A resurgence in international business travel could trigger tax challenges for financial advisors. According to a Mercer report, the majority of mobility leaders expect business travel across the globe to either increase or remain steady in 2025. For financial advisors, an uptick in mobile work could complicate clients’ portfolio performances. Too often, investors—and advisors—overlook cross-border tax obligations. This can lead to double taxation, unfavorable tax situations, penalties on investments and frustrated investors.
To avoid tax penalties and a deflated client portfolio, financial advisors need to understand the risks of cross-border taxes as well as their potential financial advantages. Here are some of the most common cross-border tax challenges financial advisors may encounter, along with tips to keep clients from spoiling their gains with tax setbacks.
How Cross-Border Tax Challenges Blindside Investors
Cross-border tax challenges may have slipped to the back of many financial advisors’ minds during the pandemic. That’s because travel halted, and international corporations asked employees to work from home. But business travel has picked back up since then, and spending is expected to hit a record $1.63 trillion this year.
For financial advisors, an increase of mobility—or even a steady pace—heightens their clients’ tax risks. Here are a few tax challenges financial advisors need to be aware of if their clients are investing while moving across borders:
Losses Due to Uninformed Tax Decisions
A seemingly wise investment’s return can be wiped out if a financial advisor overlooks tax implications. For instance, if a U.S. citizen opens a foreign bank account or accounts with more than $10,000 in aggregate at any point in time, they need to report the accounts via FinCEN Form 114, Report of Foreign Bank Account Forms. If the failure to report FinCEN Form 114 was unintentional, they could face a penalty of $10,000 per required report. Willful violations, on the other hand, carry significantly higher penalties. Here, civil penalties equal to the greater of $100,000 or 50% of the balance in the account can be assessed. These financial penalties are subject to annual adjustments for inflation. In addition, willful violations can carry potential criminal penalties of up to $500,000 and 10 years in prison.
Similarly, investments in foreign mutual funds can backfire because an investment that was designed for preferential capital gains treatment may result in gains being taxed at top marginal tax rates in the United States. In addition to unfavorable tax rates, foreign mutual funds need to be reported on Form 8621, adding to the complex reporting requirements. These are just a few examples, among many, where not knowing cross-border tax rules can set back an investor.
Missed Opportunities
Financial advisors who understand cross-border tax can use that knowledge to make more profitable investing decisions. For example, in a common scenario, non-US citizens will buy property in the U.S., thinking they’ll only have to worry about their home country’s taxes. But the IRS withholds 15% of the selling price for non-resident property sellers instead of withholding taxes only on the gains realized. This means non-residents may not see that money for a full year or more.
If financial advisors understand the IRS withholding rules beforehand, they may apply for a withholding exemption certificate Form 8288 (B) to prevent 15% of the sale amount from being withheld by the seller. There are countless similar scenarios where investors miss opportunities because they don’t understand international tax obligations.
Tax Penalties and Lost Business
Large tax penalties can overshadow an investor’s portfolio performance. If an investment client is hit with an unexpected tax bill, it can cut into their investment gains and cause them to (unfairly) blame their financial advisor.
Common Tax Mistakes Financial Advisors Can Avoid
Looking to understand the biggest cross-border tax setbacks? Here are a few common mistakes that financial advisors and their clients often make:
1. Not Understanding Global Tax Laws
Oftentimes an investment will make good sense in one country but loses value if the employee moves to a new country. For example, 401(k) withdrawals may be subject to higher taxes if the taxpayer chooses to retire in a country that taxes U.S. retirement withdrawals at higher tax rates or does not recognize the U.S. tax free treatment for a rollover of a 401(k) account into an IRA.
The bottom line? Every country has its own tax laws. If financial advisors and their clients don’t understand all the rules that apply to their investments, it’s impossible to secure tax advantages.
2. Not Realizing the U.S. Taxes Global Income
Most people don’t realize that the U.S. taxes residents on their worldwide income. This means if a client moves to the U.S. and has investments in another country, they need to pay taxes on those foreign investments. For instance, if a client owns assets in the United Kingdom, moves to the U.S., and becomes a U.S. tax resident, they may need to pay U.S. taxes on income or gains related to the U.K.-based assets. In some cases, it would be an advantage to sell an investment prior to moving (especially if it is income producing) rather than paying extra tax in the U.S. or filing multiple reporting forms to be compliant with U.S. tax laws. In short, if clients don’t enact a proactive tax plan before moving, it can end up eating into their investments.
3. Overlooking Reporting Obligations
Too often, investors either don’t realize they need to report earnings in a country or act on outdated information. In either case, misreporting or failing to report can wipe out an investor’s returns.
As an illustration, imagine a client who is a non-resident of the U.S., moves there, becomes a tax resident and receives a gift or inheritance of $120,000 from their non-resident relatives. The taxpayer may want to invest that money in the United States. However, they may not realize they need to file a special form, Form 3520, to report the gift or inheritance received from a non-US resident taxpayer in excess of $100,000. If they don’t report, they may end up facing severe penalties that could easily derail their investment strategy.
How to Protect Investors from Unwanted Tax Surprises
There’s no one strategy that will cover every investor’s situation. Every country has a different set of tax rules, tax treaties and reporting obligations, making it impossible to create a one-size-fits-all solution for international employees. However, there are a few tips financial advisors can follow to help their clients avoid penalties and protect their investments from tax setbacks:
Talk to experienced professionals in both countries.
Most tax professionals understand the reporting obligations for their own country but may not feel as confident navigating foreign tax laws. To prevent double taxation, many countries have tax treaties in place. That’s why consulting with experienced tax professionals in both the investor’s home country and their destination country is essential.
When making investments, it’s important to understand how taxes will impact every country where the investor works, lives or holds assets. With this knowledge, it becomes easier to create an investment plan that maximizes tax advantages.
Overall, financial advisors can protect against major tax setbacks by understanding the global reporting and financial implications for their clients’ cross-border investments. By knowing the risks involved and following a few best practices, they can make more tax-advantageous investment decisions, avoid surprise tax penalties and help guide clients to a less stressful investing experience.
