I have enjoyed reading your `Moneywise' articles. I was wondering if you would be so kind as to clarify a situation.

1. As a Bermudian wanting to invest in the US stock and bond market, what are the tax consequences? Understand there is a withholding tax for foreign investors and their maybe steps to circumvent this tax.

2. From what I have read a US citizen is still taxed on stocks even if they are living outside of the US borders, correct? Answer: This is actually a common question. As on-line Internet brokerage firms aggressively push the message of `getting your share' by investing with them for next to nothing (or nothing), more and more individual global investors respond to the lure of do-it-yourself. After all, it looks easy, just track the stocks, sell high, buy low and away you go! THE ACCOUNT OPENING PROCESS The actual account opening process is also fairly easy. You fill in your name, legal address, and so on and sign a few original forms which then have to be mailed (still in most cases) to the firm before you are open for trading action.

For instance, when accessing Ameritrade the other day, accompanying the account form was a a brief statement of instructions for offshore investors, including the fact that you will have to file a US taxation declaration called a form W-8BEN.

The W-8 BEN asks for your name, address (must be legal) not just a Post Box, Town, Zip Code, Phone number and Country. It then requests that you state (by signing your legal name) that you are the beneficial owner of this account; that you are not subject to United States Taxation; and other statements. It refers to things like tax treaties.

Bermuda does not have (that manner of) tax treaty with the United States. Tax treaty countries entitle citizens to lower taxation of US income, in some cases. Quite a lot of words don't you think? The signed submission of the W-8BEN form identifies you as a Non-Resident Alien. No, not the kind from outer space, although sometimes brokerage firm treatment of its customers can border on that notion, particularly after they have gotten your money and sold you a commission product.

NON-RESIDENT ALIEN WITHHOLDING AND TAXATION RULES What is taxable? Non-resident aliens (NRAs) are investing in US investment products in the Unites States are taxed on dividends and may be taxed short-term capital gains This 30% tax is withheld at the source of the income by the US custodian, the net amount is sent out of the country to you.

While we are at it, NRAs may also be taxed (at the same rate) on United States Social Security Administration payments, annuities, pensions, and qualified retirement plans, etc. This has been a source of sadness and great surprise to more that a few Bermudian widows of United States citizens.

WHAT IS NOT TAXABLE Non-resident aliens are not taxed on portfolio interest and long-term investment capital gains. And herein lies the biggest problems you may face, getting your money or your profits back INTACT from your US custodian or brokerage firm.

While the tax laws state you are not subject to taxation on these two items, you are dealing with firms that process millions of transactions everyday.

While your onshore broker may be qualified, the back office staff may not understand the withholding rules at all.

If there is any doubt in their mind at all that your paperwork is not in order, they will default to the next Internal Revenue Service rule and it is a double whammy, THEY WILL WITHHOLD 30 percent OF THE SALE PROCEEDS.

Well, who cares about a few dividends, you say. What happens when cashing out your account after a losing session. You have not made a profit at all, but on your $50,000, for example, the brokerage firm withholds 30 percent -- $15000.

Off your money goes, into limboland.

And now the fun process of trying to penetrate the complexity of US tax laws from another country, long-distance (every phone call probably costing you $30).

It is well to remember that the United States Internal Revenue Service regulates the reporting requirements on income that all US companies (not just brokerage and mutual fund firms) must comply with.

These rules are burdensome, in some cases very punitive; and many have been designed and implemented to eliminate the loopholes that US taxpayers living offshore (or investing offshore in many layered vehicles) have used and continue to use to evade taxation.

It may be your misfortune to be caught in the middle of this "when first we practice to deceive, oh, what a tangled web we weave.'' Note that these are IRS fighting words, not mine! They have made it extremely clear they are going after US citizen tax cheats and those institutions that may be perceived to be allowing US citizen tax cheats to operate without impunity.

HOW CAN YOU AVOID THESE PROBLEMS? Probably the best strategy when dealing with the voice at the other end of the phone is to ask, ask, ask until you understand.

And to immediately review any statements you receive from US onshore investment firms. If you catch the mistake in withholding before the end of the calendar year, and protest vigorously, your chances of getting it reversed (by the firm) are fairly good.

It may cost you a fair amount in time and aggravation, but asking for the legal/tax department could tip the scales in your favour.

If you wait until after the end of the year, your erroneous withholding is reported (and the money sent) to Internal Revenue Service. Now, in order to get your own money back, you will have to file a US Tax return for Non-Resident Aliens. And if you do not have an NRA TPIN (taxpayer identification number) you must obtain one in three steps; 1. by paying $25 dollars to have the American Consulate on Middle Road verify the authenticity of your passport; 2. and then filling out a form W-7 which goes directly to Internal Revenue Service requesting a TPIN. That takes about three months to obtain; 3. then you can file your US 1040NR tax return.

Refunds on these erroneous withholdings are running around four months. How many Bermudians or other expatriates have any idea how to file a US 1040NR to retrieve their own money? OPPORTUNITY COSTS LOST Not only is your money sitting idle for anywhere from two months to a year or more, earning nothing; but, what a paper trail you are laying right to Internal Revenue Service's doorstep.

IRS may pay you some interest on your money; however, the opportunity costs lost forever while this money remains uninvested can be significant. When making any investment decisions, research your options carefully and weigh all the costs.

If you get caught this way, it is also well to note that some brokers, in these circumstances, will promise you anything. By the time you need satisfaction, they have moved on and you living offshore are left to sort it all out.

These kinds of broker's should have licenses that really say CRU (commissions are us). Doing investing business through a local Bermudian firm may be very, very reasonable, in retrospect. At least you have interaction with a live person, a sympathetic ear, experience and a readable license hanging on a wall.

There are some other major taxation issues regarding holding assets in the United States with United States investment firm; but, since they all relate to taxation and probate problems in estates, it won't effect you, because you will be deceased. Subject of another article.

Second answer: FROM WHAT I HAVE READ A US CITIZEN IS STILL TAXED ON STOCKS EVEN IF THEY ARE LIVING OUTSIDE OF THE US BORDERS, CORRECT? The answer to this is directly related to the first answer.

US citizens and green card holders are subject to taxation on world-wide income. Working abroad under some specific guidelines entitles the `lucky' US expatriate to elect to exclude foreign earned income ($76,000 in tax year 2000) from taxation each year.

This election is for each person. A married couple, dual income no kids (DINK), can exclude $152,000 this year, plus standard deduction of around $7500 and two personal exemptions of estimated $2800 each.

Additionally, with careful tax and financial planning they can invest in tax-efficient funds and stocks that realise appreciation without dividends, among many strategies. They can conceivably exclude from taxation each year close to $200,000! If you are talented enough, smart enough, and lucky enough to be working in this Bermuda economic environment, you should be taking every advantage of every single one of these strategies. And banking every extra dollar, this could be some serious money.

It may be that never again will you have this opportunity to build for your future at such as accelerated rate. What is amazing to me is that so few are practicing this disciplined savings. Think again about your financial future.

It is worth it! Well, two long answers to two very important questions. I'd like to hear about NRA reader investors who have been caught in the IRS net. Please know that your information will be treated confidentially, as always.

*** Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or any other investments. Readers needing specific assistance should seek professional advice from their financial advisor.

Martha Harris Myron CPA is a Bermudian, a Comprehensive Financial Planner, holds a NASD Series 7 license and is a federally authorized US tax practitioner. She is Programming Chair for the Financial Planning Association of Bermuda.

TAXES TAX