Health Insurance is a hot topic for many foreigners in China as people look to protect themselves and spread the costs of hefty medical bills. International hospitals in China are now some of the most expensive in the world. Take this into account when family planning in Beijing.

Your need for insurance does not start when you have your first baby, it actually starts at least a year before.

Much can be written about this subject so in this blog I will focus on the key areas of family policies. The first point to note here is that your need for insurance does not start when you have your first baby, it actually starts at least a year before.

Maternity Cover
Most policies will enforce a waiting period before you will be covered for maternity related claims and this period is usually 12 months. Thus, the policy needs to be in place 12 months before you can claim for pre-natal packages, scans, delivery and so forth. Of course this pre-planning is not always possible but it will likely save you thousands of dollars if followed.

Most policies do not have an unlimited amount that you can claim in maternity expenses. There will be upper limit caps, most often between USD7,500 to USD20,000 per pregnancy.You should first decide on which hospital you intend to use for your pregnancy and research how much their packages cost. You can then choose a policy that will have an upper limit that will accommodate the hospital and package that you choose. Here in Beijing you will find that many of the full maternity packages at international hospitals are approaching the USD10,000 mark, and perhaps not coincidentally the most common upper limit on a policy is USD10,000. If you want to be covered for anything outside of a ‘normal pregnancy’ you may need a higher upper limit and thus an increase in your monthly premium.

When maternity cover is included the insurers are expecting you to use it, so the monthly premiums reflect this fact as the insurers look to protect themselves before a big claim is made. If you are cost focused, then a great way to substantially reduce your premiums is to remove ‘Luxury Providers’ from the policy. Many insurers will group the most expensive hospitals into this category, so if you are happy to use a more local style hospital then you may find your premiums will drop by up to 40%. If you do your research you will find that many of these local hospitals have a good standard of care and often have VIP departments that speak English.

Family Policies
If you are looking to insure more than one person on a policy then you need to consider whether a family policy is right for you. If you try to get an insurance quote with at least one parent and at least one child on the policy then usually you will be automatically given a family policy quote. This is a double edged sword as there are specific benefits on these polices such as new born cover and child related wellness benefits that most people want, but you may end up paying for benefits that you will never use.

I will give you two common scenarios that I regularly come across to highlight this issue. Firstly, there is the couple who are planning to have their first child. For those who are not on expat packages, this is often the first time they have decided to take out a family health insurance policy. It would seem logical to obtain a quote to cover both persons ensuring that maternity is included. The quote that you will receive will cover both persons to the same level and the premium will reflect this. The upshot of this is that the male on the policy is effectively covered for maternity as well, a benefit that would be very impressive if he was ever able to use. It may well be more beneficial and cost effective to have two separate polices with the woman having a more comprehensive cover to include maternity but for the man to have a separate policy focusing on inpatient and A & E cover.

The second common scenario is for two parents with one or more children to be insured. A similar consideration should be given as to whether the man really wants to be on the same policy as the rest of the family if you are looking to save money. The benefits that the children get on the policy are exactly the same regardless of whether there are one or two parents on the same policy. Maternity cover will usually come as standard as there are children on the policy, so it may well be cheaper to insure the mother and the children on one policy and the father on another separate policy.

I am regularly asked whether children can be insured on a policy on their own. Generally speaking, children under the age of 16 cannot be insured on their own as they do not have legal capacity to enter into the contract so at least one parent will also have to be on the policy.

Heath Insurance in China in 2016
The landscape for insuring expats in China is rapidly changing and unfortunately this is driving prices higher year on year. Many insurers now group China, Hong Kong and Singapore into a higher premium category than ever before as International hospitals start to reach near USA level prices.

I have noticed that some Insurance companies are starting to remove Direct Billing from top international hospitals in a bid to reduce regular claims, so make sure you check that your hospital of choice has direct billing set up with the insurer before taking out a policy. If not,you will be paying cash and filling out forms for each claim, which is not much fun.

As an overview there are three key factors to a health insurance policy: price, cover and will the insurer actually pay out. The price and cover are the two that most people focus on as they are easy to compare and contrast between different insurers and different policies. Whether the insurer will actually pay out is grossly overlooked and you should always remember that with insurance you usually get what you pay for as it is such a competitive market. If you see a policy that has the same benefits as ten other competitors but is 30 percent cheaper, then you need to really consider where they are making their savings.A common criticism that is leveled at the China domestic insurance market is that the prices are cheap but the insurers willingness to pay on claims is questionable.

Finally, you can take insurance out online or through a professional broker or financial adviser. The prices are always exactly the same whether you go direct to the insurance company or through a third party broker, as brokers and advisers are paid a flat commission from the insurance company.Always the best advice is to talk to an independent professional as they will be able to tailor the correct policy and insurer to suite your specific needs.

Photo: hubspot.net, Quinn Dombrowski (Flickr)

Most people learn more about money skills from their parents than from any other source. So, your kids will be learning about money from watching and listening to you. In the first part, we looked at tips for younger children and here are some top tips for older children.

Real World Situations
As your Child gets older, a coin jar or simple games may become less inspiring and they will likely be more stimulated by real world financial situations. Start to bring them to the bank with you and have them understand why you are going there. It is a good idea to start to talk openly about the family finances, not exact salaries, but the cost of holidays, pension savings and things of a general nature. Here are 3 top tips for older children:

1.Open a Savings Account
Going to the bank and making deposits is a great start to learning about saving. Although interest rates are low, the point is to regularly contribute to the account and save for a long-term goal. At most banks, a savings account can be opened for free for a minor. If children under 18 open an account at the bank their parents use, they may get a break on fees. However, some banks require account holders to maintain an average monthly balance or make automatic deposits to avoid fees.

2.Teach Them About Compound Interest
Saving money is a smart way to learn the algebraic lesson of compound interest. Money grows over time in a savings account, for example, and can be a good motivator to save. If you really want your children to see their money grow, have them invest in a mutual fund that should increase in value faster than a savings account. Warn them that mutual funds can drop in value, and go to your broker’s website to show them graphs of how mutual funds you own have done over the years. Remind them that their money is in a long race, not a short one.

3.Let Your Child Make Mistakes
Sometimes the best lesson comes from a poor decision, especially when your child is young and the financial loss won’t be so great.

When my colleagues son got his birthday and Christmas money last year, he rushed out and spent it without thinking. After spending most of it, he realized that he didn’t have enough to get the video game he wanted. He wished he had thought about it first before he spent it. But now, he saves up for the things he really wants and thinks before he spends.

Becoming Financially Independent
Becoming financially independent usually has two interpretations. Firstly, it is your child becoming financially independent from you as parents. Secondly, it is achieving financial independence to the point where you no longer have to work if you do not want to. The latter is an extensive subject so we will just consider the former.

If you think that the “Bank of Mum and Dad” will be closed for business once your child graduates and enters the world of work then think again. As of 2014, 59 percent of parents provide financial support to their adult children who are no longer at work. The “Chadult” generation has emerged over the last 20 years and parents on average now do not expect their children to become financially independent until the age of 38. If you want your child to become independent quicker, then follow these 3 top tips:

1.Set Specific Goals
Goals define what financial independence will look like for each of us. Goals, particularly specific goals written out with timetables, can motivate us to initiate and stick with the other keys to financial independence.

2.Invest
To build financial independence, your child will need to earn a reasonable return on their savings. A savings account alone is not enough. Invest in stocks, bonds, and other assets that involve an acceptable level of risk. Yes, there’s the risk of some loss of principal, but understand that investing is for long term goals that are at least five years away. When they are closer to reaching their goals, shift the invested funds into those lower earning but less risky savings accounts and money markets.

3.Stay Invested!
One of the big mistakes many investors make is waiting to invest until the market is really strong, and then bailing out when it sinks. In short, they buy high and sell low. Get in and stay in, and make adjustments if necessary. Avoid the temptation to dip into long term savings for short term pleasures, your child will thank you in the long run for your guidance!
 

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photo: Socialmoms.com

It always surprises me how little we are educated about money and finance whilst we are at school, particularly as the need for a solid understanding of these areas is a key life skill. Only in the last 2 years has the UK introduced formal curriculum in this area to help prepare kids for the daunting world of credit cards, loans, mortgages, hire purchase agreements, pensions, and much more.

Most people learn more about money skills from their parents than from any other source. So, your kids will be learning about money from watching and listening to you. It is a good idea to encourage children to save from an early age, so here are some top tips to help them along the way. This is the first part of a two part series, the second looks at older children and finally independence in kids.

Money does not grow on trees
It is important that children have an understanding about the value of money. You can help them achieve this by giving them pocket money when they help around the house. It is also important that they understand that they may need to make choices when they spend their money. Here are 3 top tips for young children:

1.Use Different Envelopes/Jars
You may be familiar with the envelope budgeting system for your own money, but this can also work for children. On either envelopes or jars, have your child draw pictures of what he or she wants. You may also want to help your child understand that some items will take longer than others to save for.

For example, the short-term savings container might have a picture of a specific toy, while the long-term container might have a picture of a trip to Disneyland. Teach your child to set aside money for short-term and long-term goals, and have another container or envelope for spending on everyday items.

2. Match Contributions
However your children get money, from doing chores for an allowance or getting cash for their birthdays, match however much money they put aside.

You can also use physical rewards or treats instead of actual money as a saving incentive. For example, if your child doesn’t spend any money for a certain amount of time, provide a small reward or treat. You can also make the prizes better the longer your child saves. Try stickers, an extra 1/2 hour of video games, toys, or whatever motivates your child.

3.Play Games
Board games such as Monopoly and The Game of Life can teach kids how to spend and earn money, but they don’t do a good job of teaching them to be savers. Instead, try online games such as Save! a free downloadable game from Mass Mutual Financial Group that can teach them how to separate wants from needs when it comes to spending. The game leads players through a 3D fantasy world where they collect virtual money while trying to avoid impulse buys called “iWannas,” more likely known to your children as candy, soda and toys.

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

There is no one in the world who can truthfully profess to having the perfect investment strategy. Every day we tune into financial based media such as Bloomberg and see numerous industry “professionals” completely disagree about the same topics. However, there are some people who have it more right than others and Warren Buffet is near the top of that list.

Buffet recently described how USD 40 invested in Coca Cola in 1919 would now be worth USD 11,000,000. This is obviously an incredible statistic with the added benefit of nearly one hundred years of hindsight, but what Buffet is teaching us is that patience is the key to investing. No one could have predicted the global dominance that Coca Cola would build over last century. Fewer still would have weathered the Great Depression, another World War or even the market peaks where it looked like a good time to sell. The point Buffet is making is that it is dangerous to try and time the markets and worse still to let your emotions guide investment decisions. The example shows us that with a good company you can figure out what is going to happen, not when it is going to happen.

One hundred years is a long time to achieve a return, so let’s reduce this to the past fifteen years. Here are three well known companies of the 21st century:

• Monster Energy – manufacturer of energy soft drinks
• Deckers Outdoor Corp – owner of the Ugg boot brand
• Gilead Sciences – a pharmaceutical company that has produced revolutionary drugs for HIV and Hepatitis-C

If we had invested USD 1,000 in each of these companies on January 1, 2000, our portfolio would now be worth USD 648,781. That’s a total return of over 20,000 percent and an average annual return of 36.38 percent. What’s more, this includes the 2007/8 Global Financial Crisis, the worst fall in markets since The Great Depression. It sounds pretty good, but of course, there are some obvious problems with this example.

For a start it is easy to pick winners when we look backwards. In reality who could have predicted that the world would take to consuming huge quantities of caffeine laden sports drinks whilst wearing sheepskin boots. Even if we could predict the right industry, how would we then know which company in that industry to buy? There are many pharmaceutical companies that would have lost all of your investment over 15 years chasing the same dream as Gilead.

What this example really highlights is the risk that comes with picking individual stocks. Yes, the rewards can be significant, but so can the losses. In this regard it is no different to gambling your hard earned savings on the Roulette table. For this reason we do not pick individual stocks for ourselves or our clients. Instead, we use actively managed investment funds that are broadly diversified geographically and among asset classes. The key words hear are actively managed and they are often misunderstood by investors.

Our investment managers are selecting those companies they believe could be the next Coca Cola or Monster Energy. Do they always get it correct, of course not, but they are spreading that risk across hundreds of different companies. Furthermore, each of our clients portfolios will typically hold 5-10 different investment funds, this means they hold positions in hundreds and hundreds of companies. The overall effect is an enormous reduction in risk and a higher chance of consistent returns over the long-term. But, not all investment managers are created equal, as with anything there are good and bad ones.

We monitor tens of thousands of investment fund managers around the world and when judging them we use a very strict set of criteria. Two of the most important factors we consider are:

Longevity
The most important factor when judging a managers performance is to look at how long and how consistently they have delivered their returns. Looking at a track record over a short time frame tells us nothing. To demonstrate this point consider the Franklin UK Smaller Companies fund (ISIN: GB00B3VGKJ64). This fund has delivered average annual returns of 26.07 percent over the past three years putting it in the top 10 percent of all UK Small-Cap Equity funds. However, over ten years its performance is so poor it is in the bottom 10 percent of all UK Small-Cap Equity funds. Investing should never be about short-term gains so the second statistic is the important one.

Capital Preservation
Volatility erodes investment performance; an investment manager must be able to manage risk and preserve the capital that they manage. In our earlier example, Deckers Outdoor Corp provided an average annual return of 24.26 percent over ten years. But its deviation above and below this average is over 50 percent. We cannot tolerate this kind of fluctuation and we would not expect our investors to either.

There is a lot written about how investors should buy indexes instead of actively managed funds. This is an unwise investment strategy for a number of reasons. The first is that many indexes are very poorly diversified, for instance the Dow Jones contains only thirty companies. More important than their diversification, however, is their performance. To illustrate this look at the returns of two of the world’s major indexes:

• FTSE100 in the UK – 10 year average annual return 2.46%
• S&P500 in the USA – 10 year average annual return 5.65%

Now, it is important to understand, that there are many active investment managers that have performed the same, or worse, than these examples. But there is also a group of investment managers who have consistently delivered returns far above these indexes. This out performance has not occurred over the past few years, it has been consistently demonstrated for 10, 15, 20 years and often even longer.What most people miss is how important small differences in performance can be. They might say if I can get 5.65 percent in the S&P500, isn’t that enough? Again, let’s look at the numbers:

• USD 100,000 growing annually at 5.65% for 20 years would grow to USD 308,745
• USD 100,000 growing annually at 10% for 20 years would grow to USD 732,807

Average annual returns of 10 percent are attainable and they do not have to come with high risks. It is possible to achieve this return and double your gains with the right selection of investment managers. In many cases the correct selection of assets not only improves performance, it also reduces risk.

Investing should not be exciting or sexy, it should be consistent and reliable. When we plan our futures we need to be able to make reasonable assumptions about how our assets will perform. This cannot be achieved if we are constantly on the hunt for the next Ugg boot because who knows how much money we’ll lose trying to find it.

A well managed portfolio, spread across a range of high quality investment fund managers, will deliver the returns and capital preservation that you need to achieve any financial goal within a reasonable time frame.

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photos: Tax Credits, Alan Cleaver (flickr)

There are many Australian expatriates who live and work abroad. As with most expatriates, when they leave Australia and become non-resident for tax purposes they open up a world of new investment opportunities, which can present significant benefits.

However, like many expatriates they are likely to return home one day and therefore it is essential to have a flexible financial plan that takes this into account. In recent years, there have been some significant changes to the tax laws in Australia that have a big impact on how expatriates can plan their finances.

A Bit of History...
Until 2010, Australian tax residents with offshore investments were generally required to declare, and pay tax, on these investments on an annual basis. This was covered by the Foreign Investment Fund (FIF) rules. However, in 2010 these rules were repealed and replaced with the Foreign Accumulation Fund (FAF) rules.

The FAF rules dramatically changed the scope of which offshore investments were subject to taxation when an Australian returned home. One of the most important changes introduced is that foreign life insurance policies are now treated the same as domestic life insurance. This means that they are not reportable or taxed on an annual basis.

This opens the door to a powerful financial planning tool for Australian expatriates. Foreign life insurance investments generally have a wider investment choice than their domestic counterparts. This greater choice offers the chance for better growth and better financial planning.

Why Use Life Insurance as an Investment Vehicle?
Outside of the traditional form of life insurance, whereby a policyholder pays a premium to be covered for a large amount of money in the event of their death, there are also various investment platforms offered by life insurance companies.

It is very common to use life insurance as an investment platform because it provides some useful financial planning benefits.

Capital Accumulation – Gross Roll Up

International life insurance products are generally not subject to tax while the investments accumulate in value. This means your savings can grow free of tax, with the exception of certain withholding taxes.

Switching Funds

As your investments grow, you may wish to switch funds to realise gains and invest in new opportunities. Buying and selling funds directly can create a liability to taxation on gains, but by using life assurance products, you should be able to avoid this and make decisions driven by investment performance rather than tax considerations.

International life insurance also offers investors the following advantages:

•    The potential for tax-free withdrawals later in life (more on this below)
•    Benefits can be paid to spouses and next of kin free from taxation
•    A wide investment choice which can include almost any tradable asset in the
world
•    Multiple currency options

“From year 11 onwards any withdrawals taken from the life insurance investment are not subject to any taxation.”

Tax-free Withdrawals from Life Insurance Policies
A day will come when you will want to withdraw money from your investments to supplement your income, during your retirement for instance.

For the first 8 years of a life insurance investment, Australian tax residents can be subject to taxation on withdrawals they make at their marginal rate:

•  AUD  0 – 18,200  = 0%
•  AUD  18,201 – 37,000 = 19%
•  AUD  37,001 – 80,000  = 32.5%
•  AUD  80,001 – 180,000 = 37%
•   AUD 180,001+  = 47%

At this point there is no real benefit to having a life insurance investment over any other kind of investment. However, from year 9 onwards the story becomes more interesting.

In year 9, only two-thirds of the gains are taxable at your marginal rate. In year 10, only one-third of the gain is taxable. Finally, from year 11 onwards any withdrawals taken from the life insurance investment are not subject to any taxation.

There are, of course, careful rules that you must comply with in order to receive this benefit and we suggest you always seek professional help from a financial advisor. You should be aware that it is not possible to add significantly large sums to an existing investment and still avoid a possible tax charge after ten years. Rules exist that are designed to restart the ten-year period from the start of the policy year in which the new investment is made.

Nevertheless, for anyone who has long-term financial planning goals, which we all should have, this is a very powerful way of creating a tax-free income later in life.

How to Calculate the Taxation of Life Insurance
In accordance with Section 26AH (6) ITAA 1936, the owner of an international life insurance policy will be assessed for income tax on chargeable bonuses.

To calculate the amount of bonus assessable for income tax the following formula is used:
Relevant amount (bonus) = (A/B) * [(B+C) – (D+E)]

A = the amount withdrawn from the policy
B = surrender value immediately prior to the withdrawal sum of any
C = earlier amounts paid out
D = total gross premiums before charges paid to the date of withdrawal
E = sum of any previous relevant amounts
(chargeable profits)

An Example…
Initial Investment = AUD 100,000

Surrender Value at time of withdrawal = AUD 150,000

AUD 25,000 Withdrawal in Year 8

Relevant amount = AUD (25,000/150,000)*[(150,000 + 0) – (100,000 + 0)] = 8,333

AUD 25,000 Withdrawal in Year 9

Of the AUD 8,333 calculated above only two-thirds is assessable = AUD 5,555

AUD 25,000 Withdrawal in Year 10

Of the AUD 8,333 calculated above only one-third is assessable = AUD 2,777

Year 11 onwards

Any amount received as bonus will not be assessable for income tax.

As you can see from this simple example, the use of life insurance based investments can offer Australian’s some significant long-term tax benefits. It is therefore, a very worthwhile tool to consider for your financial planning needs such as retirement.

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photo: Simon Cunningham (flickr)

This is a topic which is regularly discussed amongst the expat groups in China. China has currency regulations which stop the free movement of renminbi around the world. These kinds of regulations are designed to control a countries capital markets and to a certain extent stop the rich elite making their millions and leaving the country. For us expats who work here and do not fall into the category of being a rich native or a foreign speculator, then why should we fall victim of these rules?

For those of us who work here legally and pay the correct taxes the answer is “we don’t”. Contrary to popular belief, there are no daily or annual limits on the amount of money that can be transferred out of China. In order to facilitate this transaction you will need to go to your bank and prove to them that this money was earned legally and that the correct taxes have been paid. For most of us this will be satisfied by producing the following documents:

1. Valid identification documents
2. Work Permit
3. Valid employment contract
4. Payroll
5. Tax bills

These are all relatively simple documents to obtain and you should be able to get your HR department to assist you with collecting them. Your bank will then make an application to the government regulator, known as S.A.F.E (The State Administration of Foreign Exchange) and if they feel that everything is in order then they will release your funds for foreign transfer.

Furthermore, all foreign nationals living in China are allowed to remove USD 500 per day without needing to provide any documentation, proof of ownership or records of taxes being paid.

The real problems with the removal of funds from China are for the people who work in the grey areas of the Chinese economy, which is still a considerable amount of expats. There are solutions available for people in this category but they are at best risqué and at worst illegal.

The simplest and most common way is to send your bank card/s home and have a friend or loved one withdraw the money from an ATM in your native currency. You are also allowed to leave China with cash in your pockets at the exit border points and this has been reported to be up to USD 10,000.

There are a multitude of other ways that people try to circumvent the regulations. Some people buy a resaleable asset to take back home, such as a piece of art. Others will ask their friends to transfer money for them. This is very common for those with Chinese friends as they are able to transfer up to USD 50,000 without any supporting documentation.

All of the methods detailed in the above paragraph are not advisable and skirt the laws of legality, or outright break them. Through simple planning with a tax accountant or financial advisor all of them can be avoided and dealt with in a far more effective manner.

The Solution
There are foreign investment companies that will accept China UnionPay as a form of payment. The products are generally savings plans and investment platforms, which give the investor access to a broad range of mutual funds and ETF’s (Exchange Traded Funds – low cost investment vehicles). These accounts are very cost effective and remove much of the hassle with foreign currency transfers. In the eight years I have lived in China, these have to be by far the most convenient vehicle I have seen for expats to transfer money and grow their assets for the future. It is important to note that these accounts cannot just be used to remove the money from China one day and then withdrawn the following day outside of China. There are restrictions and time frames which need to be understood, and professional advice should be sought.

Why should I transfer my money and what do I do with it?
As a financial planner there are usually two questions whichI am asked regarding the topic of removing money from China.

1. Why should I send my money home? I can invest it in the Chinese stock market and make millions.
2. What should I do with my money when I have sent it home?

Let me tackle question 1 first. We have all come across stories of Chinese people making millions on the stock exchange. We see rich kids driving Lamborghinis who can barely see over the steering wheel and many of us have thought to ourselves “I would like a piece of the Chinese dream”. However, as expats we are only allowed to invest in B class shares in China. A class are reserved for Chinese and institutional investors.

Secondly, if you are worried about removing money from China then why would you attempt to grow this money and increase the size of your problem? The Chinese stock market is incredibly volatile and for every story you hear of someone making lots of money, there is someone losing the same amount but doing it in a far quieter fashion.

Can you honestly pick stocks and shares successfully and if you can why don’t you quit your day job and work for yourself or knock on the door of Goldman Sachs or JP Morgan and ask for a six-figure salary.

As for question 2, I will answer in my next blog.

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photo: Got credit (flickr)

In Part One, we looked at the rules US expatriates have to follow when filing their taxes.  In Part Two, we then looked at the specific process of filing the most common forms which need to be completed.  In the third and final installment of our series, we will take a look at what to do with the dollars you have left over after you have filed.

As we have discussed in the previous posts, the first USD 100,800 of foreign income qualifies for the Foreign Earned Income Exemption (FEIE), subject to you meeting the foreign resident test.  This is a significant deduction and will generally mean that a US expatriate has little or no US Income Tax liability.  Even if you do not qualify for the FEIE, then you most likely still have the ability to claim a tax credit under the tax treaty between the US and China. 

In the US, contributions to qualified retirement plans, such as IRAs and 401Ks, can be made pre-tax and therefore reduce your taxable income.  For some US expatriates there may be no US Income Tax from which to deduct.  Unfortunately, this means that many US expatriates I meet decide to stop making contributions altogether.  It should be obvious to everyone that putting financial planning for your future on hold while you live and work abroad is not a good idea.  Regardless of whether there is any deduction to be made from your taxable income, you will still benefit from making these contributions and should not stop.

US expatriates can still contribute to an IRA up to the annual maximum of USD 5,500, or USD 6,500 if over the age of 50.  Even if they do not receive the income tax deduction, the account still provides tax-free accumulation and has no annual reporting requirement.  Furthermore, US expatriates can establish their own 401K and Defined Benefit plans while they live and work offshore.  This will allow them to contribute up to USD 210,000 on an annual basis and again receive tax-free accumulation, with no annual reporting requirement.

What some people choose to do is to invest in off-shore schemes and insurance plans.  These plans offer no benefits for US taxpayers due to an annual reporting requirement in the US, which can be very complex because these products do not produce IRS compliant documents such as 1099s.  Once they are reported, they will often be subject to higher taxes because they qualify as Passive Foreign Investment Companies (PFICs) and may have Excess Distribution Rules applied to them.  By comparison, all US investment accounts have tax advantages for US citizens and are much easier to report on an annual basis.

To recap:
1.    Do not stop saving just because you lose the ability to save on a pre-tax basis.
2.    Back in the US your tax treatment is better and reporting requirements are easier.

Other than the aforementioned qualified accounts, such as 401Ks and IRAs, what other investment opportunities are available where it is possible to take tax advantages?

Life Insurance – There are many different types of life insurance policy.  Certain policies will allow you to accumulate a cash value that you can redeem later in life.  Any growth achieved inside the policy is tax free and non-reportable.  Furthermore, the better of these investments will allow you to grow your money in market-based products, such as the S&P 500, which deliver equity style returns.  Such plans offer the opportunity of taking tax-free withdrawals, providing an income through your retirement.

Annuities – These are treated as qualified retirement accounts; they carry tax-free accumulation with no annual reporting requirement.  Some policies provide guaranteed returns with no market risk.  This is ideal for the more cautious investor as this type of policy can produce good returns with the guarantee that the balance will never go down in value.  There are annuities of varying quality; this style of investment is complex and would warrant an article in itself.  It is important to get sound, professional advice before choosing this option.

Brokerage accounts – A few select investment providers in the US still have an appetite for overseas business.  Charles Schwab and Pershing Bank are two of the market leaders in offering accounts for expatriates.  These investment platforms can hold qualified accounts inside them, as well as non-qualified, after-tax savings money.  Such accounts allow the client access to a limitless investment range, giving the account holder the ability to buy and hold some of the best investment funds in the market place.

A recent study by Vanguard, one of the largest IRA providers in the US, found that the average account of the IRAs under their management was approximately USD 200,000.  When I plan retirement incomes, I work on being able draw down 5 percent of a retirement fund on an annual basis.  This would provide an annual retirement income of USD 10,000 to the average Vanguard client.

The days of employers and governments supporting individuals through retirement are coming to an end.  We are now on our own and have to make provision to take care of ourselves.  Wherever you work in the world, make sure you are making the most of your after-tax dollars.
Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby

William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photo: Smart Givers

In Part One of my ‘Tax Filing for US Expats & the IRS’ I looked at the landscape that US expats face when it comes to filing their annual tax return. The long and short of this article; US citizens and green card holders are subject to worldwide taxation and must file their income tax return annually. In Part Two I want to focus more on the information you need to file your own tax returns.

I am often asked in meetings whether I can refer my clients to an accountant. The answer to this question is of course, yes. We have an extensive network of tax professionals that are able to assist our clients. However, there is a cost attached to using an accountant and for many people I believe this can be avoided.

What Forms Do I Need To Complete?
The majority of people that I meet have very simple tax filing requirements and can complete their own taxes by understanding a few basic forms:

The 1040
The 1040 is the form where you state all of your various incomes, deductions and credits. This form will ultimately determine that amount of tax you are due to pay, or be refunded.

The 2555 and 2555EZ
If you pass either the Bona Fide Residence Test or Physical Presence Test then you will qualify for the Foreign Earned Income Exclusion and will need to state your income on the 2555 or 2555EZ. Generally speaking most people can fill in the simpler version of this form; the aptly named 2555EZ.

If you have self-employment income, want to claim the housing exclusion or deduction, or have business and moving expenses, then you will likely need to use the full 2555 form. If you are doing this I would advise you seek help from a tax professional.

The FBAR
The Report of Foreign Bank and Financial Accounts (FBAR) is the form I find many people miss during their filing. Importantly, this is a US Treasury form not an IRS form, which is why it is often missed. You are required file the FBAR when the aggregate value of all foreign financial accounts exceeded USD 10,000 at any time during the calendar year.

If you are a US expatriate with income below the Foreign Earned Income Exemption (USD 100,800 in 2015) and no foreign assets, these three forms will likely be all that you need to file. The 1040 and 2555EZ are two pages each and the FBAR can now be filed online. People with this simple situation could save themselves anywhere USD 200-700 per year by taking a few hours to complete these forms.

How Do I File?
The IRS provide a FreeFile service for people who wish to file their own taxes. When you enter the FreeFile system you will have the two choices. First, will be to use a third party system provided by companies like Turbo Tax, TaxAct or H&R Block. This is limited to people who earn less than USD 60,000 and when choosing a provider it is very important to select one that allows foreign addresses.

The second option is to use the IRS’ online fillable forms. When selecting this option it is important to select the full 1040 option, not the 1040EZ or 1040A. The system will then allow you to add additional forms like the 2555EZ, which can also be completed online.

You may have additional forms to complete in order to report other type of income, or claim certain credits. The vast majority of these forms are also accessible through either of the FreeFile systems and depending on your situation could also be very simple to complete.

What Else Should I Know?
In Part One of this series we also talked about the Foreign Account Tax Compliance Act (FATCA). This sweeping legislation has also introduced new filing requirements for those with foreign financial assets.
8938

As part of the new FATCA regulations that I detailed in Part One of this series, you may now have to complete the 8938. On it you report your interest in foreign financial assets such as bank accounts, investments, life insurance and business ownership. It is similar to the FBAR but goes to the IRS.

You are required to file this form if the aggregate value of your foreign assets exceeds the threshold of USD 200,000 at the end of the tax year, or USD 300,000 at anytime during the tax year. If you file jointly, these thresholds are USD 400,000 and USD 600,000 respectively. It is also important to note that these limits drop to USD 50,000 and USD 75,000 if you return the US.

The 8938 can be quite complex to fill out and I would definitely recommend that you seek help from a tax professional if you are required to file it.

Filing Jointly or Separately
If you are married then you can choose to file your taxes separately or jointly. Filing jointly can often be beneficial as it increases some of your allowable deductions and tax rates. However, I often meet people who are married to non-US spouses, and am asked what they should you do?

Firstly, if the foreign spouse is not a US taxpayer and has no US assets, they are not required to file an annual tax return. There can be benefits to filing jointly, which ultimately come down to what you want to happen to your assets over the long-term. But this is very subjective and different for every person.

There are two basic things I think you should be aware of when making this decision:

1. If you file jointly then all of the assets in the foreign spouses name are now reportable annually to the IRS, where they will not have been before.
2. The foreign spouse will need to acquire an Individual Taxpayer Identification Number (ITIN) from the IRS in order to file.

Asking For Help
If you have any doubts about the forms you need to complete, or how to complete them, the advice is simple; speak to a tax professional. It is better to get your return correct than filing it incorrectly and risking additional costs or penalties down the road.

When choosing a tax professional it is vitally important to choose someone who understands the cross-border issues faced by US expatriates. I come across people all the time who are receiving very poor advice simply because their accountant is ignorant to the rules surrounding expatriates.

In the third and final part of this series, I will be taking a look at the various financial planning instruments that US taxpayers can use to manage their tax more efficiently.

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photo: Lawgeneral.com

This is the first in a series of blogs, which will hopefully shed some light on how we file our taxes and why we need to be filing them.

I often meet US citizens living abroad who are not current with their annual US income tax filing requirement.  In some cases, their returns have not been filed for a decade or more.  In my experience, this failure to file is usually the result of receiving bad information from friends, or advisors, or a misunderstanding of the Internal Revenue Code, and not an overt attempt to evade paying US taxes.

There are complications that grow over time, however, when tax returns are not filed, and the longer the failure to file goes on, the more the taxpayer starts to look like a tax evader.  It may be worthwhile to note that failure to file is a federal crime that can have undesirable consequences for the evader.  You can be fined up to USD 25,000 and imprisoned for up to one year for each year you fail to file.  If you file, even if you can’t pay the taxes, interest, and penalties, you won’t face prosecution.

Most expats who are delinquent in filing don’t hear from the Internal Revenue Service (IRS)  about it like they would if they were living and working in the US.  Expats who are compensated “locally” don’t receive a US compliant 1099 or W-2 (documents delivered each tax year by employers to both the taxpayer and the IRS).  Expats are on the honor system to report their income.  In the US, the IRS matches W2 and 1099 documents they receive from employers with tax returns filed by the taxpayer, and if returns aren’t filed, the IRS knows, and typically initiates a Taxpayer Delinquency Investigation which generates a letter to the delinquent tax payer demanding the missing tax return. In this regard, expats may be, for the moment, “off the grid”.

What to do? Up to you.  But here are a few things to keep in mind:

The IRS requirement for all US citizens is to file an annual income tax return.  The requirement is not necessarily to pay taxes.  Tax avoidance is the American way; tax evasion is a crime.  Be sure you know the difference.  Expats often have a lower US tax liability than their US resident counterparts, and may not owe any US income tax, for a number of reasons.  Most US expats qualify for the Foreign Earned Income Exclusion (USD 99,200 in 2014).  Some US expats have deductible expenses not available to US residents, such as the Foreign Housing Exclusion and Deduction.  Many US expats have a higher income tax liability in their country of domicile than they do in the US, and a tax treaty between their country of residence and the US prevents double taxation, resulting in no tax due to the US.  None of these, however, excuse the US citizen from the requirement to file a tax return.

Audits 
In general, the IRS has three years to audit you after you file a tax return.  If you under report your US income by 25 percent or more, or you fail to report more than USD 5000 of your foreign earned income, the window expands to six years.  If you don’t file a return, the three year clock never starts and the IRS may audit you as far back as they want to.  A bigger problem may start when expats repatriate to the US and start receiving a W2 or a 1099 again, causing the IRS to wonder what happened during the missing years.  In this case, failing to file tax returns may have created a virtually unlimited window for the IRS to audit your past.

A more draconian environment was created with the implementation of FATCA (Foreign Account Tax Compliance Act) in 2010.  Designed to require foreign financial institutions to report the identity of their US citizen clients to the IRS, the effects are proving to be long reaching and are affecting expats in ways not previously considered.  The bottom line: the IRS and the US Treasury are demonstrating that they don’t intend to observe any limits on their ability to require US citizens to report worldwide assets and worldwide income, and they will apply increased pressure not just to US citizens, but to any and all financial institutions worldwide to aid them in their quest to uncover unreported assets and income.

With the caveat that I am neither an accountant nor a tax attorney, my advice to you, if you are in arrears in filing your US tax returns, is that you make a good faith effort to become current.  Most accountants advise that, at the least, you file for the current year and keep on filing.  Some accountants and attorneys advise filing (up to) the most recent six years of delinquent returns.  The cost to do this is nominal, especially in light of the possible downside of demand for compliance from the IRS if they contact you before you contact them.  In most matters with the IRS, a good faith effort to comply carries weight, and no effort to comply looks like tax evasion.

In the next blog we will focus on what needs to be filed, what forms to file them on and how to file them yourself.

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.