Additional Taxes" section in the "1040/1040SR Wks", in the "Additional Other Taxes Smart Worksheet", enter the amount against the line "O Section 1291 interest on additional tax from Form 8621".

Hope this will help someone.

--Shibu.

[SusanY1]

Thank you, Shibu! I am sure other users will be grateful for your detailed explanation of how you were able to do this in the TurboTax desktop software. 

[sonix]

Hi @shibupillai ,

This was really useful.  Can you also tell what you figured out for which years to use for distributing the excess distribution --

 Is it from year of purchase to year of selling? Or,

 Is it from year of becoming US tax resident to year of selling?

Did you use any tool to do the calculations as it seems quite daunting?

Also regarding how to report in turboTax --   So the tax needs to be reported using tax worksheet of both "Form 1040 Line 12A" as well as "Schedule 2 -Additional taxes" ? 

Thanks again for the useful post.

[steo85it]

An answer/clarification of these mentioned (still open) points would be very useful for me, too!! Thanks @shibupillai @SusanY1 ! @pk 

[hrmcgregor]

Thank you for your advice, @SusanY1!

[aybiz]

Hi  @shibupillai  and @SusanY1,

Thank you for the very useful information. I am able to fill out the form based on your insights, except the last line on interest charge on the additional tax.  Where did you find the interest rate and explanation on how to calculate the interest?  Thanks!!

[RobertB4444]

@aybiz  Here are the instructions for form 8621.

Here is how to calculate the interest for line 20.

[valleybuy]

thank you for the details, I have few tax foreign saving mutual funds / pension funds around $3000-4000 bought in 2006. Do we need to report these in 8621? I am reading form 8621 is only needed for greater than $25000. Thinking of Reporting in 8938 as foreign interest /dividend and thats about it. Do I need 8621?

[DaveF1006]

it depends. If the combined value of the stock you own is $25,000 or less, you do not need to file a 8621.  However if you are an indirect stockholder, the limit is $5000. This exception applies only to PFIC shareholders who are subject to tax under the tax and interest charge scheme. Please refer to the instructions for the 8621 on page 6.