Q. So all the rich guys hide money overseas. How can a regular guy like me do the same? I’m afraid New Jersey is eating too much of my money.
— Overtaxed

A. Overseas bank accounts — at least in the movies — appear to be the fancy of rich folks who want to shield their wealth from U.S. tax law.

The reality isn’t exactly that glamorous, or that simple.

While some investors may think hiding money offshore to avoid paying taxes is a good idea, it can actually be quite costly, said Michal Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

“In 2010, Congress passed a law getting tens of thousands of foreign banks and other financial institutions to disclose information about U.S. customers,” Green said. “This law was designed to expose those U.S. investors hiding money offshore and put an end to tax evasion.”

He said Congress gave these foreign firms incentives to cooperate. Should a firm choose not to cooperate, they and all their account holders could be docked 30 percent of interest and dividend payments, Green said, so many overseas banks and other financial firms agreed to share the requested data with the U.S.

There are plenty of times a U.S. citizen might have accounts in another country for very legitimate reasons.

Think about all the people from other countries who come to live in the United States, said Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester. Chances are pretty good they still have an account or two in their home country.

Creative investors may invest overseas legitimately.

“Many countries, including the U.S., may provide incentives to foreigners in a way to attract foreign investment capital,” Marchesi said. “Many countries have laws or policies in place that allow for bank interest to be tax-free for foreigners.”

Plus, Marchesi said, there may be a benefit to have accounts in different countries to have your money in different currencies.

Now, we need to address the “hide money overseas’ part of your question.

Yes, it would seem that hiding money could be the intention of some U.S. citizens that set up accounts outside the U.S.

“There are elaborate ownership strategies — incorporation, trust-owned assets, etc. — that could be used to veil the direct owner of a foreign account,” Marchesi said. “There are more registered organizations in the Cayman Islands than people living there.”

Marchesi said it would be very cumbersome for a government to furnish tax reporting to each client’s home country. The reporting is typically left to the responsibility of the account holder.

So, you can see how this could be viewed as an opportunity to hold investments abroad with no direct tax reporting to the owner’s home country.

If you have foreign accounts in your name or have signing authority on the account and the combined value is at least $10,000, you are supposed to file, Marchesi said. If you have foreign accounts that are worth at least $50,000, you may have to disclose them on your tax return.

So what happens if the foreign country where you have money doesn’t report anything? Then who will find out? Now the trouble starts.

“If you willfully failed to disclose overseas account activity on your taxes, you could owe a penalty of 50 penalty of your total account balance or $100,000, whichever is greater, for every year you failed to file — capped at 6 years,” Marchesi said. “That is a severe penalty that would quickly wash away any monetary benefits.”

He said there are mitigating guidelines for smaller accounts, yet penalties would still eat into the account value.

If you want to set up an offshore account for legitimate reasons, Marchesi had some suggestions. Pick a country with a central banking system, look for a full service bank that has local depositors as well as foreign clients, and make sure you would want to visit that country — just in case they require you to come in person to sign signature cards and account documents.

Investors who want to save on taxes but who do not feel it is worth the effort to move assets offshore can consider setting up a trust right here, Marchesi said.

“Putting assets in trust is a way to freeze the value of assets for many years before you plan to pass them along and to exclude all the appreciation on the assets from the estate any from any taxes,” Marchesi said.

Don’t forget that you can also benefit from overseas markets by investing in overseas mutual funds and individual stocks.

Specifically to your comment about New Jersey taxes, heck yeah, we are one heavily taxed state. But prudent tax planning can help lower the bite.

“Depending on your tax bracket, there are investments that could be beneficial to research that offer state-tax free income, but hiding money in offshore accounts is not recommended,” Green said.

Email your questions to Ask@NJMoneyHelp


Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.