As a U.S. expat, you’ve probably heard alot about FATCA (unless you moved to a remote desert island with no WiFi access). On this page you’ll learn:
- What is FATCA?
- How does FATCA impact you?
- Does FATCA impact you if you are paying taxes in your host country?
- How to go about filing under FATCA
- Much more
What Is FATCA?
Simply put, FATCA (Foreign Account Tax Compliance Act) requires U.S. citizens to report all foreign earned income to the IRS. FATCA was put in place to prevent tax evasion on foreign assets owned by U.S. citizens, in an attempt to recover some of the $40 billion that the U.S. Treasury loses annually due to offshore tax non-compliance.
The U.S. requires that countries take responsibility for ensuring that U.S. Expats report to the IRS all income earned in their host country. The countries themselves are placing the responsibility in the hands of the local financial institutions, whose failure to comply can (and did) result in hundreds of millions of dollars in fines. If you’ve received a letter from your bank asking if you are compliant, this is why.
Beginning in July 2014, 46 countries around the world began complying with FATCA’s demands, with more having been added over the last year.
How Does FATCA Impact You?
In reality, all this talk about FATCA and its implications doesn’t impact much on the average Expat household. Assuming you weren’t laundering big money or actively evading taxation, it won’t take much for you to be fully compliant with FATCA’s requirements. Every year in addition to filing your 1040, you have to add form 8938, send in by June 15th and you’re done.
Your best bet is to get in touch with a U.S.-trained accountant who has extensive experience working with FATCA. Like any taxation law, there are fine points which you may not be aware of, and exemptions you may be eligible, for you but won’t know it unless you sit down with a pro.
We have helped hundreds of Expats get up to date on their U.S. Taxes while minimizing costs and penalties.
What If I’m Paying Taxes In My Host Country?
While FATCA compliance ensures the IRS doesn’t miss out on any of your taxable income, it does recognize Expats’ obligation to pay taxes to the host country. As such, foreign assets are only taxable in the U.S. if they’re above $200k at year’s end or $300k at any point during the year for unmarried Expats, or $400k and $600k respectively for married Expats.
But just because you may be below the income brackets doesn’t mean you can get away without filing your U.S. taxes. Under FATCA, all U.S. Expats must file with the IRS every year, regardless of their earnings (even if the earnings are nill). In fact, even if you choose not to file (not recommended), all foreign financial institutions in participating countries are must report your documented financial information to the IRS on demand. In short, there is no escaping the of the IRS.
Who must file Form 8938?
In order to qualify for the requirement to file Form 8938, you must fulfill 3 criteria:
1. You must be a US citizen, or resident alien of US for any portion of the tax year, or a non- resident alien who chooses to be regarded as a resident alien in order to file a joint income tax return, or a bona fide resident of Puerto Rico or American Samoa.
2. You have interest in certain foreign financial assets (as detailed below).
3. The collective value of those assets exceeds the reporting threshold that applies to you (as discussed below).
Which assets require reporting and which do not?
- All financial accounts maintained by foreign financial institutions (deposit, custodial, stocks and securities), with the exception of those specifically excluded in the “not-required-to-report assets” section
- Foreign financial assets held for investment:
- Securities or stocks issued by a non-US person
- Interest in a foreign entity
- Financial contracts or instruments in which the issuer or counterparty is a non-US person
- Foreign mutual funds
- Foreign financial accounts and foreign assets held for investment which are held by any grantor trust in which you are the grantor
- Life insurance or annuity contract with a cash value that are issued by a foreign entity
- Foreign private equity funds
- Foreign hedge funds
- Financial accounts maintained by a US payer
- Financial accounts maintained by an overseas branch of a US financial institution
- Financial accounts maintained by a US branch of a foreign financial institution
- Foreign financial accounts or assets over which you hold signature authority (unless any activity from the accounts or assets are required to be reported on your income tax return)
- Indirect interest in foreign financial assets through an entity
- Investments in foreign stocks and securities through a domestic mutual fund
- Directly-held foreign real estate
- Foreign real estate held through a foreign entity (its value will be included in the valuereported for the interest in the foreign entity)
- Directly-held foreign currency
- Directly-held precious metals
- Directly held personal property (ie. art, antiques, jewelry, cars, collectibles)
- Benefits supplied by foreign governments similar to social security
What is the asset value threshold that I have to meet in order to be required to file?
Taxpayers residing in the US:
For single taxpayers residing in the US and for married taxpayers filing separate income tax returns and residing in the US: if the collective value of your foreign financial assets exceeds $50,000 on December 31 of the tax year or $75,000 at any point during the year, you are required to file.
For married taxpayers filing joint income tax returns and residing in the US: if the collective value of your foreign financial assets exceeds $100,000 on December 31 of the tax year or $150,000 at any point during the year, you are required to file.
Taxpayers residing outside of the US:
- For taxpayers residing abroad who do not file a joint income tax return: if the collective value of your foreign financial assets exceeds $200,000 on December 31 of the tax year or $300,000 at any point during the year, you are required to file.
- For taxpayers residing abroad who do file a joint income tax return: if the collective value of your foreign financial assets exceeds $400,000 on December 31 of the tax year or $600,000 at any point during the year, you are required to file. *Note that for the purposes of filing Form 8938, a taxpayer living abroad is defined as a:
- US citizen who has a foreign tax home and is a bona fide resident of a foreign country(ies) for a consecutive time period that contains the whole tax year or
- US resident or citizen who was physically present outside of the US for 330 days of a consecutive 12 month period that ends during the tax year.
How do I value my assets to determine if I meet the threshold or not?
To value your assets for FATCA purposes, use the fair market value of each asset. Foreign assets must first be valued in the appropriate foreign currency and then converted to US dollars. Special guidelines exist for those assets for which fair market value is indeterminable. Assets for which the value is less than zero are not used to offset the value of other assets; they are simply valued at zero.
If I file an FBAR, does that fulfill my FATCA filing requirements?
No; although some of the reporting requirements of the two forms overlap, the FBAR and the Form 8938 have different rules, and you may be required to file both.
If I am not required to file an income tax return for a specific year, do I have to still file the 8938?
No; if you are not required to file an income tax return for a specific year, then the requirement to file Form 8938 also falls away, no matter what foreign assets you held during the year.
What happens to me if I fail to file Form 8938?
A penalty of $10,000 may face you for failure to file Form 8938. If you receive a notice from the IRS and you still fail to file, you may face a penalty of $50,000. In addition, a penalty of 40% will be applied to any tax underpayment that resulted from failure to report foreign financial assets.
How would the IRS know about my offshore assets anyway?
Have you heard of third party reporting? Foreign institutions can supply the IRS with information about accounts held by US citizens. This information may include the identity of account holders and financial information about the account. This is the essence of Form W9 that many foreign banks have been requiring their US account holders to fill out and sign. In light of the IRS recently cracking down on foreign banks to obtain the names, social security numbers, and financial information on assets held by US persons, the awareness of the need to follow the FATCA provisions is becoming continuously more widespread.
If you are an expat in need of assistance, please contact us now.