101817 SVC Transcript
The Bauman Letter Weekly October 18, 2017 Transcript Good afternoon, everyone. This is Ted Bauman speaking to you from Atlanta, Georgia, with this week’s Bauman Letter Weekly podcast. It’s a pretty good day today. It’s kind of cool, and it looks like fall has finally arrived here in the Deep South. I have a couple of questions today I want to address. There’s no specific theme; it’s kind of a grab bag of questions. I will start with a question from someone regarding dual residency and international tax reporting for people in that situation. She says: I’m a U.S. green card holder since 2004, and I’m a French citizen. I have a passport from France. I travel back and forth from France frequently to manage my rental properties in that country, which I acquired prior to holding a green card. I also received an inheritance in 1998. Since I was not familiar with U.S. tax laws, I did not know I was supposed to report either of the above issues to the IRS. My accountant suggested that I keep reporting my rental income in France, but he does not suggest reporting it here in the United States. He also said I should not report the bank account I have in France. I have not secured any other advice at this point, but I would like your advice on it, and I thank you in advance! Unfortunately, I’m afraid that your accountant has misinformed you. This is not the first time that I’ve heard from someone whose accountant has misinformed someone about their tax obligations and reporting obligations here in the United States. First of all, as a green card holder, you are obligated to report any income that you receive anywhere in the world to the IRS. That includes the rental income that you get from your properties in France, even though you acquired those properties prior to becoming a permanent resident of the United States. As I understand your question, your accountant has suggested that you keep 1
reporting your rental income in France, but has advised that you do not report it here in United States. That is wrong. If you do not report the income that you receive from your rental properties in France on your 1040 tax returns in the United States, you may be penalized by the IRS if you are audited or if they find out that you have this additional income that you’ve not reported. Now, one thing to bear in mind is that if you are paying tax to the French government on your rental income in France, then, because France and the United States have a bilateral tax treaty, you will not end up paying additional tax here in the United States. By virtue of reporting that income to the IRS, and because the tax that you pay in France is, I believe, higher than in United States, it will more than offset any tax that you would be liable to pay to the IRS. So, in other words, the fact that you’re getting income from these properties in France is not going to result in extra tax for you here in United States, because you can get credit for your French taxes. But if you don’t report them to the IRS, then you’re in violation of the law, and that could cause problems for you. The second issue is your bank account, which I assume is holding the inheritance you mentioned and also, possibly, your rental income. As a permanent U.S. resident and green card holder, you are obligated, just like everybody else in the United States, to report the existence of financial assets, financial accounts and any interest that you have in any foreign corporation or any holding structure anywhere in the world under the terms of the Foreign Account Tax Compliance Act (FATCA) as well as the FBAR. The fact that you may have had that account prior to becoming a U.S. green card holder is of no consequence to the IRS. They expect it to be reported no matter what, where or how you acquired these financial interests … and it’s important that that you do so. Your accountant is dead wrong here in recommending that you not report this information. Unfortunately, I think the fact that that this has gone on for over a decade puts you in a bit of a difficult position, because the IRS is unlikely at this stage to agree to give you any sort of amnesty. They will argue that you had plenty of time to become familiar with the laws. The fact that you were misadvised by your accountant will not be an issue for them. They will simply say that you need to take the issue up with your accountant. 2
I’m sorry to be the bearer of bad news, but I think it’s important that you bring your reporting of both of your income and of your foreign financial accounts up-todate with the IRS now. If they find out about it before you come to them, the penalties will be much higher than if you go to them first and say: “This is the situation, but I want to come clean.” So, at this point, I think it is really important to take that step, but I would certainly do so with a brand-new accountant and also probably with a tax attorney who has some sort of familiarity with working in this particular area, i.e., with people who have foreign income and foreign assets. So, again, sorry to be the bearer of bad news, but there it is. My next question comes from someone who wants to know whether I think that the current behavior in the U.S. stock market indicates the potential for crash. The question is: Usually, before a crash, there is a buying frenzy. Do you see this happening again? Well, yes, it is true that in the lead-up to a stock market correction people really pile into stocks because they’re worried about missing the opportunity to cash in on whatever gains are to be made. It’s a phenomenon that’s been observed many times, and it’s not necessarily indicative of a crash, but every time that there is a crash or correction, we can look backward and see that there was increased buying activity in the period leading up to the crash. So, people were piling into stocks and trade volumes were going up. Now, rising trade volume is a warning sign, but for me, there’s a much bigger warning sign — and we’ve seen it in the past couple of months. Institutional investors here in the United States have been unloading stocks. They’ve been pulling out of the U.S. stock market, and the slack has been taken up by retail investors, i.e., people like you and me. This, to me, is a much bigger concern. When you have a situation where the big institutional investors are pulling out and letting the little people like us push the market up, that’s a pretty good sign that the smart money is starting to move. I think that’s a much more important warning sign than trading volumes. Bear in mind that the movement of institutional investors out of stocks at the 3
moment is partly because the last quarter of the year tends to be a bit volatile … there tends to be a sort of correction or bump or dip in the last quarter of the year. September and October are known as kind of dicey months for the stock market, so part of this activity is normal seasonal trading. But, as I’ve said many times before, I certainly believe that it’s just impossible for these valuations to continue at this level. The argument that some people make, particularly Warren Buffett, is that as long as interest rates remain low, the divergence between stock market prices and future earnings (i.e., the price-toearnings [P/E] ratio) is not a big deal because you don’t have to discount those future earnings against a higher interest rate. The thing is, at some point, interest rates are going to go up. I know that right now, the Fed is raising rates in little tiny baby steps, but the news on the street is that President Trump might be looking to appoint a much more hawkish person to lead the Fed and replace Janet Yellen. If that happens, it’s possible that we could see somebody come in and push through an interest-rate hike of a full percentage point, as opposed to the 25 basis points that we have seen in the last couple of increases. If that were to happen, or even if the rumor of such a thing were to take hold, I think it would lead to an immediate correction in stocks. People would recognize that it would devalue future earnings for stocks, and so the high prices wouldn’t make sense. So, again, I lean bearish in this environment. I really do think that now is a good time to have a hedging strategy, to hold a significant portion of your portfolio in cash and also to look at countercyclical stocks, including things like offshore investments through, for example, exchange-traded funds. In the November issue of The Bauman Letter, I talk about the opportunities of trading outside the United States and the fact that these opportunities tend to be countercyclical to the U.S. stock market, which can be a really important hedging strategy. So, that’s all for me today. This is Ted Bauman signing off. I’ll talk to you next week.
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reporting your rental income in France, but has advised that you do not report it here in United States. That is wrong. If you do not report the income that you receive from your rental properties in France on your 1040 tax returns in the United States, you may be penalized by the IRS if you are audited or if they find out that you have this additional income that you’ve not reported. Now, one thing to bear in mind is that if you are paying tax to the French government on your rental income in France, then, because France and the United States have a bilateral tax treaty, you will not end up paying additional tax here in the United States. By virtue of reporting that income to the IRS, and because the tax that you pay in France is, I believe, higher than in United States, it will more than offset any tax that you would be liable to pay to the IRS. So, in other words, the fact that you’re getting income from these properties in France is not going to result in extra tax for you here in United States, because you can get credit for your French taxes. But if you don’t report them to the IRS, then you’re in violation of the law, and that could cause problems for you. The second issue is your bank account, which I assume is holding the inheritance you mentioned and also, possibly, your rental income. As a permanent U.S. resident and green card holder, you are obligated, just like everybody else in the United States, to report the existence of financial assets, financial accounts and any interest that you have in any foreign corporation or any holding structure anywhere in the world under the terms of the Foreign Account Tax Compliance Act (FATCA) as well as the FBAR. The fact that you may have had that account prior to becoming a U.S. green card holder is of no consequence to the IRS. They expect it to be reported no matter what, where or how you acquired these financial interests … and it’s important that that you do so. Your accountant is dead wrong here in recommending that you not report this information. Unfortunately, I think the fact that that this has gone on for over a decade puts you in a bit of a difficult position, because the IRS is unlikely at this stage to agree to give you any sort of amnesty. They will argue that you had plenty of time to become familiar with the laws. The fact that you were misadvised by your accountant will not be an issue for them. They will simply say that you need to take the issue up with your accountant. 2
I’m sorry to be the bearer of bad news, but I think it’s important that you bring your reporting of both of your income and of your foreign financial accounts up-todate with the IRS now. If they find out about it before you come to them, the penalties will be much higher than if you go to them first and say: “This is the situation, but I want to come clean.” So, at this point, I think it is really important to take that step, but I would certainly do so with a brand-new accountant and also probably with a tax attorney who has some sort of familiarity with working in this particular area, i.e., with people who have foreign income and foreign assets. So, again, sorry to be the bearer of bad news, but there it is. My next question comes from someone who wants to know whether I think that the current behavior in the U.S. stock market indicates the potential for crash. The question is: Usually, before a crash, there is a buying frenzy. Do you see this happening again? Well, yes, it is true that in the lead-up to a stock market correction people really pile into stocks because they’re worried about missing the opportunity to cash in on whatever gains are to be made. It’s a phenomenon that’s been observed many times, and it’s not necessarily indicative of a crash, but every time that there is a crash or correction, we can look backward and see that there was increased buying activity in the period leading up to the crash. So, people were piling into stocks and trade volumes were going up. Now, rising trade volume is a warning sign, but for me, there’s a much bigger warning sign — and we’ve seen it in the past couple of months. Institutional investors here in the United States have been unloading stocks. They’ve been pulling out of the U.S. stock market, and the slack has been taken up by retail investors, i.e., people like you and me. This, to me, is a much bigger concern. When you have a situation where the big institutional investors are pulling out and letting the little people like us push the market up, that’s a pretty good sign that the smart money is starting to move. I think that’s a much more important warning sign than trading volumes. Bear in mind that the movement of institutional investors out of stocks at the 3
moment is partly because the last quarter of the year tends to be a bit volatile … there tends to be a sort of correction or bump or dip in the last quarter of the year. September and October are known as kind of dicey months for the stock market, so part of this activity is normal seasonal trading. But, as I’ve said many times before, I certainly believe that it’s just impossible for these valuations to continue at this level. The argument that some people make, particularly Warren Buffett, is that as long as interest rates remain low, the divergence between stock market prices and future earnings (i.e., the price-toearnings [P/E] ratio) is not a big deal because you don’t have to discount those future earnings against a higher interest rate. The thing is, at some point, interest rates are going to go up. I know that right now, the Fed is raising rates in little tiny baby steps, but the news on the street is that President Trump might be looking to appoint a much more hawkish person to lead the Fed and replace Janet Yellen. If that happens, it’s possible that we could see somebody come in and push through an interest-rate hike of a full percentage point, as opposed to the 25 basis points that we have seen in the last couple of increases. If that were to happen, or even if the rumor of such a thing were to take hold, I think it would lead to an immediate correction in stocks. People would recognize that it would devalue future earnings for stocks, and so the high prices wouldn’t make sense. So, again, I lean bearish in this environment. I really do think that now is a good time to have a hedging strategy, to hold a significant portion of your portfolio in cash and also to look at countercyclical stocks, including things like offshore investments through, for example, exchange-traded funds. In the November issue of The Bauman Letter, I talk about the opportunities of trading outside the United States and the fact that these opportunities tend to be countercyclical to the U.S. stock market, which can be a really important hedging strategy. So, that’s all for me today. This is Ted Bauman signing off. I’ll talk to you next week.
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