Form 8621 Tax Allocation for Default Excess Distribution Method

mytaxabc — Sun, 07 Sep 2025 16:10:26 GMT

Here is a case for discussion. Monthly contribution $1000 to a PFIC since 1/1/2020. I became US tax resident in 2024. If all units were sold on 7/1/2025. How to pro rata the gain and allocate them to the pre-residency years? Assume we're using default excess distribution method on Form 8621.

For example, the total gain is $5500, should we allocate the gain as follows since the holding period starts on 1/12020?

2020: $1000

2021: $1000

2022: $1000

2023: $1000

2024: $1000

2025: $500

Only the amount $1000 in 2024 is subject to other income with deferred tax and interest and is taxed at highest rate 37%.

The amount $500 in 2025 is subject to ordinary income with marginal tax rate.

No tax and interest is due for 2020-2023?

Some people think, you need to allocate the total gain $5500 into 2024 and 2025 as follows.

2024: $3667 (5500 / 1.5 * 1) -> punitive tax and interest

2025: $1833 (5500 / 1.5 * 0.5) -> normal tax without interest

I'm looking forward to getting feedback from the tax experts in this community. It would be greatly appreciated if someone could provide the correct answer.

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Form 8621 Tax Allocation for Default Excess Distribution Method