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CPF interest and FBAR?

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neefo
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CPF interest and FBAR?

Postby neefo » Sun, 19 Jun 2016 6:34 am

I'm a US Permanent Resident and a Singapore Citizen. I'm wondering if my CPF account needs to be reported to the US IRS using the FBAR? how about the interest on the CPF? I can never touch the account until i reach retirement age...the interest that the CPF pays cannot be touched either....

so what should i do about my CPF account to the US tax authorities?

confused...

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Re: CPF interest and FBAR?

Postby BBCWatcher » Sun, 19 Jun 2016 8:15 am

Here's the general consensus as best I can determine it. I'm going to try to cover everything CPF-related in the U.S. context in one post.

1. Although slightly ambiguous, it appears that CPF accounts are FinCEN Form 114 reportable. (And IRS Form 8938 reportable as well.) There's no harm in overreporting while there is harm in underreporting, so it's best to err on the side of reporting.

2. CPF interest is U.S. reportable and taxable as it is credited, in each year.

3. Employer and (on edit/corrected; see the follow-up post below) employee contributions are U.S. reportable and taxable when made, in each year, and are not earned income for purposes of the Foreign Earned Income Exclusion. (The latter part is a bit strange, but the IRS itself said as much many years ago in a letter and hasn't said otherwise since.) Hypothetically, if somebody else can pay into your CPF account -- a one-time bonus paid by the government, for example -- then that'd probably be U.S. reportable and taxable income, too. (One exception: government social welfare payments based on need are generally not U.S. taxable -- for example, hypothetically, if the government tops up your account because you're poor.)

3A. On edit: If you became a U.S. person after some or all of your/your employer's CPF contributions were made, and after some interest was paid, then the untaxed portion is probably U.S. reportable and taxable on a pro rata basis upon withdrawal. (Double check, but that's my understanding.) For example, if your CPF account balance is $50,000 on the date you became a U.S. person you would report and pay tax on interest (and contributions, if any) from that date forward. Let's suppose you start to withdraw after another $10,000 of interest has been paid (and $0 contributions in this example, just to keep it simple). The account balance is now $60,000. You withdraw $6,000. At that point, $5,000 (the pro rata untaxed portion) is U.S. reportable and taxable, and $1,000 (the additional interest already reported and taxed) is not U.S. taxable. (This example also ignores MediShield Life premiums, if applicable. MediShield Life premiums tend to drive down your CPF account balance if you have no further contributions, but they would not affect the pro rata allocation between previously taxed and untaxed CPF monies.) Pro rata tax treatment makes sure that each/every dollar is taxed once and only once. Dollars prior to your U.S. personhood are taxed only upon withdrawal, while dollars flowing in (and accruing) during your U.S. personhood are taxed as/when they flow. Consequently the timing of your withdrawal(s) is(are) important. For example, it may make sense to withdraw CPF monies (if permitted) before becoming a U.S. person -- although I wouldn't go overboard with this idea since, even U.S. taxed, CPF is quite attractive.

4. If you direct any of your CPF funds into the investment products allowed then those investment holdings are almost certainly PFICs and need to be handled as such (generally with annual mark-to-market elections, probably also with foreign trust reporting). I recommend avoiding that (if you haven't already avoided that). Stick to traditional CPF SA. Otherwise you've got IRS Forms 8621 and 3520 to deal with.

5. You cannot take any Foreign Tax Credits on the U.S. side for CPF payroll taxes or for MediShield Life premiums. Foreign Tax Credits are only allowed for foreign income taxes, and CPF has none.

6. MediShield Life does not count as Minimum Essential Coverage in the U.S.

7. CPF withdrawals (when you retire, presumably) have no particular consequences given the above, except....

8. CPF funds are part of your estate for U.S. estate tax purposes.

9. CPF funds are part of your assets for determining whether you are a "Covered Expatriate" and for Expatriation Tax calculations.

10. You have to inform the U.S. Social Security Administration of any CPF benefits when you apply for Social Security benefits -- or at least tell the truth if asked. CPF benefits probably won't affect your Social Security benefits, although they might through something called the Windfall Elimination Provision.

11. Generally, since CPF gains are U.S. taxable, if you retire in the U.S. (or as a U.S. person) you'll want to tap CPF as much as allowed (if you need the funds) before you tap U.S. tax free and tax deferred retirement savings such as IRAs and 401(k)s. But "it depends." CPF is high yielding for a safe investment, so that's not a hard and fast rule by any means, especially if you're in a low tax bracket.
Last edited by BBCWatcher on Mon, 20 Jun 2016 9:47 am, edited 7 times in total.

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Re: CPF interest and FBAR?

Postby PNGMK » Sun, 19 Jun 2016 11:12 am

I'm absolutely astonished about 3. As Employer contributions are part of your reported and taxed income in Singapore surely they'd be foreign earned income and under the foreign earned income exclusion?
I have gay, black, Asian friends and then JR8.

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Re: CPF interest and FBAR?

Postby neefo » Sun, 19 Jun 2016 10:07 pm

thanks for the reply. I've asked maybe 3 -4 people. singaporeans with green cards. most of them have the opinion that CPF is not reportable, as we do not have access to it, not even the interest, as this is like a retirement fund? as you said it is ambiguous.... so far the few i've asked, no one reports.

much like i asked other green card holders, they never report their home country retirement scheme, Eg. Japan. cos they cannot touch it (it also accrues interest, although not as high as CPF...), they consider it taxable once you start withdrawing it, taxable as income. thats the opinion.

so if you get the CPF interest taxed now, then withdraw CPF later as taxed income. doesn't the IRS tax you twice?

if,as you mentioned it is reportable, to FBAR and the interest is reportable as an interest (much like a bank interest reporting i.e. 1099-INT), then which part of CPF is reportable? OA, SA, Medisave? I wouldn't even think medisave and its interest is reportable as it is like medicare in the US.

if you worked in SG for 10 years, the amount you have in CPF is quite high, the interest is also pretty high. I find it difficult t understand how it can be taxed when you have no access to it until retirement, and it really bumps your US tax quite abit.

its all confusing to me.

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Re: CPF interest and FBAR?

Postby sundaymorningstaple » Sun, 19 Jun 2016 10:44 pm

Unlike a lot, I used to be the District Director for H & R Block in Washington, DC, several lifetimes ago, so I just use my reasoning from those days. I've been here 30 + years and a PR for 25 of them. I have always reported all my income on my US 1040 Local Salary & Employers CPF contributions as well, additionally I have always reported the interest accrued on my CPF account as well on Schedul B of my 1040. I take the income earned abroad exclusion and pay taxes, if any on the remainder of salaries and all interest and the Employers CPF. When I retire if I cash out I won't be reporting any of my CPF as income as it's nothing more than a savings account with a good interest rate. As It not a social security type program in the US viewpoint I don't think as you can use it (at least portions of it as you can use it to pay your mortgage, & pay your medical bills, invest it, etc. By reporting it like I would any saving vehicle, I think will not be taxible upon withdrawal as long as you can prove you have paid or at least reported it as taxable as it was earned.

All the interest is reportable. If you give up your PR or your citizenship you can withdraw ALL funds from ALL accounts, no problem. BUT YOU MUST REPORT ALL INCOME AND INTEREST TIMELY as if you don't then they, depending on the amounts, could get you for tax evasion. Not good.

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Re: CPF interest and FBAR?

Postby sundaymorningstaple » Sun, 19 Jun 2016 10:49 pm

You must also report all on the FABAR as well. Again, not a real problem. I've been doing my own tax returns since the mid-sixties without any problems.

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Re: CPF interest and FBAR?

Postby BBCWatcher » Mon, 20 Jun 2016 7:53 am

PNGMK wrote:I'm absolutely astonished about 3. As Employer contributions are part of your reported and taxed income in Singapore surely they'd be foreign earned income and under the foreign earned income exclusion?

Nope. The IRS specifically ruled on this question back in the late 1990s and made clear that employer contributions to CPF are U.S. reportable, taxable, and nonexcludable....

....and I stand corrected. Employee contributions are also nonexcludable. (The IRS amended its ruling in the late 1990s to bar exclusion of employee contributions to CPF as well.)

So, you report your gross income (inclusive of all CPF contributions), but you can exclude (via the Foreign Earned Income Exclusion and Foreign Housing Exclusion, if otherwise eligible) only your take-home pay from work, after CPF contributions (employer and employee). CPF contributions (employer and employee), and all nonexcludable income, are U.S. taxed, less a Foreign Tax Credit (but no Foreign Tax Credit on CPF contributions since they're Singapore income tax free).

You're not double taxed. You pay tax on the way in, you pay tax on the gains as/when they accrue, in every year, and then pay no tax for withdrawals. It works much like an ordinary bank account from the U.S. tax perspective. If you became a U.S. person after making some or all of your CPF contributions then special rules may apply, notably that some portion of your withdrawal could be taxable (but still not double taxed).

It's income, not "foreign earned," and there's no U.S.-Singapore tax treaty that says otherwise (and probably wouldn't anyway if such a treaty existed). So this is how it works. Yes, the IRS's FEIE ruling is slightly surprising, but so it goes. The fact you cannot tap into CPF monies until a change of status (termination of PR or citizenship) or for defined purposes (HDB, retirement) doesn't matter for these purposes. The income/gains are still "constructively received." Bank Certificates of Deposit (CDs) work the same way: the money is "locked"(*), but you report and pay tax on the interest along the way -- and pay tax on the income that you/your employer received/provided to buy the CD in the first place.

(*) Not really. You can tap into a CD prematurely (with a penalty), just like you can terminate status (the penalty) to tap into CPF prematurely. "Good enough" for U.S. tax purposes.
Last edited by BBCWatcher on Mon, 20 Jun 2016 7:59 am, edited 1 time in total.

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Re: CPF interest and FBAR?

Postby PNGMK » Mon, 20 Jun 2016 7:58 am

You've point out a significant reason I abandoned applying for US Citizenship (for some time and to the annoyance of my wife who wants me to vote against Trump).... the lack of a dual taxation treaty. The FEIE is just too low to be meaningufl at my income level and paying US income tax on the difference for NO actual benefit (bar "Pax America") is nuts.

One thing Singapore has absolutely right is not taxing CPF contributions. Australian Super is a taxed at 15% going in and 15% on any returns which is just nuts...
I have gay, black, Asian friends and then JR8.

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Re: CPF interest and FBAR?

Postby BBCWatcher » Mon, 20 Jun 2016 8:05 am

PNGMK wrote:....paying US income tax on the difference for NO actual benefit (bar "Pax America") is nuts.

U.S. citizenship always provides some benefits, even if contingent. It is a valuable citizenship, and the Grand Canyon really is lovely. Of course one of the obligations associated with that citizenship may be U.S. income tax. If the package of rights, privileges, obligations, and responsibilities doesn't work for you, no problem, you just don't take that particular package deal -- or you end that package deal if you want, as the case may be.

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Re: CPF interest and FBAR?

Postby PNGMK » Mon, 20 Jun 2016 8:07 am

Valuable citizenship... :)
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Re: CPF interest and FBAR?

Postby BBCWatcher » Mon, 20 Jun 2016 8:32 am

Yes, it is, and there's some strong evidence available. Value is determined by market participants (immigrants in this case), and when you ask them (as Gallup did/does) they pick the United States ahead of anywhere else. The United States is the #1 most desired destination for prospective immigrants in terms of absolute numbers. (Switzerland is #1 on a per capita basis.) This year there will be about one million adults naturalizing as U.S. citizens. I'm not aware of any other country naturalizing so many people (in absolute numbers anyway), and they're all paying hefty fees to do it.

Obviously U.S. citizenship is valuable. That's just a basic, factual statement about the "marketplace" of citizenships. Beer is valuable, too, but that doesn't mean that everyone likes beer.

As it happens the United States has the lowest total tax burden among developed countries in the OECD. Yes, including federal, state, and local taxes, all of them. It's simply not a high tax country. Situationally it might be a high tax country (as in practically every tax code), but not in terms of mean and median experiences.

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Re: CPF interest and FBAR?

Postby BBCWatcher » Mon, 20 Jun 2016 10:11 am

By the way, I agree with SMS's approach: report and pay tax on the income flows as/when they occur, with all contributions nonexcludable. "It's just another foreign bank account" from the U.S. point of view (assuming you don't direct any CPF monies into the investment products CPF allows), so you treat it as such. The fact a foreign government (Singapore's in this case) calls it something, gives it special tax treatment in Singapore, etc. is immaterial. And, unfortunately, just because your and your employer's CPF contributions are associated with a job doesn't mean they are "earned." They aren't from the IRS's point of view, so they aren't excludable.

To expand on CPF's investments for a moment, CPF has something called the "CPF Investment Schemes" (CPFIS). Leaving aside U.S. tax considerations, I don't recommend investing in any of the CPFIS options since their yields are not particularly attractive compared to good old fashioned CPF SA. However, for the record, some of the permitted investments should be uncomplicated from a U.S. tax point of view. The ones that look OK to me include Fixed Deposits, Singapore Government Bonds, Treasury Bills, Statutory Board Bonds, Bonds Guaranteed by the Singapore Government, and Corporate Bonds (but only if the bonds are directly and individually held, not via a bond fund or unit trust). Direct holding of shares of stock in DBS, UOB, and/or OCBC look OK, too. Everything else could trigger PFIC rules. They're not necessarily bad if you make mark-to-market elections, but they're complicated and involve extra paperwork.

....But why would you trade a greater than 4% CPF SA yield for a less than 2% Fixed Deposit yield, for example? It makes no sense. Just because you can do something doesn't mean you should.

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Re: CPF interest and FBAR?

Postby PNGMK » Mon, 20 Jun 2016 10:20 am

I agree that CPFIS sucks. I lost a few thousand in it many years ago and have never even thought of it since.
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Re: CPF interest and FBAR?

Postby BBCWatcher » Mon, 20 Jun 2016 11:01 am

Here's something that looks interesting as a tax optimization strategy.

CPF allows you to make voluntary cash "top ups" to your (or someone else's) CPF account. There's an annual Singapore tax relief of up to S$7,000 per year for yourself and another S$7,000 if you're topping up somebody else's account. Top ups, at least the ones with the Singapore tax benefits, are also capped at the Full Retirement Sum. And here's the neat part: as far as I can determine, your personal, voluntary CPF contributions are still excludable for purposes of the U.S. Foreign Earned Income Exclusion. You received that income; you earned it. The fact you then put that income into a foreign bank account (CPF) is fine -- it's still excludable if you otherwise qualify. Yes, the same bank account receiving nonexcludable income (yours and your employer's).

OK, so let's put all this together. If you're a U.S. person living in Singapore as a Permanent Resident, and if you (or at least one U.S. person in your household) is earning below the U.S. Foreign Earned Income Exclusion/Foreign Housing Exclusion limits, then it could be very wise to top up your (and/or the other household member's) CPF account voluntarily. The income used for the top up would be U.S. and Singapore tax free (up to S$7,000/year), and only the interest would be U.S. taxable. That's my understanding of how all this works, but please double check that. Also, it's prudent to do this right from the get go, as soon as you become a PR, if I understand the Singapore side correctly. Singapore lets you top up at S$7,000/year assuming you're below caps. As soon as you reach one of the caps, you can't top up. So to boost your CPF (assuming that's what you want to do, and assuming you or somebody else can afford it), this would be the best approach, and in a U.S. tax optimized way.

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Re: CPF interest and FBAR?

Postby PNGMK » Mon, 20 Jun 2016 11:13 am

Except it's surprisingly easy to hit the contribution caps. If you are earning more than $6000 and have bonuses (which are CPF contribution deducted as well) it can be hard. I haven't been able to voluntary contribute for some years and my US wife is not a PR. I see your logic though.
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