Obama in 2010, successfully implemented the Foreign Account Tax Compliance Act or better known as FATCA to the U.S and international financial institutions. My aim today is to help expats understand FATCA a bit more and where they stand if they live offshore / abroad!
This has impacted an estimated 9 million U.S expats. How? It has put their financial affairs, banking, and investing at the forefront of penalties and taxes for not complying with FATCA. You can potentially reduce your taxes as an expat by using certain forms but this depends on your situation.
U.S, non-residents are required to report anything over $10,000 on tax returns. This can be in one account or spread over several accounts. Overseas banks/financial insinuations are required to report any assets held by U.S citizens to the IRS. If you or the institution fail both the individual and institutions can have significant financial penalties.
Inability to report form 8938 from a “non-willful” comes with a statutory $10,000 penalty. $50,000 additionally for a continuous failure and a 40% further for understatement of the tax penalty.
“Wilful” can be considered a criminal penalty.
Although, FATCA did not alter sanctions, for non-reporting for PFICs or FBAR. It did enhance rules in relation to these legislations so U.S expats should be aware of the ramifications.
Understanding FATCA
FATCA, as stated above is introduced to financial institutions to make it easier for the IRS to trace U.S related personal/companies who earn money in a foreign bank.
They want to know who earns what and where!
Who are Affected by FATCA?
FATCA will impact you if you match one or more of the following criteria:
- US individuals, classified as either US citizens or resident aliens (Green Card Holders), are obligated to comply with FATCA requirements all over the world.
- Businesses owned by US citizens or with a majority shareholder who is a US citizen.
- Banks, investment companies, and any other entity that receives or retains wealth are examples of foreign financial institutions.
- Banks and investment firms in the United States that do business with international banks and financial organizations
What Information Must Be Reported Under FATCA?
The FATCA reporting requirements are not simple. It is difficult to establish specified foreign assets. The Internal Revenue Service (IRS) defines the assets as accordingly:
- Foreign pensions
- Foreign stockholdings
- Foreign partnership interests
- Foreign financial accounts
- Foreign mutual funds
- Foreign issued life insurance
- Foreign hedge funds
- Foreign real estate held through a foreign entity (You do not need to disclose the real estate, but the foreign entity is a defined foreign financial asset with a maximum value that incorporates the real estate.)
- Your foreign home does NOT need to be reported.
Reporting Threshold
For overseas expats the reporting threshold is $200,000 for a single person in foreign financial assets on form 8938 and is doubled to $400,000 if married or file jointly.
If you have $300,000 or more in the account at any time during the year or $600,000 for married couples then you will need:
Form 8938 is in conjunction with the Treasury Department’s long-standing FBAR (Foreign Bank and Financial Accounts Report) obligation for financial assets maintained in foreign institutions that surpass $10,000.
Form 8621 (Passive Foreign Investment Company – PFIC) must now be submitted annually for each distinctive PFIC investment, rather than solely in years where the PFIC investment generated dividends.
For returns involving foreign-sourced income, the IRS audit statute of limitations has been stretched to six years which was previously for 3 years.
In conclusion, FATCA is another layer of hindrance from allowing U.S. related persons to invest outside the U.S. To avoid unnecessary expenses due to non-compliance with these laws, seek professional help from international accountants and cross border financial planners.
If you want to talk about investments as a US expat then please email me at info@investmentsforexpats.com
