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Question for the Money Doctors

Question submitted on Aug 13, 2012.

Question

Hello. I live in Lima, Peru right now. I have my primary residence in Montana, but we are planning on moving back to California as of this coming christmas. I am about to make a commission for selling a company of close to $1,700,000 (this is the commission being paid to me). I am paying almost 30% income tax here in Peru because I am a Peruvian Citizen and also an American Citizen. My husband is an American Citizen and we don''t know if we should file together. We also have no clue if we need to pay taxes on this income, and what kind of taxes we would be subjected to, or if we would be allowed to bring the money into the country. I also would like to know if I can put most of the money in my Life Insurance for our child, since we don''t need to use ALL the money right away, and take advantage of the no-tax. We are pretty much lost. Is this the right place to submit the question?

Answer

Your tax situation is definitely in need of some professional guidance.  And, the time to get it is now, before you actually receive your commission.  This will give you the greatest flexibility to plan to take advantage of the opportunities that may be available to you under the tax laws of Peru and the US.  You will probably be able to pay your advisor's fee several times over by the savings you can realize with the correct guidance.  With respect to US tax laws (I can't address Peruvian tax laws), you will owe Federal income tax on your income wherever it is earned.  The US is a little unusual in this respect, so it's possible that you might be able to lawfully save Peru tax if you do not actually receive your commission until after you have left the country.  If you are subject to tax in Peru and the US, you should be able to claim a foreign tax credit on your US tax return which will reduce the effect of being subject to tax in two countries.  The rules concerning foreign tax credits can get pretty intricate but you should know that it's possible to generate a credit that is larger than the amount you are actually allowed to claim in one particular year.  If this happens, the IRS allows you to "carryback" the credit one year and to "carryforward" the credit for up to ten years.  For those people who conduct business in several different countries, tax planning can become extremely important as an expert planner can advise you as to which countries to most closely focus on in order to generate earnings which will best use your foreign tax credits on your US tax return.

Also, a tax adviser should help you decide whether it's better for you to maintain your Montana residence until after you have received your commission, and only then, move back to California. You can a CPA/PFS near you by visiting www.findacpapfs.com.

You are wise to recognize the need to save the portion of the money that you don't immediately need.  The best vehicle for your savings and investing should really be determined after you have had a financial plan prepared which considers your overall financial goals and investment risk tolerance.  You are correct that life insurance will offer certain tax advantages.  However, there are other investments that are also tax advantaged such as municipal bonds, qualified retirement plans, a 529 plan for your child's education or variable annuities which may be even better alternatives for you.


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