Junior NISA and the IRS

[judomarshall]

Halfway through setting up a NISA account for my 2-month old son, I realize that since we plan on applying for dual citizenship (USA), he will have to pay taxes based on FACTA:

https://www.irs.gov/businesses/corporat ... -act-fatca

Does this mean we won't be able to choose any funds with US stocks in them?
It doesn't seem moral to want my son, who has never even stepped foot in the US to have to pay taxes on investments aimed at financing his education.
Makes me want to consider taking a pass on his US citizenship (Not just for NISA but taxes in general), but that is one VERY big decision...

[TokyoWart]

The taxes due are unlikely to be substantial. Assuming you are a US citizen and want to claim your son on your taxes (a $2000 tax credit starting in 2018), the process is easier if he gets a Social Security number and US citizenship. The dividends and capital gains from his Junior NISA (not taxable in Japan but taxable in the US) can be handled on your tax form until they reach very high amounts (which haven't been reached by any of my children who have had fully funded Junior NISA since they started). That is true regardless of whether the NISA has US or non-US stocks. A foreign investor holding US stocks will get taxes withheld from dividends or capital gains before those gains even reach them so this is a reason to avoid US stocks in the NISA regardless of your son's citizenship. For that reason, I don't hold any US stocks in our Japanese accounts. When I set up the Junior NISA's for my kids I noticed that I had signature authority over the accounts so from the IRS/Treasury department's standpoint I became responsible for filing the FATCA's anyway. In my experience the US filing requirement is not too onerous and the Junior NISA account is great, especially for young kids who will get to hold their positions without Japanese taxes for longer time periods.

[RetireJapan]

Are you going to have to report PFICs? I hear the paperwork is pretty daunting.

Junior NISA accounts can only buy Japanese stocks and mutual funds.

[TokyoWart]

Form 8162 for Foreign Passive Investment Company reporting is not required for owning Japanese stocks. Compliance with FATCA and sending in FBAR's will be required but they are also required if the total of everything in your bank and brokerage accounts reaches $10,000 at any point in the year so almost every US citizen in Japan is already under that obligation.

[judomarshall]

TokyoWart and RetireJapan, thanks to both of you for the info.
I will have to look into this a bit more, but I like what TokyoWart is saying about the process.

About the PFICs, I heard it would take forever to report if you have an index fund, which is why the company i use (MONEX) won't even go there.

Anyways, was hoping to open an account in time to put money in before the end of the year.
It might take a bit longer though...

[RetireJapan]

Form 8162 for Foreign Passive Investment Company reporting is not required for owning Japanese stocks.

Ah, yes, sorry! I meant for mutual funds, which are probably the best option for most people in Junior NISA (other than Americans, that is).

[judomarshall]

Tokyowart, RetireJapan

Thanks for the information.
Old thread, but just want to confirm something since we did in fact end up getting a social security number for my son.

We set up an account for him and invested in the slim maxxis deleloping countries index fund.
Now, I just want to confirm something Tokyowar mentioned:

"A foreign investor holding US stocks will get taxes withheld from dividends or capital gains before those gains even reach them so this is a reason to avoid US stocks in the NISA regardless of your son's citizenship. For that reason, I don't hold any US stocks in our Japanese accounts. When I set up the Junior NISA's for my kids I noticed that I had signature authority over the accounts so from the IRS/Treasury department's standpoint I became responsible for filing the FATCA's anyway."

A couple of questions for clarification here:

1) Im guess thing applies to the slim maxxis series of funds since even though they are pulled together and made for a Japanese market, there are US stocks held inside of them. So, would you recommend I do not invest in this set of funds?

2) Since my wife (Japanese citizen) set up the account for him and has signature authority over the accounts, would the situation be different from yours in any way?

Thanks in advance. Would be really nice to get some clarification before I invest more money next year.

[TokyoWart]

1) Im guess thing applies to the slim maxxis series of funds since even though they are pulled together and made for a Japanese market, there are US stocks held inside of them. So, would you recommend I do not invest in this set of funds?

2) Since my wife (Japanese citizen) set up the account for him and has signature authority over the accounts, would the situation be different from yours in any way?

I don't have experience owning any of the slim maxxis funds, but let me clarify what I mean about holding US stocks in a non-US-based brokerage account or mutual fund. A 30% withholding tax is generally applied to any dividends or capital gains. The fund or brokerage has to collect it directly and pay it to the US government because the presumption is it'd be hard for the IRS to go chasing foreign holders of US stocks. That can be limited by tax treaties and I don't know what happens when those funds are held in Japan. I don't think the fund is going to check if you are a Japanese or US citizen; they will just withhold the taxes. Because current dividend yields for the US market as a whole are around 2% that 30% withholding results in a tax drag of under 0.6%.

[RetireJapan]

I don't have experience owning any of the slim maxxis funds, but let me clarify what I mean about holding US stocks in a non-US-based brokerage account or mutual fund. A 30% withholding tax is generally applied to any dividends or capital gains. The fund or brokerage has to collect it directly and pay it to the US government because the presumption is it'd be hard for the IRS to go chasing foreign holders of US stocks. That can be limited by tax treaties and I don't know what happens when those funds are held in Japan. I don't think the fund is going to check if you are a Japanese or US citizen; they will just withhold the taxes. Because current dividend yields for the US market as a whole are around 2% that 30% withholding results in a tax drag of under 0.6%.

Don't think the withholding tax applies to capital gains (only dividends). I believe you can file paperwork with your broker if you are a US citizen, and Japanese residents 'only' pay 10% withholding tax on dividends due to the tax treaty -thanks, America

That 10% can be offset against Japanese taxes in a taxable account (but not in a tax-free one like NISA or iDeCo).

[judomarshall]

Thank you both for the clarification.
That clears things up a lot.
Wish things were a bit more straightforward.