What this line means
Interest charged on deferred tax from passive foreign investment company (PFIC) holdings, calculated on Form 8621. When you hold shares in a foreign mutual fund or other PFIC and receive an “excess distribution” or sell the shares at a gain, the IRS treats the income as if it was earned ratably over your holding period and charges interest on the deferred tax for prior years. This interest amount goes on line 13.
Does this apply to you?
- You own shares in a foreign mutual fund domiciled outside the United States
- You hold stock in a foreign corporation where 75% or more of income is passive or 50% or more of assets produce passive income
- You received an excess distribution from a PFIC (a distribution exceeding 125% of the average distributions over the prior three years)
- You sold PFIC shares at a gain
Easy to overlook
Foreign mutual funds are almost always PFICs A mutual fund, ETF, or investment trust organized outside the United States is classified as a PFIC under U.S. tax law, even if the underlying investments are U.S. stocks and bonds. 1 U.S. citizens living abroad who invest through local banks often hold PFICs without realizing it. The PFIC rules apply regardless of whether the foreign fund is subject to tax in its home country. IRS Form 8621 Instructions — Passive Foreign Investment Companies
Electing mark-to-market or QEF treatment avoids the interest charge You can make a qualifying electing fund (QEF) election or a mark-to-market election on Form 8621 to avoid the default excess distribution regime and its interest charge. 2 A QEF election requires the fund to provide annual income statements. A mark-to-market election recognizes gain or loss annually based on fair market value. Both elections eliminate the deferred tax and interest calculation but require annual reporting even in years with no distributions. General filing pattern — PFIC reporting missed on foreign mutual funds
Watch out for this
Ignoring PFIC reporting because the amounts are small. The Form 8621 filing requirement applies to every PFIC you hold, regardless of value. There is no minimum threshold. Failing to file Form 8621 keeps the statute of limitations open indefinitely for the IRS to assess tax on the PFIC income, and penalties for non-filing apply per form, per year.
Footnotes
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IRS Form 8621 Instructions, Definition of a PFIC. https://www.irs.gov/instructions/i8621 ↩
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IRS Form 8621 Instructions, Elections. https://www.irs.gov/instructions/i8621 ↩