US stock market investment guide: tax issues that investors need to know

In Malaysia, capital gains and dividends from stocks are generally tax-free. But if you are a Malaysian and invest in the US stock market, do you need to pay taxes? This article will sort out the main tax aspects that Malaysians need to pay attention to when investing in US securities, including dividends, capital gains and inheritance taxes.

Dividend Tax

When you receive dividends from a US company, the IRS will usually withhold 30% in taxes. As a result, the dividend you receive is 30% less than the amount announced by the company. This withholding tax applies to all “non-resident aliens”, that is, investors who are not US citizens or green card holders.

In Malaysia, dividends from US investments are classified as foreign currency income. According to the Malaysian Inland Revenue Board, starting from January 2022, all Malaysian residents will be subject to tax on foreign currency income received domestically.

The good news for individual investors is that since the dividends have been withheld by the US government, Malaysia will be exempt from tax on this type of income until the end of 2036. In simple terms, these dividends have been taxed in the United States, but are tax-free in Malaysia during the exemption period.

Capital gains

So, what about the gains from selling stocks in the U.S. market? U.S. residents are subject to progressive capital gains tax rates. The long-term capital gains tax rate for all types of investment income, including stocks, is as high as 20% for holdings of more than one year, and the short-term capital gains tax rate is as high as 37% for holdings of less than one year.

For Malaysians who qualify as “non-resident aliens”, if they stay in the United States for less than 183 days per year, they are not subject to US capital gains tax. However, if they stay in the United States for 183 days or more in a year, they are subject to capital gains tax at a flat rate of 30%. Since Malaysia does not have a capital gains tax on stocks, Malaysian investors are actually exempt from capital gains tax when they meet the non-resident requirements.

The process of remitting funds back to Malaysia is relatively simple. The United States generally does not restrict cross-border transfers of investment income, and it is only a transfer of funds between accounts, and no additional taxes are required. However, if the amount of remittance is large, it may trigger the reporting requirements of anti-money laundering regulations, which will attract the attention of relevant departments.

Inheritance Tax

Next is the US estate tax, which Malaysian investors need to pay special attention to. The US imposes an estate tax on US assets held by non-resident foreigners upon their death, including real estate, tangible property, and US company stocks.

For most Malaysians, the estate tax exemption for non-resident foreigners is only US$60,000, which is much lower than the tax exemption for US citizens and residents. This means that if you have US assets worth more than US$60,000 at the time of your death (bad luck), your estate will face a US estate tax of up to 40%.

To mitigate the potential impact of U.S. estate taxes, some investors consider strategies such as transferring stocks into a trust, using an international insurance structure, or applying for an annual gift tax exemption. For the gift tax exemption, you can transfer assets worth up to $18,000 to others each year while you are alive, starting in 2024. In Malaysia, gifts received are not taxable as the country has no estate, gift or gift taxes.

Another way to avoid US estate taxes is to consider investing in Irish domiciled ETFs when purchasing ETFs. These ETFs not only avoid US estate taxes, but also provide exposure to the US market. Click here to learn more about Irish domiciled ETFs.

The Fifth Perspective

Investing in the US market has great potential for Malaysian investors, but it also brings additional tax considerations. This article provides some overviews, but tax regulations are subject to change and individual circumstances vary. It is recommended to consult a professional tax advisor in Malaysia and the United States for more detailed advice. Proper tax planning and understanding of these impacts can help you make more informed investment decisions and improve after-tax returns.